Complete addressable market (TAM) is an estimation of how a lot you might earn in the event you might promote your services or products to each potential buyer in your market.
The fundamental method for calculating TAM is:
TAM = (Complete Variety of Potential Prospects) × (Common Annual Income per Buyer)
Understanding TAM helps you determine the scale of your market and the amount of cash you might make in the event you captured all of it.
TAM can also be a key metric for startup buyers. It reveals whether or not a enterprise concept has a large enough alternative. Buyers typically search for a TAM that’s “excellent” — not too massive or too small. A TAM that’s too giant may imply the market is crowded with robust competitors, whereas a TAM that’s too small might imply restricted room for development.
On this information, you’ll learn to estimate TAM utilizing three strategies, the place individuals typically make errors, and find out how to refine your estimations to make them believable to buyers or stakeholders and actionable for your corporation.
There are three approaches to calculating TAM. Relying on the accessible market knowledge, your corporation mannequin, and your stakeholders/buyers, it’s best to think about using the top-down, bottom-up, or worth concept method.
1. Prime-down method
The highest-down method begins with broad market knowledge and narrows it right down to estimate the market dimension on your particular services or products.
This method is helpful when there’s dependable, broad business knowledge accessible.
Methods to use
- Estimate the general market dimension during which your product operates, normally obtained from business reviews or analysis.
- Apply a proportion that represents the portion of the market your product can realistically seize.
Instance
If the worldwide smartphone market is valued at $500 billion, and you might be launching a brand new smartphone accent, you may estimate that your product might goal 5% of the market, which provides you a TAM of $25 billion.
2. Backside-up method
The underside-up method builds the TAM by beginning with particular, particular person knowledge associated to your corporation and scaling it up.
This methodology is nice when you’ve gotten detailed data of your buyer base and pricing. So far as I do know, buyers want this methodology, which affords essentially the most correct and actionable TAM estimation.
A couple of birds within the hand is value billions within the TAM. Early-stage (pre-Collection-B) startups shouldn’t fear an excessive amount of about calculating a exact TAM. So long as it’s in the suitable ballpark for his or her thesis, buyers care much more in regards to the traction you may present with paying clients. That’s why bottom-up is much extra convincing than hand-wavy top-down strategies that solely depend on discovering a large enough pie to say as your market.
Methods to use
- Estimate what number of potential clients there are in your goal market. You are able to do this by utilizing sources like business reviews, census knowledge, or analysis from trusted organizations (extra knowledge sources on the finish of the article).
- Multiply this quantity by the common income you count on to earn from every buyer (ARPU – Common Income Per Consumer).
Tip
To calculate ARPU, contemplate the pricing of your services or products, how ceaselessly clients will buy, and the churn fee.
For instance, in the event you cost $100 per thirty days for a subscription service, your month-to-month churn fee is 5%; on common, a buyer may keep subscribed for round 6-7 months, which means your common income per buyer could be round $600-700.
Instance
Let’s say you’ve gotten subscription-based software program that helps small companies handle their funds. You establish that 2 million small companies may benefit out of your software program. In case your ARPU is $600, your TAM could be 2 million clients × $600 = $1.2 billion.
3. Worth concept method
The worth concept method estimates TAM primarily based on the worth your product supplies to clients and the way a lot they is likely to be prepared to pay for it.
This method is very helpful in the event you’re introducing a services or products that disrupts present markets; conventional market dimension calculations could not precisely mirror the potential.
Methods to use
- Assess the worth or price financial savings that your product delivers to the client.
- Estimate how a lot clients could be prepared to pay for that worth and scale it throughout your complete market.
Instance
Suppose you’ve gotten developed a brand new energy-efficient lighting system that saves firms $10,000 per 12 months in vitality prices.
If 100,000 firms might use your lighting system, and every is prepared to pay $5,000 for it (as a result of they’ll save $10,000), your TAM could be 100,000 firms × $5,000 = $500 million.
There’s additionally a fourth possibility — a center floor talked about by fairly a number of individuals who provided their insights for this text.
I’d say the perfect methodology to estimate TAM is normally a mix of top-down and bottom-up approaches. The highest-down methodology offers you a giant image view utilizing business reviews and market analysis, whereas bottom-up helps you to construct from the bottom up utilizing your personal knowledge and buyer insights. This mixed method helps stability out the weaknesses of every methodology.
You might encounter the TAM, SAM, and SOM terminology and wish to use it if an investor requests it.
