What is Total Addressable Market (TAM)?
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Total addressable market (TAM or total available market) represents the total revenue opportunity available to a product or service if 100% market share is achieved.
Calculating TAM helps business owners understand what financing is needed for a new product offering. It also provides insight into a company’s competitive landscape and growth potential.
Some companies refer to TAM as the total number of business opportunities that could become your customers.
Why is total addressable market analysis important?
Analysing your TAM is key to estimating the number of potential customers and predicting your business’s potential for growth.
These are the benefits of TAM analysis:
- It helps you decide whether it’s worth investing in additional products or services.
- It gives you a top-down overview of your target market and helps you to segment your audience into different groups.
- It assists you in identifying which types of customers would be most receptive to your product categories.
- It provides a benchmark against competitors and helps you understand market share.
- After you define your TAM, you can allocate resources accordingly. It gives you a good idea of where you can expect the best return on investment.
How to calculate total addressable market?
It’s important to stress that a well-calculated TAM isn’t an accurate measure of all your future customers or annual revenue; it must consider your competitors, who’ll always grab a slice of the TAM pie.
But it’s a good starting point for learning how many people or companies could potentially purchase your product.
There are four ways to calculate the total addressable market. Let’s look at each method in more detail.
1. Top-down market sizing
The top-down approach to market sizing involves taking the total number of potential customers in a B2B dataset, and applying demographic and geographic filters, narrowing the results until you reach a market subset. It’s based on existing findings from market research firms, such as Gartner and Forrester.
Here’s an example of total addressable market calculation from a graduate recruitment agency in London, UK:
- They know there are 8,900,000 people in the city.
- They also know that 11.6% of those people are between 18-24.
- By multiplying 8,900,000 by 11.6%, they estimated a market opportunity of 1,032,399.
Pros:
Top-down analysis relies on gathering macroeconomic data from third-party organisations and sources. You can easily source this data type from various websites and institutions, including market research reports.
Cons:
Because the data comes from third parties, it may only be partially accurate.
The top-down method also doesn’t account for disruptive products that alter or create new market landscapes due to their popularity (e.g. the Uber app dramatically increased the number of people making taxi rides yearly).
2. Bottom-up market sizing
The bottom-up method is the reverse of the top-down.
To do a bottom-up analysis, start with a smaller market segment. Then extrapolate from that until you discover a total potential customer base. A bottom-up calculation is expressed in terms of maximum revenue.
Unlike top-down TAM, the bottom-up approach relies on your own primary research (e.g., a survey conducted in a local target market or a pilot campaign in a small geographic area).
What’s a good example of bottom-up TAM?
Let’s return to the London graduate recruitment agency.
- They sent out a campaign of email newsletters to London universities and had 25,000 sign-ups.
- They charge a single fixed fee of £100 per person recruited.
- 25,000 x £100 = a total potential revenue of £2,500,000.
The simple total addressable market formula in this case is:
(# of possible Accounts) x (Annual Contract Value) = TAM
Pros:
Bottom-up TAM is based on your own sales data generated in-house. Therefore, the final calculation is more likely to be accurate and relevant to your business model.
Cons:
Due to the assumptions made from a small target market segment, the ultimate TAM calculation derived from the bottom-up technique can be misleading.
This is particularly pertinent if you’re trying to make a global TAM calculation. Factors such as population density, economic prosperity and consumer expenditure can vary from country to country.
However, we recommend this as the best method for most B2B SaaS companies.
3. Value-theory market size
The value-theory method begins by asking what a buyer would be willing to pay for a product or service based on the value it delivers.
You then multiply this by the total number of people or companies that perceive the same value and would be willing to adopt your solution in place of the competition.
Here are some questions to answer when determining your total available market using this method:
- How many people would get value out of your latest idea?
- How much they would be willing to pay for it?
Pros:
Value theory is helpful for companies that have developed a unique product that is creating new markets or reshaping current ones.
It’s a suitable method for companies that lack marketing data or the resources to conduct their own research (typically startups).
It’s also beneficial if you’re testing new features or upgrading your existing product roadmap.
Cons:
Value theory is primarily based on conjecture and guesswork; its conclusions will never be 100% accurate.
But, by focusing on the value your product can deliver to consumers, you can estimate how to capture that value through pricing.
4. Use Cognism’s TAM calculator
As you scroll down the page, you’ll realise calculating your TAM is tough!
