Total Addressable Market (TAM)

Date created: Apr 21, 2021  •   Last updated: Jul 5, 2021

What is Total Addressable Market?

Total Addressable Market (TAM) is a measure of the revenue opportunity of capturing 100% of the market for a product or service.

Formula

ƒ Count(Total Number of Potential Customers) * Sum(Annual Contract Value)

How to calculate

Say your company provides a cloud storage solution with an annual contract value of $13,000. You identify through research that there are 400,000 companies who are potential customers. Your TAM is therefore 400,000 * $13,000, or $5.2 billion.

Total Addressable Market

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What is a good Total Addressable Market benchmark?

If you’re looking to enter a market with your new product or service, the larger the TAM generally the better. Venture Capital firms often look to invest in businesses with a TAM in the billions.

More about this metric

Total Addressable Market is the size of the opportunity for your product or service in the market. Calculating TAM is a crucial part of research you should perform before entering or expanding into a new market. Since you cannot capture everyone, it is good to have an idea of the potential market size for your product or service.

You can calculate this number through three main methods: the top-down approach, the bottom-up approach, and the value theory approach.

The top-down approach involves starting with research about a given industry compiled by research specialists such as Gartner or IDC. This is the method that involves the most guesswork and estimation and is not recommended for detailed market analysis. In the bottom-up approach, you look more at specific market segments that you are going after, add them up and then multiply by the annual price. It is a more nuanced analysis of the market you are going after. Finally, the value theory approach calculates TAM through an analysis of the potential value a product or service could bring to customers, by comparing it against a similar or substitute product or service.

TAM is an umbrella term that can be further narrowed down into SAM (Serviceable Available Market) which focuses on the market share specific to your product or service, and SOM (Serviceable Obtainable Market) which is the realistic market share for your product or service. A complete market share analysis would look at all three numbers.

Recommended resources related to Total Addressable Market

Gartner shares how to calculate potential market size for a new tech product or service.Read about the difference between TAM, SAM, and SOM.