Individuals who want this method deal with TAM as a “pie within the sky” quantity and additional refine it with SAM and SOM parts of it.
- TAM (Complete Addressable Market) is the overall market in the event you might promote to everybody, in every single place. Your largest potential alternative.
- SAM (Service Addressable Market) is the portion of the TAM you may really goal primarily based on the place you use and who your product is for. For instance, in the event you’re an area espresso store in New York Metropolis, your SAM is likely to be espresso drinkers in NYC, not each espresso drinker worldwide.
- SOM (Service Obtainable Market) is the life like piece of the SAM which you can really win over, contemplating the competitors and your strengths. Persevering with with the espresso store instance, your SOM is likely to be the variety of clients you may realistically entice in your neighborhood, given components like close by rivals, your distinctive choices, and advertising and marketing efforts.
TAM is usually used to make a compelling story in regards to the potential for development, so it’s straightforward to be over-optimistic and make errors that would make your TAM look higher.
Right here’s an instance. I used a instrument that calculates TAM robotically primarily based on a URL to search out the market dimension for netflix.com. The instrument advised me that there are 7B individuals who “want it (…) even when they’re not prepared or capable of make a purchase order” and 6.3B able to make a purchase order. One thing that I discover onerous to imagine since there are an estimated 5.3B individuals with web entry worldwide.
Additionally, the best way that the instrument defines my potential clients doesn’t sound convincing to me, both, not to mention logical.
Different errors it’s best to keep away from:
- Falling into the “every thing lure”. That is when companies assume that their services or products might enchantment to everybody available in the market, main them to calculate TAM primarily based on a very broad viewers.
- Sizing the issue as a substitute of the market. This occurs when companies give attention to the overall quantity of people that may profit from their resolution with out contemplating what number of are realistically prepared to pay for it.
- Overlooking market tendencies and dynamics. The market can develop or contract, shopper preferences can change, authorities laws can affect the market, and so forth.
The fundamental knowledge sources for TAM calculations are business reviews you’ll find on platforms like Statista and census knowledge (just like the US census knowledge). Nevertheless, there are different locations the place you may search for extra detailed knowledge.
Discover the market utilizing search knowledge
Search knowledge is details about what individuals are searching for on-line. It could possibly provide help to perceive what clients need, the place curiosity is rising, and what areas are most lively.
Google Developments supplies a few of that knowledge without spending a dime. For instance, you may examine if curiosity in a plant-based food plan remains to be sturdy and the place within the US you might discover essentially the most clients.
However that’s how far this instrument goes. You don’t know what phrases are “inside” the subject or how standard a key phrase is (the numbers in Google Developments are relative). Additionally, generally Google received’t have the information, identical to for the time period “child meals subscription”.
Alternatively, you should use Ahrefs. I’m positive you’ll discover extra search phrases there and much more knowledge factors. Let me take you thru three examples.
Gauge demand with search quantity
Search quantity is an estimation of the common month-to-month variety of searches for a key phrase over the most recent recognized 12 months of knowledge.
Excessive search volumes counsel a bigger potential market. Low search volumes, counsel a smaller market (or that you’ll want to be extra artistic to search out clients).
For instance, whereas Google Developments didn’t have any knowledge on “child meals subscription”, Ahrefs’ Key phrases Explorer reveals that there are an estimated 1.2K searches per thirty days within the US of that time period. Plus, it reveals you the forecast for that key phrase.
In case you’d be planning to start out a brand new enterprise on this area of interest, you’d want compelling arguments to justify a excessive TAM estimate, as a result of the present demand for the sort of service seems to be comparatively low.
Study what individuals need and the way they search for it
Key phrase analysis can inform you what individuals need during which international locations. All you might want to know is a number of broad phrases associated to your product.
For instance, for plant-based merchandise, you might simply kind in “plant-based, vegan” after which go to the Matching phrases report back to see the recognition of sure sorts of merchandise. You can even see if the demand for these merchandise has grown or fallen over the past three months.
So, in the event you discover that the demand for many vegan merchandise has elevated, you might assume that your TAM goes to develop within the close to future as a result of extra individuals appear to be .
You can even use the instrument to robotically translate these key phrases and see what search phrases individuals use to search out the identical merchandise all over the world and the way standard they are.
And in the event you’re uncertain what key phrases individuals might use to discover a services or products like yours, simply use the AI suggestion characteristic.
