What is TAM Sizing?
TAM Sizing is a top-down forecasting approach used by companies to determine their product’s total market demand and revenue potential.
The process of sizing a particular market requires informed assumptions leveraging internal company data, industry reports, and customer analysis among various data sets to quantify the revenue opportunity.
TAM Sizing Methodology: How to Size a Market (Step-by-Step)
The total addressable market (TAM) represents the entire revenue opportunity present within a particular market, which is a function of customer demand and the pricing of products/services.
Upon establishing the revenue opportunity from selling a specific product/service, the company can then decide whether or not to enter a particular market.
In the absence of sufficient customer demand and revenue potential, most companies would be deterred from entering a given market.
While all TAM market sizing exercises are “ballpark” estimate figures, the process of taking a high-level view of the market landscape and segmenting customers into unique profiles can still be very insightful.
TAM vs. SAM vs. SOM
The total addressable market (TAM) can be further broken down into 1) the serviceable addressable market (SAM) and 2) the serviceable obtainable market (SOM).
- Total Addressable Market (TAM) → The TAM is an all-inclusive, “birds-eye” view of the entire market (and representative of the total revenue potential in the market).
- Serviceable Available Market (SAM) → The SAM refers to the proportion of customers counted in a company’s TAM that actually needs its products/services.
- Serviceable Obtainable Market (SOM) → The SOM is defined as the company’s current market share that accounts for the proportion of its SAM that can realistically be captured across the forecast period alongside the growth of the overall market, i.e. the company is assumed to be able to retain its current market share percentage into the foreseeable future.
From the steps shown above, we start with the largest potential revenue value (TAM) and subsequently reduce the potential revenue based on the company and customer profile as well as relevant market assumptions to ultimately arrive at the SOM.
TAM Sizing Formula
In order to calculate the total addressable market (TAM), the total number of potential customers is multiplied by a pricing metric.
For instance, the pricing metric could be the average order value (AOV), annual contract value (ACV), average selling price (ASP), and more.
Further, the pricing terms are typically tier-based, so it is recommended to segment the customers by type, e.g. small and mid-sized enterprises (SMEs) vs. large enterprises.
One example formula for calculating the TAM in the SaaS industry is shown below.
