How to Determine Your Company's Total Addressable Market

Do you want to avoid chasing the wrong customers and missing out on potential revenue?

It's time to step back and figure out your company's total addressable market (TAM).

Are you wondering how? Don’t worry.

Determining your TAM doesn't have to be a daunting task.

With the right strategy and a little research, you can uncover the full potential of your business.

Did you know that a company's TAM can often be much larger than they initially thought?

For example, when Amazon started selling books online, they likely didn't realize they would one day compete in the multi-trillion-dollar retail industry.

By determining your TAM, you can identify new opportunities, expand your customer base, and increase your revenue.

In this guide, we'll walk you through the steps to determining your TAM, from defining your ideal customer to analyzing industry trends.

Don't wait any longer to unlock your company's full potential!

Let’s dive in!

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What is Total Addressable Market (TAM)?

The total addressable market (TAM) is the largest potential market for a specific product or solution.

In other words, how huge would a market be if every individual who may find value in a product or solution bought/started using it (i.e., 100% market share)?

TAM does not represent future revenue or customers.

This is because competitors in the same industry can also target the same TAM, and there may be alternative solutions that customers can choose from instead.

However, TAM can give stakeholders a sense of the size of the total market opportunity before it is divided among different companies, including the focal company, its competitors, and potential customers who choose not to use or purchase anything.

Ultimately, a company's success will depend on how well it can capture its market portion and convert potential customers into actual revenue.

The idea of a total addressable market is significant for startups and established organizations because it allows them to select specific products, client groups, and business possibilities based on estimating the effort and capital necessary.

Corporate management can use TAM to give a plausible value proposition to potential investors and purchasers of the firm.

Here is a graph showcasing the difference between the global market and TAM:

Global Market vs. Total Addressable Market

TAM Examples

For example, suppose your firm sells laptop computers.

Your potential market size (total addressable market) is the number of individuals who purchase a laptop in a year, around 60 million Americans.

If your firm has 50% of that share, you can reach 30 million people with this product or service, whereas two other companies with 20% each may reach 15 million customers.

TAM vs. SAM vs. SOM: What is the Difference?

TAM represents the total market demand, SAM is the portion of TAM that a business can target, and SOM is the portion that a company can realistically capture.

Here are the details explained briefly:

Total Addressable Market (TAM)

To elaborate, the TAM, as previously described, is an all-encompassing, "birds-eye" perspective of the complete market environment.

TAM is thus the greatest amount of money that might be earned inside a particular market using the least stringent criteria for counting potential consumers.

Serviceable Available Market (SAM)

The serviced addressable market (SAM) is the fraction of the total addressable market (TAM) that requires the company's products or services.

To arrive at the SAM, we begin with the highest potential revenue value and lower it using company-specific facts and market assumptions.

The SAM seeks to illustrate the percentage of the TAM that, given their customer profile and demand for the company's services and the business model, may become customers someday (e.g., based on location, pricing tiers, technical capabilities, and accessibility).

Serviceable Obtainable Market (SOM)

SOM assesses the company's market share to account for a fraction of the SAM that can be expanded as the market increases.

The fundamental assumption in the SOM calculation is that the firm will be able to maintain its market share soon.

How To Calculate Total Addressable Market

The whole addressable market is the yearly estimated sales within an observable market. The formula for calculating the total addressable market is straightforward:

TAM may be calculated using three major collection techniques and one secondary method:

The top-down analysis examines elements at the top of an economy from a macro perspective.

The bottom-up analysis examines a subgroup of a localized issue before extrapolating the results to the larger market potential.

The positive externalities obtained from an offering against existing choices are the subject of value theory.

The secondary collecting approach employs validated third-party research (external research).

External Research

A quick and straightforward technique to find a TAM is to refer to already obtained professional data. Private research studies are expensive, but their headline statistics are occasionally made public through news releases.

The benefits of adopting these numbers are pragmatic; they are quick to collect, and, by the laws of the division of labor, they are prepared by a more trained expert with credibility.

Organizations like Gartner, Forrester, and IDC do research and produce industry reports with detailed dives into sectors, which often include figures like revenue opportunity and future potential.

‍A quick search revealed a Gartner news release claiming the cybersecurity business was valued at $81.6 billion in 2016.

As a downside, it needs to show how the number was derived.

If an investor asks you to justify the statistics, your only reply will be, "Oh, it was published by X." Thus, it's valid.

Creating your own TAM will give you a better knowledge of the figures and greater negotiating power.

Top-down Approach

The top-down strategy is based on starting at the top of an extensive data collection and working your way down to locate a market subset.

You begin with a population and then use reasoning to eliminate unnecessary parts based on demographic, geographic, and economic assumptions.