Study out of your rivals
By finding out the key phrases your rivals are concentrating on, you may uncover untapped niches or areas the place demand is excessive however competitors is decrease.
For instance, say you’re a SaaS firm providing a undertaking administration instrument. In case you used Ahrefs’ Web site Explorer, you’ll discover that considered one of your rivals ranks for phrases like “engineering undertaking administration software program”. This might point out a distinct segment market with distinctive wants, the place there’s appreciable demand however much less competitors.
Whilst you’re at it, go to the Natural Rivals tab to see who else competes for a similar viewers. Chances are high, chances are you’ll discover some new potential rivals.
Use S-1 filings and quarterly reviews from public firms
Public firms’ quarterly reviews (10-Q) and S-1/F-1 filings supply wealthy knowledge for estimating TAM. They supply detailed breakdowns of income by product line, geographic area, and market section, together with insights into market share and development potential.
For instance, if an organization generates $500 million from a specific service and claims 10% of the market, you may estimate the TAM at $5 billion.
Each reviews may present steerage on future development tendencies, serving to forecast your TAM’s evolution.
You should utilize AI like ChatGPT to investigate the paperwork for you (they are often fairly complicated). Right here’s a pattern evaluation of an over 500-page F-1 submitting by an Esports firm.
Interview potential clients
Whereas reviews offer you massive numbers, speaking to actual individuals offers you the sensible insights wanted to regulate these estimates.
- By talking on to clients, you may gauge whether or not they really need your product and the way probably they’re to undertake it.
- Interviews provide help to slim down the client segments most thinking about your resolution. Possibly not everyone seems to be a match, but when sure industries or firm sizes present extra curiosity, you may focus your TAM on these segments.
- Asking clients what they’d really pay on your product offers you actual knowledge. If you realize what your goal clients are prepared to spend, you may multiply that by the variety of related clients to estimate your income potential and refine your TAM.
Use PitchBook for funding and market knowledge
PitchBook affords broader market knowledge and funding tendencies. It supplies dependable data on market valuations, funding rounds, and business development, which helps you gauge the general dimension and development potential of a market.
PitchBook additionally helps establish key gamers, making it simpler to estimate how a lot of the market is presently being captured and what stays untapped.
For instance, primarily based on Stripe’s post-valuation of $152 billion and an assumed 30% market share, Stripe’s TAM could be roughly $506.67 billion (TAM = valuation/market share).
Different instruments for SaaS firms
In case you’re in SaaS, there are a pair extra sources of knowledge chances are you’ll discover particularly helpful: BuiltWith and Latka SaaS Database.
BuiltWith is a instrument that reveals you what applied sciences web sites are utilizing. This instrument is nice for figuring out your perfect buyer as a result of you may see which firms use sure instruments or platforms that align along with your product.
Sidenote.
The Supreme buyer profile (ICP) is an in depth description of the kind of firm or one that would profit most out of your services or products. It’s useful principally for a bottom-up method to calculate market dimension, because it helps you give attention to the particular segments of the market which might be most related to your corporation.
Enter a competitor into BuiltWith, and search for the checklist of their clients. For instance, listed below are among the websites that use Salesforce. You’ll be able to kind the checklist by staff or site visitors to search out the scale of the corporate you suppose you might get on board.
The following one is Latka SaaS Database. In case you can’t discover a SaaS firm on PitchBook or BuiltWith, there’s an opportunity you’ll find it on Latka. It’s a SaaS-specific database that tracks metrics like income, buyer development, churn charges, and funding for 1000’s of firms.
Figuring out your rivals’ income and the variety of clients they serve can assist you higher estimate the scale of your potential market.
- Use rivals’ ARPU or ACV (Annual Contract Worth) to estimate your personal future metrics.
- Use the competitor’s income or valuation and apply a market share estimation to calculate TAM.
Closing ideas
Bear in mind, TAM is in the end an estimation. It’s pure to be barely off, and also you’ll in all probability have to reevaluate yearly, after important adjustments available in the market or after introducing new merchandise.
Typically, TAM calculations aren’t very correct. At greatest, you’re counting on partially recognized variables (variety of potential clients and common lifetime buyer worth). Industries additionally change so rapidly that TAM calculations can turn into irrelevant inside a matter of months.
What’s maybe extra vital than the precise quantity is the methodology behind your TAM calculation. A well-thought-out method demonstrates how severely you’re taking the enterprise and the trouble you’ve put into understanding the market.
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