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What is total addressable market?

Total addressable market (also known as TAM) represents the total revenue opportunity that’s available to a product or service. It’s normally measured in terms of revenue, but it can also be expressed as the total number of companies that could become your customers.

It’s important to stress that a well-calculated TAM isn’t an accurate measure of all your future customers or revenue; it must take into account your competitors, who will 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.

Why is total addressable market important?

It all comes down to a basic B2B sales principle: know your customers! If you don’t know your TAM, then you don’t know how many potential customers are out there, and you don’t know how fast your business may grow.

As well as giving you a top-down overview of your target market, TAM is also useful for segmenting your audience into different groups. It assists you in identifying which types of customers would be most receptive to your offering - meaning you can allocate resources accordingly. It gives you a good idea of where you can expect the best return on your investment.

Total addressable market is especially useful for B2B SaaS sales organisations. In this industry, sales cycles are often longer and deal sizes are larger. Therefore, knowing who your ideal customers are, and how many of them there 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 total addressable market?

Calculating total addressable market is the crucial first step in developing a winning sales strategy. It can deliver many positive benefits to your business. Here are the top 6 benefits of total addressable market:

total-addressable-market-benefits

How is total addressable market calculated?

There are three ways to calculate total addressable market. They are:

total-addressable-market-calculations

Let’s look at each method in more detail.

Top-down TAM

How it works

The top-down method involves taking the total number of people in a dataset and then applying demographic and geographic filters, narrowing the results down until you reach a market subset.

Here’s an example 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 aged between 18-24.
  • By multiplying 8,900,000 by 11.6%, they estimated a market size of 1,032,399.

What are the advantages of top-down TAM?

Top-down relies on gathering macroeconomic data from third-party organisations. This type of data pre-exists and can be easily sourced from a variety of websites and institutions.

What are the disadvantages of top-down TAM?

Because the data comes from third parties, it may not be entirely 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 per year).


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Bottom-up TAM

How it works

The bottom-up method is the reverse of top-down. You 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, however, 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).

For a practical example, 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.

What are the advantages of bottom-up TAM?

Bottom-up TAM is based on your own data generated in-house; therefore the final calculation is more likely to be accurate and relevant to your business.

What are the disadvantages of bottom-up TAM?

Due to the assumptions being 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.

Value-theory TAM

How it works

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.

What are the advantages of value-theory TAM?

Value-theory is useful for companies that have developed a unique product which is creating new markets or reshaping current ones. It’s a good 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, and you want to know:

  • How many people would get value out of your latest idea.
  • How much they would be willing to pay for it.

What are the disadvantages of value-theory TAM?

Value-theory is largely 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.

How Cognism calculates total addressable market

Cognism’s growth strategy all started with total addressable market. By thoroughly investigating and defining our buying audience, we were able to develop innovative products and winning go-to-market strategies.

We adhere to the bottom-up TAM method. Our flagship tool, Cognism Prospector, is ideal for generating an accurate bottom-up TAM representation.

This is our workflow:

total-addressable-market-cognismBook your free TAM demo today

Cognism’s B2B data solutions were tailor-made for accurate TAM analysis. We’d love to show you what our pioneering prospecting tech can do.

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