The advantage of this strategy is that you can discover reliable and open statistics on macroeconomic data. The UN, OECD, World Bank, and CIA World Factbook are examples.

For example, one person's required daily water consumption is 1.9 liters, and the world population is 7.5 billion.

Considering an average cost of $1.22 per gallon ($0.32 per liter) and a targeted margin of 20%, the TAM for bottled water could be:

7.5 billion people * 1.9 liters * $0.32 price per liter * 120% margin * 365 days = $2.01 trillion TAM

Bottom-up Approach

This strategy entails working at a granular level to locate waypoints that can be extrapolated to a larger population. It is preferred since its foundation is based on a confirmed data point that can be amplified to reveal the whole TAM population.

Primary data gathering methods (such as a survey in a local market) or secondary research can be used (news reports, company filings).

As an example, Tesco controls 27.8% of the UK food market. Its most recent financial figures reveal that the company achieved £35.9 billion in revenue for the fiscal year that ended in April 2017. (excluding gas and Republic of Ireland sales).

Combining these two figures yields a TAM of £129.1 billion ($167.1 billion) for the UK grocery sector in 2017.

One downside of the bottom-up strategy is that the TAM might need to be corrected since enormous assumptions are formed from a conceptually small fraction.

This is especially true for a worldwide TAM estimate when population density, economic development, and customer tastes differ significantly between countries.

Top-Down Approach vs. Bottoms-up Approach

Value-Theory Approach

Top-down and bottom-up approaches typically examine existing paradigms and believe a new product will fit them.

So, how can one judge the potential for, for instance, flying automobiles when flying cars do not yet exist?

The value theory is the most excellent option for items or services that develop a market into a new state and deliver value-add to diverse groups of customers.

With value theory, one must determine how much a consumer will pay for a product improvement/evolution.

When music streaming subscription services like Spotify first became available, such an exercise would have been beneficial.

At the time, consumers paid a set price for music. But the value-add of not owning a song but having access to a large library of them to essentially "borrow" was enough for the current cost of $9.99 per month to be considered worthwhile.

Attaching that price to the number of music listeners would have shown the TAM more accurately than merely looking at how much was spent on bought downloads.

Why Total Addressable Market is Important

TAM, or total addressable market, is essential for B2B sales because it helps businesses identify the potential market size they are targeting and determine if it is worth pursuing.

It is the initial element in almost every business case and the most vital information to review when evaluating any company opportunity.

Confirming income, growth, or usage predictions is more accessible by considering how many individuals or corporations could purchase a product.

When a company contemplates developing a new product, entering a new vertical market, or even introducing a new feature, it must analyze the revenue implications of that strategic decision.

The TAM calculation may suggest that an opportunity could be more appealing than previously anticipated, or it may disclose a much larger market than previously thought.

With this knowledge, businesses may make better-educated judgments on where to invest resources for the best return, including abandoning plans if the TAM is too tiny.

TAM may also help determine the impact of a new market entry or a pricing adjustment.

Knowing how market share may change due to these factors is only genuinely relevant when the unlimited market potential is known, as it extends the implications of these actions to revenue predictions.

When investors or board members evaluate the possibilities of a company or product, TAM is undoubtedly one of the most critical data points they will request since it offers a comparable value compared to other investment alternatives they may be considering.

The TAM calculation procedure also requires a firm or product to identify itself and determine where it fits within the larger competitive environment.

While TAM may be estimated for a specific time, it is subject to change.

Markets decrease and increase all the time due to demographic changes, business cycles, and technology adoption; thus, when employed in a projection, those macroeconomic variables should also be addressed, and estimates should be reassessed regularly.

How TAM Analysis Drives Results

In addition to improving your marketing strategy in broad strokes, calculating your TAM correctly can also improve these finer points.

The Big Picture

A well-calculated TAM, at the most basic level, assists your firm in explaining its potential to investors, workers, and other essential stakeholders.

Investors and outside partners want to know your company's aims and the C-objectives, but they also want to know that the math backs them up.

A well-crafted TAM directs your team toward a similar objective and gives everyone a precise gauge of how close they are to grabbing a substantial slice of the market.

The Detailed View

On a more granular level, a well-considered TAM calculation may assist in guiding your quarterly budgeting and investment decisions.

Once your TAM is determined, your marketing team will know which market segments to focus on next — and will better grasp how their efforts are converting into financial outcomes that benefit everyone.

A thorough grasp of your TAM improves the effectiveness of your marketing. Behind the numbers lies the key: if you properly grasp your market's features, you will wonder what inspires your prospects.

Putting yourself in the buyer's shoes also brings you closer to gaining their business.