Total addressable market, referred to as TAM, is an important part of any successful sales strategy or new product campaign.
Quite frankly, it doesn’t really matter how innovative your product is or how many cool features it has. If you haven’t identified the total addressable market for your product, don’t have an idea of market saturation, and haven’t assessed the need and demand for your product, not only in the present, but in the future, your new product or service is doomed to fail before you even launch.
That's why it's important to learn what TAM is and how to calculate it so you can crush your next product launch or sales campaign.
What is the Meaning of TAM?
TAM is an acronym for total addressable market. In terms of business and sales, TAM represents the total possible market demand, or in simple terms like seeing all the slices of a pie, for a product or service.
TAM takes into account the total amount of revenue and profit you could generate from successfully selling your solution. It's like a big pie that represents the entire group of people who might want to buy your product or use your service.
Knowing the TAM for a business helps you understand how big the market is for the product. It's like looking at the size of the whole pie before you start cutting slices.
This market information is essential because it tells you the potential of your business and how much you can grow if you do things perfectly.
TAM is a great starting point for making smart decisions about your marketing and sales strategies.
Related: Effective strategies to increase revenue
What Does TAM Mean to Business?
When you’ve got a business you’re trying to grow, or a new product you’re trying to launch, calculating the total addressable market is so crucial because it’s one of the few metrics that will give you a good understanding of the money-making opportunity that is available in the market.
TAM will let you know if a venture or market is worth entering. Plus, TAM will keep you from miscalculating your reach and overspending as a result.
Total addressable market in business is also important because it will give you a sense of whether or not your product or service is scalable. It's like knowing how big the pie is or top of the ceiling for growth.
- Is this a venture that’s going to steadily grow as your company grows, regardless of the economy?
- Is it going to expand rapidly, burst, and disappear as quickly as it came?
- Or is your product going to struggle to gain a footing because it’s not a good fit for the market?
TAM will let you know this important information and then some.
How Does TAM Work?
Now that you have a better understanding of what TAM is and why it’s important, you might be feeling a bit overwhelmed right about now, huh?
It’s easy to talk in abstract terms about capturing an entire market, but how does this information apply to you and your company? When you get down to brass tacks– what does TAM actually look like for you?
Here are some 5 questions to ask when determining the total addressable market for a business, so you can narrow things down a bit:
1. How big or small is the market?
Knowing the size of the market you want to enter is crucial because it helps keep your expectations in check (again so you don’t overspend) and gives you a more accurate sense of how many potential customers you can capture.
2. How fast or slow is the market growing?
Research the growth rate of the market in order to figure out if there’s any lucrative opportunity there. Is this a market where your business or product has the chance to rapidly scale?
3. What do your target customers (current and potential) look like?
Now is the time to learn everything you can about your target customers. What industry are they in? Where are they geographically located? What are their greatest pain points? What do they tend to like and dislike when it comes to a product or service like yours?
4. Who are your competitors?
Identify and research the companies that offer products or services similar to yours. If the market is over saturated with lookalike solutions or dominated by a handful of corporate giants, it may or may not be the right market to venture into.
5. What makes your solution different from what’s currently available on the market?
This question dovetails with #4, but once you analyze your potential customers, pinpoint what if anything makes your product or service different and better than what’s on the market. What pain points are you solving that competitors aren’t? How is your solution going to help people achieve their greatest dreams and goals in ways that are different from anything else they’ve used? Answering these questions is a great way to tighten up brand messaging. And if your product or service doesn’t bring anything new to the market, then this could be a sign to steer clear.
According to Amra Beganovich, founder of Amra & Elma and Colorful Socks, "spending at least 6 months researching and understanding the market is crucial for product development decisions. In order to make sure that the brand truly delivers something new or addresses an existing problem, reading negative reviews may hold the key to the development of that differentiating factor. Addressing the negative reviews on an existing product is the ticket to building a brand that is better than what the existing market offers."
Related: What is Go-to-Market Strategy
3 Ways to Calculate TAM
1. Bottom-Up
One way to calculate the total addressable market in sales and business is to take a Bottom-Up approach. This is a great method if you’ve already launched your company and/or product/services, and you have some kind of sales history to reference.