So, we decided to make it much easier with our total addressable market calculator.
The TAM template offers you enough Cognism functionality to help you work out the size and makeup of your total addressable market. Cool right? 😎
Give it a try now 👇
What are the differences between TAM, SAM, and SOM?
People often speak about TAM alongside SAM and SOM.
Acronym overload, right?
So, let’s break each of them down so we know exactly what we’re talking about.
- SAM is a Serviceable Available Market. It’s the segment of TAM that your products and services target.
- SOM is a Serviceable Obtainable Market. It’s the segment of your SAM that you can realistically capture.
In simple terms, TAM represents your company’s total possible growth opportunity. SAM is what your company can realistically target, and SOM is what your company can capture.
It’s important to note that these three concepts are entirely interrelated – the larger your TAM, the larger your SAM and SOM will be.
In conclusion, when evaluating your TAM, consider both your available market and obtainable market. These insights will help you understand the number of actual customers your company can realistically target and capture.
TAM FAQs
Why is total addressable market useful for B2B and SaaS?
In B2B SaaS sales and marketing, sales cycles are often longer and deal sizes are larger. Knowing your ideal customer profile, and also how many actual customers are available to you will make a real difference to your company’s growth rate.
Potential investors also look for well-thought-out TAM calculations when considering which businesses to fund.
If you can prove that you understand the entire market and your product’s place in it, investors will be much more likely to invest in your company.
What is the difference between market size and TAM?
TAM provides a big-picture view of your total market potential. Market size, on the other hand, offers a more immediate and realistic snapshot of economic activity in a specific segment.
Here’s a concise comparison between the two:
Market size
- Definition: The current total sales or revenue generated within a specific market segment over a given period.
- Scope: Narrower and focused on existing market conditions and economic activity.
- Purpose: Assessing the present market environment, helping with budgeting, sales forecasting and operational planning.
- Example: The current annual revenue from sales of electric vehicles in North America.
Total Addressable Market (TAM)
- Definition: The total revenue opportunity available for a product or service if it captures 100% of the market.
- Scope: Broader and more theoretical, encompassing the entire potential market.
- Purpose: Evaluating the overall market potential, aiding in strategic planning, market entry decisions and investment considerations.
- Example: The global potential revenue from all-electric vehicle sales if every vehicle worldwide was electric.
What is a good size TAM?
A “good” size TAM is context-dependent and should align with your company’s strategic goals, industry norms, and growth potential.
While larger TAMs are generally more attractive for high-growth businesses and investors, smaller TAMs can still be valuable for niche markets or specialised products.
Ultimately, the right TAM size is one that supports your company’s long-term objectives and provides a realistic pathway to achieving those goals.
What are the benefits of finding your TAM?
Calculating your total addressable market is the first step in developing a winning sales strategy. It can deliver many positive benefits to your business. The top six benefits of the total addressable market are:
- Identifying new revenue opportunities. It highlights potential new markets or customer segments that you can target for future growth.
- Calculating your potential revenue. It helps estimate potential revenue and set realistic financial goals.
- Attracting investors. A well-defined TAM demonstrates growth potential, making your business more attractive to investors and venture capitalists.
- Planning your outreach. It enables more effective sales and marketing campaigns by focusing on the most lucrative customer segments.
- Generating B2B leads. It identifies which market segments you should prioritise. This ensures that you allocate resources to the most promising opportunities.
- Setting achievable goals. It helps you to estimate potential revenue and set realistic revenue goals.
What is an example of a TAM?
Like many successful start-ups, Cognism’s growth strategy started with a total addressable market.
By thoroughly investigating and defining our buying audience, we developed innovative products and winning go to market strategies.
We adhere to the bottom-up TAM method. Use this workflow to determine your total addressable market:
- Ask customer service to analyse your existing customer base and look for trends.
- Investigate other geographic or industry sectors based on those trends.
- Use the information to define an accurate buyer persona.
- Run a search in Cognism to discover prospects who match your persona.
You can now reach out to them!
Total addressable market: key takeaways
- If you don’t know your TAM, you don’t know how fast your business may grow.
- Investors are more likely to buy into your company if you have a well-thought-out TAM.
- Cognism recommends using the bottom-up TAM method.
- Cognism’s B2B data solutions are tailor-made for accurate TAM analysis.
We’d love to show you what our pioneering prospecting tech can do. Click 👇 to schedule a demo with our experts.
