Total Addressable Market (TAM) sizing studies have grown to be very popular for evaluating a business’s potential. TAM is, however, often miscalculated and misinterpreted. We will examine its calculation in this article, as well as its derivative subset waypoints for SAM and SOM. A working example will also be demonstrated for WeWork.
How to estimate market size? (TAM or Total Addressable Market)
Three methods for calculating total addressable market
Here are three methods for calculating TAM:
1. Top-down TAM analysis
With a top-down TAM analysis, you can forecast your company’s performance using information from market-research companies. The technique aims to estimate the market demand for your sector at the moment, enabling you to estimate your potential earnings. If you are selective with the data you use when performing a top-down TAM analysis method, you may get more accurate insights. Using data from reputable market research companies may limit your exposure to businesses that submit inaccurate information or lack transparency. Additionally, take into account gathering recent data from numerous businesses in your industry.
Consider doing additional research to guarantee your findings are as accurate as possible. You can obtain data that is fresh and pertinent to your industry by hiring outside consultants to manage phone or email surveys. The insights may support your calculations and build their credibility.
A company sells time-tracking software that monitors remote work. The business uses data from a market research company that claims there are 1 billion businesses worldwide to perform a top-down TAM analysis. According to another statistic, 500 million people are left as potential customers because half of all businesses employ remote workers. If a different statistic revealed that only 25% of businesses with remote workers desired to use a time-tracking tool, the business would have 1 remote worker. 25 million potential customers. The TAM would be $125 million if the company sold its time-tracking software for $100 annually.
2. Bottom-up TAM analysis
A bottom-up TAM analysis uses your company’s current prices and performance in place of industry data to forecast how much of the market it could capture. You can begin by figuring out your average selling price for a product and counting how many units you sold in a certain period of time. After that, you can estimate how many potential clients your business can reach. Using this technique, you can assess your global total addressable market or gather data for a specific geographic area.
The bottom-up TAM analysis method is popular because it offers more accurate insights by utilizing the specific data of a company. Additionally, it takes into account how a company’s entry into the market may affect the overall addressable market. You can forecast your company’s performance in comparison to other companies by performing a bottom-up TAM analysis.
Say your business sells a $20 new shampoo for hair loss. You’ve sold 50 units locally in the last week. These sales amount to $1,000 weekly or $52,000 annually. Your marketing department estimates that 30,000 potential customers in your state could be reached by advertising, increasing your potential annual revenue to $1,560,000. You could carry on with these calculations if you wanted to reach a national or even global audience.
3. Value theory TAM analysis
Performing a value theory TAM analysis entails figuring out what your target customers value. You can carry out research using sources like market research or client surveys. You then work to incorporate this value into your product and estimate how many customers will be willing to pay more for it. The process also includes estimating the additional revenue that customers would pay.
When entering a market, startups can use value theory TAM analysis, but many established businesses also do. They might want to forecast how new products will perform or determine how audiences will react to product upgrades. These calculations can help you decide whether it would be more profitable to concentrate on your current product catalog or launch a new product.
Due to its theoretical nature, this approach can be difficult to implement, but it can help you outperform your competitors. For example, consider a company that specializes in grocery delivery. Parents who are busy, seniors, and anyone else who needs assistance with shopping will find this service useful. Because it saves these customers from going to the store or asking a relative to finish their shopping, your service is valuable. You might find that clients are willing to pay 15% of their grocery bill for your service, in which case you would put in place the proper pricing strategy.
What is total addressable market?
The demand for your good or service across the entire market is known as the total addressable market (TAM). It takes into account how many customers are interested in what you sell and the potential profit. Knowing your company’s potential revenue can help you identify growth opportunities and convince investors to fund your business.
Three uses for total addressable market
Here are three applications for your TAM figure:
Predict your companys profitability
After determining your TAM, take into account how much of the audience you can actually reach. This estimate can assist you in estimating the potential revenue for your business. Then, you can take into account your business’s costs to project total profits. This analysis can help you decide whether a market is profitable enough for you to enter and how you might stack up against competitors.
Find your target audience
Most businesses find it difficult to engage all of their TAMs. Instead of trying to appeal to as many consumers as you can, think about identifying your target market. By identifying the population segments that might be interested in your goods or services, you can reduce your TAM. For example, if your TAM is comprised entirely of laptop users globally and you have a U S. company, you might focus on marketing to U. S. laptop users.
Appeal to investors
Investors typically prefer to work with businesses that have a financial strategy. They might also want to see that you are entering a midsize market because niche or oversaturated markets can be difficult for startups to succeed in. Investors may be more inclined to provide funding if your TAM demonstrates that you have the potential to make money.
Total addressable market vs. market share
Each competitor in a market with competition must split the total addressable market. The section that each competitor has is a market share. If your business operates in a market with lots of competitors, your market share will be lower. Your market share is higher if there are fewer rivals. In a monopoly, your company’s market share would be equal to the total addressable market.
TAM vs. SAM vs. SOM
The portion of the TAM that you can serve is known as the SAM (served available market or serviceable available market). For a company that sells laptops in the U. S. the SAM would be the U.S. laptop market, while the TAM would be the global laptop market. S. laptop market.
The SOM (serviceable obtainable market) further reduces your market by taking into account the types of customers you can reasonably expect to attract. The SOM would be a portion of the SAM in the same example after taking competitors in the U S. laptop market.
FAQ
What total addressable market means?
The term “total addressable market” (TAM) describes the largest possible market opportunity for a specific good or service. To put it another way, if each and every person who could possibly benefit from a product or solution bought it or began utilizing it (i e. 100% market share), how big would that market be?.
What is total addressable market example?
In the beginning, multiply your average sales price by the quantity of your current clients. This will yield your annual contract value. Then, multiply your ACV by the total number of customers. This will yield your total addressable market.
What is TAM and Sam?
For example, your company sells laptops. The total number of consumers who purchase laptops annually, or about 60 million Americans, is your potential market size.
