What is TAM?
The Total Addressable Market (TAM) measures the market demand for a certain product/service, which can estimate the revenue opportunity applicable to a company.
How to Calculate TAM (Step-by-Step)
TAM, shorthand for the “total addressable market,” is representative of the entire revenue potential within a particular market.
For companies of all sizes – ranging from early-stage startups to established, low-growth companies – market sizing is an essential step in determining the growth potential of the company.
- Startups calculate the market size to see if a market is even worth attempting to disrupt.
- Mature companies use the metric to evaluate their remaining “upside” potential and to look elsewhere if deemed appropriate (i.e. introduce new products/services).
The TAM of a company could sometimes be expressed in terms of the total number of potential customers, split out by customer sizes.
However, the far more prevalent method is for the TAM to be measured in terms of revenue.
If a startup seeks to grab 10% of its $1 billion TAM, that implies its target revenue is approximately $100 million.
How to Interpret TAM: Market Sizing Analysis
TAM figures, even if well-thought-out, are simplified calculations at the end of the day – hence, market sizes are never taken at face value, especially for startups pitching to venture capital (VC) firms.
The real value of calculating the TAM stems from the basic principle of “knowing your customer.”
If a company does not know its TAM or did not even attempt to get to a ballpark figure, that implies the company does not know the number of potential customers there are.
Furthermore, a company that does not know how many customers can be obtained, in all likelihood, cannot provide a defensible projection model to investors when raising outside capital.
Besides estimating the total potential revenue, other benefits of companies calculating their TAM are as follows:
- Identify New Revenue Opportunities
- Find Investors with Aligned Timeframes (i.e. Venture Capital, Growth Equity, Late-Stage Private Equity)
- Targeted Sales & Marketing Campaigns for Different Customer Segments
Over time, as a byproduct of TAM analysis and the proper implementation of the data, a company should see improved growth from well-defined strategies and better customer retention (i.e. low churn rates).