<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=4015980235086547&amp;ev=PageView&amp;noscript=1">
Request demo

What is total addressable market?

Total addressable market 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 population 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 TAM important?

It all comes down to a basic business 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.

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.

How to calculate TAM

There are three ways to approach calculating TAM. They are:

  1. Top-down

    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.

    What are the advantages?
    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 global institutions.

    What are the disadvantages?
    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).

  2. Bottom-up

    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. 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).

    What are the advantages?
    Bottom-up TAM is based on your own data generated in-house; therefore the end result is far more likely to be accurate and relevant to your business.

    What are the disadvantages?
    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.

  3. Value-theory

    How it works
    The value-theory approach 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?
    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, and how much they would be willing to pay for it.

    What are the disadvantages?
    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 we use TAM at Cognism

Cognism’s growth strategy all started with TAM. By thoroughly investigating and defining our buying audience, we were able to develop innovative products that suited their needs and codify successful go-to-market strategies for sales and marketing. It’s partly the reason why we’ve scaled so well over the last 2 years - growing our revenue by 600% in 2018 and going from $2.5 million to $7 million in ARR in 2019.

Would you like your business to grow in the same way? Our advice is - lock down your TAM first!