What Is Total Addressable Market (Tam)? | Glossary

What Is Total Addressable Market?

Total addressable market (TAM), or the total available market, describes the overall revenue opportunity for any given product or service on the presumption of a 100% market share.

To simplify that, it’s a way of describing the potential value of a product and how much revenue it could generate for an organization. This helps businesses understand how much they should be investing and which products and services they should prioritize when considering their content marketing strategy, for example.

Primary Benefits of Understanding TAM

Every business leader wants to know if their product will be successful. However, success depends on positioning goods in the right market at the right time. Investing heavily in a product with no meaningful need can result in negative ROI.

TAM is a way to ascertain the potential revenue of goods before putting marketing plans into place. This helps businesses create strategic, financially viable budgeting and product evolution roadmaps.

TAM also helps businesses uncover the following:

Is there a good product-market fit? Are there too many competitors in this market? Is there evidence to demonstrate to investors and other stakeholders that this venture can generate significant ROI? Is there potential to expand into other markets? TAM calculations require significant research and a deep understanding of the relevant market and its challenges. Some industries will naturally have a larger TAM than others. For example, Airbnb potentially has a TAM that includes anyone booking accommodation online. According to research, that’s up to 700 million people each year. In 2021, Airbnb calculated this TAM to be worth $3.2 trillion, a figure sure to impress investors.

How To Calculate Total Addressable Market

There are generally four ways to calculate TAM, each utilizing different data points. Because of this, TAM is never a fixed figure, and it changes depending on the calculation method employed.

Top-Down TAM

The top-down TAM analysis focuses on macroeconomic factors. These include local population sizes, demographics within that population, and economic challenges for those demographics. Organizations typically get this data from external resources such as the Organization for Economic Co-operation and Development (OECD) or the United Nations Fund for Population Activities (UNFPA).

Top-down TAM can be calculated as follows:

• TAM = (number of people in geographic location) x (product requirements) x (product base price) x (desired margin) x (time period)

Example: A company wants to sell animal feed within Texas.

• TAM = (number of farmers in Texas) x (recommended daily amountt of feed) x (feed base price) x (50% margin) x (365 days)
• TAM = 248,416 x 24 (pounds of food) x $0.21 x .50 x 365

This results in a total TAM of $457 million, rounded up.

Remember, this isn’t guaranteed income. It"s the potential revenue if everyone in the addressable market purchased at the rates within the calculation.

Bottom-Up TAM

Bottom-up TAM calculations are considered the more accurate option. This is because you start with existing data points within your organization and extrapolate.

You can make bottom-up TAM calculations based on revenue.

Example: If you sell SaaS (software as a service) products, you can apply your sales success to the same demographic over a wider area. Say your current revenue in a small town is $1 million, and you expand into a city with four times the number of people with the same demographics and buyer traits.

• TAM = (current revenue) x (percentage of people in expanded area)
• TAM = $1 million x 400%

This shows you could potentially yield a revenue of $4 million.

TAM can also be described as a percentage of any given population based on the currentt share of the market.

Example: If you market primarily to B2B buyers in large enterprises, expanding to medium enterprises could net you the same percentage of buyers in a larger market. That percentage multiplied by the new number of potential buyers multiplied by your subscription cost is your bottom-up TAM.

• TAM = (market population percentage) x (number of new potential buyers) x (subscription cost)

Value Theory TAM

New technologies and evolving products don’t necessarily have existing markets to research. Value theory approaches TAM by considering the potential impact of new goods and services.

To calculate value theory-based TAM, you must research:

• What will customers be willing to pay for the service?
• Is there a market requirement for the product or service?
• How many potential users would there be?

There is no fixed calculation because these figures fluctuate. Also, other factors can feed into the value theory approach.

Extrapolating TAM Using External Research Companies like Gartner, IDC, and Forrester do the hard work to gather industry-specific data. They research market share and industry value, providing those figures to other organizations. This pre-calculated data can be used to work out TAM figures more quickly.

Subsets of TAM

The business-savvy reader will note that claiming 100% of a market share is almost impossible. That’s why many business strategists utilize two subsets of TAM, known as SAM and SOM.

SAM

SAM stands for serviceable available (or addressable) market. Rather than considering the entire market share, SAM considers the portion of the market targeted directly by the business. This could be a figure provided side-by-side with the TAM to demonstrate how much of the market an organization can potentially corner.

SOM

SOM means serviceable obtainable market and assumes that it"s possible to onboard everyone in this segment. In other words, this is the portion of the market that businesses are confident they can capture. A good example would be the rise of the iPod against rival Microsoft Zune devices. Apple timed the launch of their product perfectly, capturing the market so well that they drove the Zune out of business. Confidence in a significant market share, talented marketing, and a flare for publishing data at the right time created a vast SOM.

Businesses can also break these markets up into smaller segments. For example, you can focus on loyal customers only or particular demographics. Then, marketing leaders can utilize this data to drive campaigns that effectively target the most significant number of people within those segments.

Drive Growth Through Targeted Content Marketing

Understanding your target market helps you create strategies that drive continuous growth. One vital aspect of that is content marketing. Your content should reflect your corporate values and brand messaging and resonate with your target audience. Businesses should consider outsourcing expert help to get the most out of their TAM calculations and expand their available market as much as possible.

Scripted provides AI-powered content generation tools and a unique pool of carefully curated content creators from across multiple industries. Scripted’s one-stop platform is the only digital tool offering both human and AI written content, plus it utilizes AI to make ordering and revising content far more efficient.

To find out how Scripted can optimize your content marketing strategy, schedule a demo or register for a free account today.

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