Did you know that 50% of businesses do not survive past their first 5 years?

Imagine that you have just started your own business. 

How would you know if your target market actually wants to buy your products or services? How would you understand whether your business will be successful or not?

The answer is through your TAM calculation. TAM Market or calculation of the Total addressable product shows you the market potential of your product. 

In this article, we’ll delve into what Total Addressable Market (TAM) is and how to calculate TAM for your business.

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What is Total Addressable Market (TAM)?

TAM or Total Addressable Market is a term that is self-explanatory. In simple terms, it refers to your total available market. TAM shows the total market potential, that is, the total market demand for a specific service or product. 

TAM is the total revenue opportunity that your product has if it could achieve 100% of the market share.

No company can possess the total addressable market for their product or service unless they are a monopoly. Say you have only one competitor. Despite this, it’d be nearly impossible to convince the entirety of the market audience to opt for only your product.

This is why the majority of companies first measure their serviceable available market or SAM. 

SAM is calculated to determine the number of customers you can practically reach with your sales and marketing channels. Using SAM, companies also understand their own share of the market. Through SAM, you get an idea of the actual size of your target market.

Yet, the total addressable market or TAM is quite useful. This is because businesses are able to use the value of total addressable market i.e. TAM. TAM  allows you to get an unbiased estimate of how much potential for growth a specific market has.

How do you calculate Total Addressable Market (TAM)?

Here are the three main methods to calculating your company’s total addressable market:

1. Top-Down

The first method to calculate the total addressable market for your business is the top-down approach. It uses research studies, industry data, and market reports,to identify and calculate the TAM. 

Here, use industry-based data to identify the parts of your chosen industry aligning with your goals and objectives. You can also gauge the importance of those parts of the industry. 

However, you will face limitations with the top-down approach of calculating the TAM. You cannot always expect up-to-date data from industry reports. Moreover, they may not always reflect specific elements of the market of your specific industry. 

In such a case, you should outsource research for your key areas to a market research-based consulting firm. That way you can be sure that the Target addressable market calculation for your company is accurate.

2. Bottom-Up

The next approach for your total addressable market calculation is the bottom-up approach. This approach of TAM calculation relies on pricing data and previous sales. Here’s how to do your total addressable market calculation by the bottom-up approach.

First, you multiply the average price in your sales by the number of customers you have at present. This multiplication will give you the annual contract value (ACV). Then, you need to multiply the ACV value by the total number of your customers.

Finally, you get the value of your total addressable market. 

3. Value-Theory

The third and final approach to calculating your TAM is the value-theory approach. It relies on the value that customers would get from your service or product. It also relies on how much your customers are ready to pay in the future for your product.

One could consider the value-theory approach as the wild card of TAM Market calculation. You can apply it best for your TAM Market calculation when a unique product creates a whole new category. In this case, you will have no market data to base your TAM calculation.

For TAM calculation by this method, you need to ask a typical buyer an important question. What would they be ready to pay for a product or service for the value that it provides? 

Then, you multiply this amount by the total number of individuals who will also agree with that value. You must then adopt this TAM Market value instead of  any other alternatives.

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Conclusion

It is quite thrilling to start a new business and calculate the growth for every new year. However, a successful business needs you to follow a realistic path and see what is possible. This is why you need to let your TAM Market value guide you through the reality of growing your business.

After your TAM calculation is done, you can make a decision about whether or not to enter that industry. For example, say you consider entering an industry whose market size ranges from $25 million to $180 million/ year. This will definitely be worth it. 

However, it won’t be worth it to enter an industry with a market size below $4 million/ year. This is because it has chance of being too niche. Similarly, an industry size of more than $1 billion/ year, would be over-saturated and it will be difficult for you to get investors.

For all these reasons it’s important to calculate your TAM market value to make smart business decisions.