A bottom-up approach uses this equation:
Total # of Customers x Price of Annual Contract = Total Addressable Market (TAM)
Simply multiply your number of possible customers by the price of an annual contract for your product, and this will give you your total addressable market!
2. Top-Down
Another approach for calculating TAM, is the Top-Down method. With the top-down approach, you start with the entire global population. Then you shave down that massive number by factoring in all the characteristics of a qualified lead within your ideal customer profile and your target market (i.e. industry, company size, geographic location, target demographics, etc.).
The top-down approach obviously isn’t as accurate as the bottom-up approach because you have to rely on third-party market data and guessing. But if you haven’t started your business yet, this is a good strategy to leverage when you just need a good TAM guesstimate to get started.
3. Value Theory
The Value Theory method is great to leverage when you have a product or service that is like nothing else on the market, or you have an established product/service, and you’re looking to add new product features. In other words, if you want to launch a product or service that’s the first of its kind and you have no third-party data to reference, then value theory is the strategy for you.
With value theory, you factor in the pain points your product/service eliminates, as well as the benefits and goals your product/service can help clients achieve.
Once you determine this value, you have to calculate the number of people who would find use and benefit in your product/service (people who will fit into your ideal customer profile).
After that, figure out how much a person will pay to enjoy the benefits of your product/service. Then multiply that price by the total number of people in your target market.
Examples of TAM
1. Bottom-Up
# of potential customers for CRM software product: 63,000
Annual contract price: $18,000
TAM: $1.13 Billion
As stated earlier, with the bottom-up approach, simply multiply your total number of possible customers (63,000) by your annual contract price ($18,000) to get TAM.
2. Top-Down
Global Customer Relationship Management (CRM) Market Size: $64.41 Billion (2022)
Percentage of CRM Market that is B2B: 55%
Percentage of CRM Market in North America: 44%
TAM: $15.6 Billion
To calculate TAM using the top-down approach, here we use B2B CRM software in this example. We start out with the total CRM market size ($64.41B).
We then segment the global CRM market down to the company’s specific category, which is B2B in this instance (55% of $64.41B is $35.43B).
Then, (this may or may not be relevant for you) we further narrowed down to geography (44% of $35.43B is approximately $15.6B). In the example case of B2B CRM software, you could narrow the B2B segment further down to location and time.
And if you want to pare your top-down analysis even more, you can include your desired market share (i.e. 15%, etc.) as well.
3. Value-Theory
How much would someone be willing to pay for your grocery service: $10
Total # of possible clients who would use your grocery service over competitors: 4.6 Million
TAM: $46M
For the above example, we used a grocery app service (i.e. Instacart). Based on 3rd party projections and data, the total number of grocery app users is roughly 30.4 million. If your company were to capture 15% of that market, your potential total number of possible clients would be 4.6 Million. The next step was figuring out the perceived value of a grocery app service. In other words, how much would someone pay for a grocery app service vs. going to the grocery store themselves (via car, walking, or public transportation) and taking X amount of time to complete shopping. When we compared the cost of time and money vs. using an app, we estimated that the potential price could be $10.
When we multiplied 4.6 Million (total # of possible clients) by $10 (assumed value of app service), we arrived at a $46 Million TAM.
Best Ways to Calculate TAM
Now that we’ve covered definitions, and shared specific examples, which method is the best way to calculate TAM in sales and business?
All three ways: bottom-up, top-down, and value theory, have their pros and cons. And while the bottom-up approach is the most accurate and requires the least amount of guesswork, the method that you choose depends on the quality data you already have at hand, and the stage your business is at.
If you’ve already launched a business and a product/service– bottom-up is the way to go. If you’re looking to launch a new product or feature, top-down or value theory might be the better alternative.
Regardless of the method you choose, calculating your total addressable market is essential to a successful new venture.
TAM or total addressable market is the total possible market demand for a product or service and it is essential to any successful sales strategy or market campaign. It lets you know the money-making opportunity in a potential market, and whether or not your product/service is scalable.
In order to determine your total addressable market, ask questions about competitors, the pace of market growth, etc. Then identify the TAM calculation that is right for your product/service and company: bottom-up, top-down, and value theory.
Related: What is a business directory
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