Total addressable market (TAM)

Why bother with total addressable market? Knowing the total addressable market (TAM — basically, your maximum revenue opportunity volume) provides an objective assessment of the market situation. It also allows to see opportunities for the future development of given company, service or product, determine future positions in relation to competitors, choose appropriate lines of business, plan …

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Dmitrii Borodin
Founder and product owner

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'Total addressable market (TAM)'

Total addressable market (TAM)

Why bother with total addressable market?

Knowing the total addressable market (TAM — basically, your maximum revenue opportunity volume) provides an objective assessment of the market situation. It also allows to see opportunities for the future development of given company, service or product, determine future positions in relation to competitors, choose appropriate lines of business, plan production, finances and develop a sales program for different regions.

TAM (total addressable market) indicates how many сlients are there in the target market and how much they need (not necessarily can buy), products/services in the same product/service category that you offer. The key question for determining your TAM is: who can needs your product or service and to what extent.

The total addressable market calculation logic

b2c business example

  • Need: bakery foods
  • Your product:  premade baked frozen products
  • Product category: bakery products
  • Target market (the market you are targeting): UK

TAM result in this case

  • Consumption rate: 200 grams/person/day of all baked goods
  • Population: 66 million people
  • Total: 9 000 tons/day

This article will be useful for the following segments:

  • startups
  • b2c
  • b2b
  • digital

What input data you need to calculate TAM?

As a brief introduction, let’s first take a look at input data you might need. In order to calculate TAM, you must first collect the necessary information using market research. The following questions will help you solve this problem:

Factors & indicators Description
Period Month/quarter/half a year/year
Market Region USA, Western Europe, Asia, Far East, etc? This will be helpful in working out further factors
Competition How many other companies already play in this particular market or actively aim at it? Remember: in that case TAM revenue is going to be split between you.
Product group/type E.g.: are you going to sell cars? Or cars & parts? Or cars, parts & services? It is important to specify this accurately in order to further define your addressable audience.
Audience

Is it the entire population of 18+? What about gender? Women? Or anyone?

Consider:

  • Age
  • Gender
  • Income levels
  • Social/marital status (in case with, say, baby strollers)

The more precise you are, the better your revenue estimation is.

Metrics The main are — number of clients and total revenue/per year (in case you choose 12 month period for your calculations)
Sources Where can you get this data? Resort to official statistics or/and hire a market researcher. Better do both for better results.

Now with that in mind let’s move forward and take a look at general approaches one can use to work with that data and calculate TAM.

The 3 approaches to TAM calculations

There are three primary approaches to how to calculate total addressable market: top-down, bottom-up and value theory.

Top-down approach

The method involves determining the size of the market based on the data of domestic sales of all market players for the billing period (if it is impossible to cover all players – it is enough to take only the large ones making up 80-90% of the market sales).

The formula for calculating the market capacity for the top-down approach is as follows:

Market capacity = Sum of sales of all companies on the market, expressed in sales prices to the buyer (that is, not in shipping, but in retail prices).

Information can be obtained through surveys of large market players, as a result of open reporting published by players in some markets.

So, this approach is kinda okay, if you trust the data obtained, but vague enough to not risk your whole game. Unless you’re a huge company and you occupy a solid position in a very specific market like oil refinement. I’d advise startups mostly to steer clear from it for their own good.

Bottom-up approach

This method is, in my opinion, more preferable. It relies on a solid data you as a company can provide to your partners or investors. It is based on what you can produce, how you can price it and whom you can cater it to, including the level of demand for your particular product. The bottom-up TAM is equal to the sum of all expected purchases of goods by the target audience volume over the billing period (more often, annually).

Calculation. If you want to estimate TAM using the “bottom-up” approach, then you’ll need input presented earlier in the article and a couple of formulas presented below.

Your job here is:

  • to define your target audience and its volume
  • calculate TAM based on this data
TAM Formula
TAM in quantitative terms TAM volume over the period N (thousands pcs) =  target audience volume (thousands ppl) * rate of consumption of goods over the period N (pcs)

[the same goes for volumetric consumption, when we talk about coffee shops, bars, or other commodity markets. Use ounces/litres/pounds instead of pieces]

TAM in monetary terms ($/€/etc) TAM volume over the period N ($/€/etc) = target audience volume (thousands ppl) * rate of consumption of goods over the period N (pcs) * the average price of 1 unit of product on the market ($/€/etc)

What’s great about this approach is that it not only clears things up for you giving you a tangible perspective but it is also a reliable set of data for a pitch. Investors are more likely to trust companies (especially if we’re talking about startups) who are able to prove their point and showcase the potential success of their endeavour.

Real sales approach

Many research companies, such as Nielsen (formerly known as AC Nielsen) currently use this approach. The essence of it is in tracking actual sales of certain categories of goods through actual receipts of real buyers.

This approach only fits into large chain stores. A company signs a data supply agreement with a chain and their stores provide a representative sample. As a result, the data obtained can be extrapolated to the entire country.

In this approach it is impossible to isolate a specific audience, but it is possible to realistically estimate: at what price and in what volume individual products are sold over the billing period. This approach allows you to analyze information in all its dynamics.

And remember: TAM assessment should not be taken lightly. Apart from calculating numbers it is also a great way to model a meaningful roadmap for future business scaling.

TAM specifics in B2B industry

Estimating TAM in the B2B segment is much easier than dealing with consumer market. But that’s if you know which indicators to use and which direction to follow.

To figure out TAM we need the following information:

  • a list of potential companies,
  • purchase frequency (of goods or services provided by target companies),
  • average order value.

In order to estimate b2b TAM, first examine the current customers of the company. You need to evaluate:

  • Whether current customers can be divided into specific groups that differ in the way they interact and requirement they have for the product?
  • How often during the year does each group of customers place an order?
  • What is the average cost of 1 order for each group of customers?

Know your boundaries

Correct TAM assessment requires that you know your market boundaries. To do this, you only need to make a list of the countries and/or cities in which you operate or plan to carry out your activities.

Working with the base of companies and assessing TAM

Calculation of the volume of the target market is a laborious process, and this stage is the longest and most ambitious. Without the help of sales managers who work in the target market, it becomes a process very difficult to pull off.

Humble self promotion: prospects list building is a fundamental thing in b2b sales, thats why we have market research listed at GRIN Launcher as separate service. Basically, when we figure out target profiles for customers and do list building of say “CTOs in Bay Area of Warehouse companies with head count up to 500” thats a TAM metric for them that can be further extrapolated to same parameters by targeting a wider geo. Here is an article covering the topic in greater details: Scraping LinkedIn – scalable approach to prospecting & lead gen

 

How much it costs

Costs also depend on the company’s objectives and business specifics. Sometimes you can get by buying a finished report (as in top-down approach). For some markets there is barely any statistics at all, no ready-made studies, market players are extremely reluctant to share any information, so special studies are the only way out.

To sum it up on Total Addressable Market

In b2b sales list building alone is so many potential pitfalls and miscalculations, that I don’t believe that it is possible to execute TAM calculation without external help unless you have a relevant background.