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What is TAM and how to calculate it

June 23, 2020

Your Total Addressable Market, or TAM, is the total number of people in your target market. The figure doesn’t take into account the likelihood of them buying your product, nor does it consider their availability. TAM is a measure of potential.

Calculating your TAM is the crucial first step to creating an outbound sales plan. It’s the cornerstone of strategic planning and it facilitates each of the following processes:

  • Identifying new revenue opportunities
  • Calculating your total potential revenue
  • Finding investors
  • Planning your outreach
  • B2B lead generation
  • Setting achievable goals

Once you’ve calculated your TAM and used it to develop a B2B sales strategy, you’re ready to start prospecting!

How to calculate your TAM

By our count, there are two fundamental ways of measuring your TAM.

Top-down TAM analysis

This method of TAM identification is quick. It’s also possible even if you have little knowledge of the market you’re targeting. To calculate your TAM using this method, first consider the total number of people in the area you are targeting, then, add additional filters to narrow down your results.

Take the example of a graduate recruitment agency in Cornwall:

  • They know that there are 500,000 people in the city.
  • They also know that 5% of these people are between the ages of 18 and 28.
  • By multiplying 500,000 by 5%, you can estimate a market size of 25,000 people. 

You can add more filters to refine this further, but the calculation still involves a lot of guesswork. For this reason, you should identify an upper and lower bound, and make an estimation somewhere in the middle. It’s better to be more conservative with this estimation if you want to avoid falling short of your targets! 

If you’re looking for a higher level of accuracy, consider this next method.

Cognism TAM analysis

With Cognism’s B2B prospecting tool, Prospector, you can get a much more accurate representation of your TAM. By analysing your current client base and using it to run a search for similar people you will discover opportunities you didn't know existed. Here’s how it works:

  1. Cognism’s Customer Success team will help you to analyse your existing client base and look for trends. These could include job titles, industries, company sizes and locations that you have had particular success with.
  2. Based on your findings, they will consider other areas which you have not had as much experience with that could be worth contacting. Understanding why your product resonates with your users can help you to scale up your business.
  3. Use the information you’ve found to run a search in Cognism Prospector for similar people. This will show you the number of people who fit this description. This is your TAM.

One of the benefits of using Cognism to identify your TAM is that you can accurately identify your total market size, and then you can segment it to find the number of relevant people in each area. This can be incredibly useful for strategic B2B sales and marketing planning.

Once you’ve achieved this, you can use the bottom-up analysis to calculate your total potential revenue.

The bottom-up method

The bottom-up method (which is not only our technique for drinking a pint of squash in less than 5 seconds!) can be used to make an estimation of your total potential revenue. Simply multiply your TAM with your pricing.

Let’s consider the graduate recruitment agency in Cornwall again. We established their TAM was 25,000 people. Let’s say they charge a single fixed fee of £500 per person recruited. By multiplying these numbers, we find that they have a total potential revenue of £2.5 million. It’s worth mentioning again here that with a more accurate TAM calculation, you will get a more accurate potential revenue figure.

Which TAM analysis method is right for you?

If you’re still in the investigation and research phase of an entrepreneurial journey, the top-down method of TAM analysis is a useful tool. Use it to gain an insight into potential markets and estimate the value of your offering. 

Top-down is also valuable if you’re redesigning your offering, since this doesn’t require absolute precision, just an idea of which way you should go.

If you want to go into more depth and really understand your target market, it’s definitely worth looking into Cognism Prospector.

With the help of our award-winning outbound experts, you can analyse your TAM in-depth and leverage the world’s best B2B data to supercharge your outbound. 

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