Market size is one of the main areas of interest of every company, which is why today we will learn what the total addressable market is and why we should pay attention to this indicator.
By tracking this business metric, you will have a starting point for the growth opportunity in a given space.
What is the total addressable market?
It is a measure of the revenue opportunity of capturing 100% of the market for a product or service. Show the value in pesos of your potential market. Although this is a broad category, you can’t simply label everyone within your reach as part of your market.
Total Addressable Market and market size are important metrics in the product-market fit stage. Being able to back up your numbers from all angles will give you credibility and confidence.
Total Steerable Market Formula
ƒ Count (Total number of potential clients) * Sum (Annual contract value)
How to calculate the total addressable market
Let’s say your company offers a cloud storage solution with an annual contract value of $13,000. Through research, we identified that there are 400,000 companies that are potential clients. Your TAM is therefore 400,000 * 13,000 dollars, that is, 5.2 billion dollars.
Calculating the total addressable market is a crucial part of the research that should be done before entering or expanding into a new market. Since you can’t reach everyone, it’s good to have an idea of the size of the potential market for your product or service.
You can calculate this figure using three main methods: the top-down approach, the bottom-up approach, and the theory of value approach.
The top-down approach involves starting with research on a given sector collected by research specialists. This is the method that involves the most guesswork and estimation and is not recommended for detailed market analysis.
In the bottom-up approach, the specific market segments being pursued are further examined, added up, and multiplied by the annual price. This is a more nuanced analysis of the market being pursued. Finally, the value theory approach calculates the TAM through an analysis of the potential value that a product or service could bring to customers, comparing it with a similar or substitute product or service.
The total addressable market is a general term that can be divided into SAM (We Can Serve Market), which focuses on the specific market share of your product or service, and SOM (Available Market), which is the realistic market share of your product or service. A complete market share analysis must take all three figures into account.
Importance of the total addressable market
This metric is important because startups and existing companies use it to estimate the potential scale of the market in terms of total sales and service revenue.
In accounting, the terms “sales” and “revenue” can and often are used interchangeably to mean the same thing. Income does not necessarily mean money received. When a company is launching a new product, a new customer segment, or considering selling an existing product to existing customers, the TAM helps break down these numbers into manageable levels.
An investor must be objective when estimating the available market, since an exaggerated value can lead to markets with lower growth potential. The ideal market for any entrepreneur is one with potential growth capacity.
Conclusion
The total addressable market or TAM is the total market demand for a product or service. It is the maximum amount of revenue that a company can potentially generate by selling its product or service in a specific market.
Calculating your total addressable market is useful for several reasons beyond simply estimating the size of your opportunity. The process can also allow you to delve deeper into the composition of your market, so you can better segment and target your components. This analysis can guide you in marketing your product and give you a reliable idea of where you need to put more effort and where you can expect greater performance.
A specific and well-thought-out calculation of the total addressable market or TAM is also the best way to convince potential investors that you are prepared to market your products effectively.
The use of a dashboard will be very useful to visualize this and other indicators and monitor the health of your business for better decision making.