Total Addressable Market (TAM) Definition + How to Calculate It
Knowing the size of your total addressable market is crucial for making product development and investment decisions.
TAM represents the maximum potential revenue a company can generate from its products or services. By determining the size of a company’s TAM, businesses can focus their resources to maximise profits and achieve company goals.
In this article, we’re covering:
- Total addressable market definition
- How is TAM size calculated?
- Free TAM calculator
- And more!
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What is Total Addressable Market (TAM)?
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 understand what financing is needed for a new business line and helps to provide insight into a company’s competitive landscape and growth potential.
Some companies also refer to TAM as the total number of companies that could become your customers.
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 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.
TAM calculations with examples
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 size of 1,032,399.
Top-down TAM relies on gathering macroeconomic data from third-party organisations. This data type can be easily sourced from various websites and institutions.
Because the data comes from third parties, it may only partially be accurate.
The top-down method also doesn’t account for disruptive products that alter or create brand-new markets 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 market sizing is the reverse of the top-down.
To do bottom-up TAM analysis, start with a smaller market subset and then extrapolate from that until you discover a total population of buyers. A bottom-up calculation is expressed in terms of revenue.
Unlike top-down, bottom-up TAM relies on your own primary research (e.g. a survey conducted in a local market or a pilot campaign in a small geographic area).
What is a good total addressable market example?
For practical reasons, 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
Bottom-up TAM is your own sales data generated in-house. Therefore, the final calculation is more likely to be accurate and relevant to your business.
Due to the assumptions made from a small subset of data, 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, where factors such as population density, economic prosperity and consumer habits 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 things you want to know to determine the 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?
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 don’t have any market data at their disposal or don’t have the resources to conduct their own research (typically startups).
It’s also beneficial if you’re testing new features or upgrades to existing products.
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.
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? 😎
Why is total addressable market analysis important?
Analysing your TAM is key to estimating how many potential customers are out there and predicting how fast your business may grow. It helps you decide if it’s worth investing in a new product or service.
It also gives you a top-down overview of your target market and helps segment your audience into different groups.
It assists you in identifying which types of customers would be most receptive to your offering.
After you define TAM, you can allocate resources accordingly. It gives you a good idea of where you can expect the best return on your investment.
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 is the segment of TAM your products and services target.
- SOM is a Serviceable Obtainable Market. It is the segment of your SAM you can realistically capture.
In simple terms, TAM represents the total possible opportunity for your company, 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.
Thus, it’s worth considering SAM and SOM when looking at your total addressable market since they provide further insight into the market size your company can realistically target and capture.
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. Therefore, knowing who your ideal customers are and how many of them are can make a real difference to your company’s growth.
Investors also look for well-thought-out TAM calculations.
If you can prove that you have a good understanding of the market and your product’s place in it, then investors will be much more likely to buy into your company.
What are the benefits of finding your TAM?
Calculating the 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
- Calculating your potential revenue
- Finding investors
- Planning your outreach
- Generating B2B leads
- Setting achievable goals
How calculating total addressable market helped Cognism?
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. Here’s the workflow you can use 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 Cognismto discover prospects who match your persona.
You can now reach out to them!
Our flagship tool, Prospector, is ideal for generating an accurate bottom-up TAM representation. But don’t take our word for it.
“[Cognism] gave us an understanding of the market and how many potential buyers were out there. It helped us to discover our Total Addressable Market. It’s a good market research tool, as well as a prospecting tool.”
As a result, they found 450 new potential customers in target accounts. Read the case study.
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 total addressable market experts.