By Team Intricately · May 19, 2021 · 10 minute read
Total Addressable Market (TAM) is the total available market opportunity for your product, solution, or service. In this module, you'll learn exactly what TAM is, why it matters for your business, and how to calculate and use it practically.
Total addressable market – also called total available market or TAM – refers to the most revenue a business can generate by selling its product or service in a specific market.
A company would need to operate as a monopoly to win 100% of the market share, but TAM is the theoretical “size of the prize” a company could go after.
Total addressable market is a full picture of market demand for a product or service, as well as the collection of companies that have the characteristics of your ideal customer profile (ICP) – and how much they’re willing to pay for the product.
TAM is a crucial component of any account-based marketing strategy. But to calculate it accurately, you must first solidify your Ideal Customer Profile (ICP).
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Why an Accurate Total Addressable Market is Essential for ABM
Creating an accurate total addressable market is essential for your entire go-to-market program. Your TAM indicates the breadth and depth of your opportunities. Without it, you won’t know what customers you should be targeting, or how much potential revenue they can generate for your business.
By knowing the size and shape of the market you're selling to, you can break up your TAM into various sub-markets. Then, you and your organization can analyze which sub-markets to pursue – and which to avoid.
Building your total addressable market with accurate data is important for a few reasons:
It lays the foundation. Your total addressable market forces you to think through data systematically. While pushing deeper into your market research and understanding potential customers better, it shows that you’ve taken time to determine your priorities. Founders use this analysis to show investors and management teams how they think about their market, product-market fit, and product roadmap.
It propels your go-to-market strategy. When done well, understanding your TAM guides your business’s segmentation, distribution, sales, and marketing strategy.
It enables thinking beyond current markets. While establishing a TAM, some companies will answer questions about growing the total market or developing an emerging market. Will your technology or service disrupt a pre-existing industry? Calculating a TAM helps you with financial planning and sales forecasting in unchartered territory.
Founders, management teams, and investors use TAM models for different purposes. However, the research and analytical exercise put into calculating a TAM are building blocks for segmenting customers, building a successful roadmap, and getting necessary funding.
A large total addressable market looks good to investors, but an accurate and precise TAM analysis is most beneficial for scaling a successful company.
Traditional Methods of TAM Calculation and Analysis are Less Than Ideal
A Sample Graphical ICP
How to Calculate Total Addressable Market
Traditional Methods of TAM Calculation and Analysis
Traditionally, there are three methods of calculating a business's total addressable market:
Let's explore each of these methods below.
A top-down calculated TAM uses industry reports from sources like Gartner and Forrester to make conclusions about a market. This method is looked down upon by most investors.
It requires little work from the founder, which signifies no sign of a unique understanding of the market – and relies on faith in the analysts at these outside institutions.
While Gartner and Forrester are respectable sources for macro-level research, initial insights, or verifying other calculations, neither should be the sole source of input for calculating your total addressable market.
The bottom-up approach uses evidence based on a company’s early selling efforts. In other words, based on early sales, the company leans on its product's price point and number of units that are expected to sell.
Whereas a top-down strategy is based on current industry size, bottom-up looks at product-market fit factors. It uses a company’s current customer base as proof that customers are adopting the product, as well as reasons why. It builds off of this evidence to demonstrate how this company could capture similar customers in the future.
A company will also look at different market segments, each segment's addressability, and possibly competitors’ sales.
It’s not a perfect approach, however. Basing data on current customers can be limiting. Sample sizing can be limited, or – if you haven’t proven your pricing – you could be basing calculations on faulty assumptions. Assessing current customers alone to develop your TAM could limit your market potential. It’s essential to look at data that demonstrates product adoption, usage, and spending behavior to identify new verticals and prospects outside of your current customer base.
Value theory uses conjecture about buyers’ willingness to pay. Founders taking this approach are typically seeking to disrupt a market or form a new one entirely. They draw conclusions about how much value they could offer customers and how much they could charge for that value.
This type of analysis is not data-driven, relying largely on assumptions about potential customers and future purchasing behaviors.
Modern Ways of Calculating and Analyzing Your Total Addressable Market
Total addressable market can be difficult to calculate because it’s a predictive measurement, rather than one based on qualified demand in a pipeline.
Enter: modern data analytics tools. With data on current buyers within an industry, the amount they spend on similar products, overall capacity to spend – and a plan to capture these target accounts – a company has a more accurate view of its TAM.
Traditional ways of calculating total addressable market involve firmographics – revenue, company size, location, and more. Though these data points are important, they’re also lacking.
Today, with rapidly advancing technology, executives need to know how customers will use your product, not just who – the how gives more insight into data usage, current software, and current needs. Advanced platforms like Intricately can offer these insights.