What Total Addressable Market Is…and Isn’t
Marketers are familiar with the term “Total Addressable Market” (TAM), a.k.a “Total Available Market” as being the potential revenue opportunity for a product or service they are offering. Understanding the total market demand for something you’re putting out into the world is important as it should drive the design and development of those things to maximize sales and market share. On the flip side, calculating TAM may provide justification to kill an idea because the market simply isn’t there.
Corporate Finance Institute (CFI) says, “The concept of total addressable market is important for startups and existing businesses because the estimates of effort and funding required allow them to prioritize specific products, customer segments, and business opportunities.”
While TAM calculations are common, they are often misunderstood. What TAM isn’t is a routine exercise to determine how much market share your product or service might attract. It isn’t a competitive analysis, but a way to look at the entirety of a market and determine how much revenue could be earned if you captured 100% of the market share. Of course, achieving complete market domination is unlikely, but assuming it’s possible helps marketers and product developers determine if a project is worth undertaking. It identifies opportunities and provides insight into where your competitors are in relation.
For instance, if TAM research shows that even if you achieved total market ownership for a particular product or service you want to bring to market, you would only add a modest revenue boost, you would likely focus your efforts elsewhere. When you repeat this practice across all viable ideas and compare the results, it makes it much easier to prioritize initiatives based on the value each would bring to your organization and your customers. It also ensures your projects are aligned with corporate strategies and goals and are based on the most relevant data possible.
How to Find Your Total Addressable Market
Understanding your market is critical to determining where your product or service might fit in. Before any product or service is brought to market, you want to know how (or if) it can scale to become a winner.
There are several ways you can approach calculating your total addressable market, and each will yield a different result. Most experts say you have three routes to get to your TAM:
This method relies on industry research and reports to determine markets, segments, and the size of each. In this exercise, you look at your total target market and then continue to narrow it down to align with your specific target market for your product or service. This method is typically represented as an inverted pyramid, with the most general market at the top and the niche market you are trying to target at the bottom. Many experts warn against this method because it is too reliant on varying reports that are may not be completely trustworthy or are out of context.
This method depends on data from your current sales and then extrapolates that number to account for estimated future sales. By forecasting revenue based on a reasonable estimate of the number of plausible customers in your target market, your TAM calculation is relatively accurate. This is a good exercise to reveal why specific categories of customers will use your product versus those that likely won’t.
The value-created model is an estimate of your buyers’ willingness to pay for the value you believe you can provide them and how that value will be reflected in your product/solution pricing. This works particularly well if you are introducing a new product or wanting to cross-sell products to your customers because it forces you to consider exactly what your customers want enough to pay for it.
Common Mistakes in Determining TAM
Even though calculating Total Addressable Market is table stakes, it’s easy to succumb to common mistakes. Medium says the most frequent TAM calculation “blunders” are:
- Defining the market size with the problem
- Under or overestimating the market size
- Selecting a market that isn’t suitable for your product
- Choosing the wrong geographic location to sell your product, service, or solution
- Calculating the wrong price for your product, service, or solution
Many companies look at a specific market size and believe that is their opportunity. For instance, you may be developing a new firewall security software. You discover that the global IT security software industry is just over $36 billion. But that doesn’t mean you are serving a $36 billion industry. Your market may only be in the U.S. and the type of software you are developing is only a subset of that comprehensive market. If you don’t break down your market to consider your actual customers and product segment, your TAM numbers will be overblown. This failure is mostly reflected in the top-down method.
All of your TAM efforts revolve around knowing your true market – who your potential buyers really are, what they really want, and how much they are willing to pay. This isn’t throwing spaghetti on the wall and seeing what sticks. Developing new products and services or modifying existing ones is a risky and expensive endeavor. You need as much information upfront as possible before the projects consume too many resources – resources that could be spent on higher-value projects.
Data You Can Use for TAM
Manually gathering data you need to calculate TAM can be difficult and time-consuming. All of your data is likely within your MAPs and CRM systems, or elsewhere, but tapping into it isn’t always possible. What you need is to have all of the data integrated with systems talking to each other in real-time so you spend less time gathering data and more time working with the data. Even more, you need another layer to make sense of all of the data.
There may not be an app for that (yet), but there is software for that. Software that helps you automatically identify and reach your total addressable market based on real data. When you have a trustworthy, comprehensive database of all of your company’s sales prospects and customer accounts, you get a more accurate picture of your TAM. You can compare your database to all of the potential customers you should be targeting, identify segments that are missing segments, and ensure your marketing efforts are reaching the largest potential audience.
There is real value in seeing data operationalized in a visual way so you can have meaningful conversations about product or service viability and reach decisions faster. By knowing the quality of every potential marketing segment, you can develop smarter campaigns that have less risk and greater potential to add value to your company.
You don’t have to approach your TAM calculations manually. Leverage software that centralizes your data, ensures it’s accurate and current, and helps you visualize it.