Total Addressable Market (TAM): What It Is & How You Can Calculate It
By cchi@hubspot.com (Clifford Chi)
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Whether you want to start a new company or forecast realistic revenue growth, measuring your total addressable market is a crucial first step.
In order to understand how much of the market you can secure — and how much revenue your business can generate — you’ll need the right formula.
In this post, you’ll learn what total addressable market is and the best way to calculate it.
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Unless they’re a monopoly, most companies can’t capture the total addressable market for their product or service. Even if a company just has one competitor, it would still be extremely difficult for them to convince an entire market to only buy its product or service.
That’s why most companies also use other metrics to analyze the market.
Companies can measure their serviceable available market (SAM) to determine how many customers they can realistically reach. Additionally, they gauge their share of market (SOM) to understand the size of their actual target market.
However, TAM is still useful. Businesses can use a total addressable market analysis to objectively estimate a specific market’s potential for growth.
How to Calculate TAM
There are three ways to calculate your business’ total addressable market.
1. Top-down
The top-down approach uses industry data, market reports, and research studies to identify the TAM. In this approach, you might use industry data from Gartner or Forrester to identify which subsections of your industry align with your goals and offerings.
However, there are limitations here. Data generated by industry groups may not always be kept up-to-date and may not reflect niche elements of your market.
You may want to hire a market research consulting firm to conduct fresh research that is focused on your market.
2. Bottom-up
The bottom-up approach to TAM calculation is based on previous sales and pricing data.
First, multiply your average sales price by your number of current customers. This will yield your annual contract value.
Then, multiply your ACV by the total number of customers. This will yield your total addressable market. Let’s see what this looks like in an example.
Say you sell scuba fins to dive shops in the state of California.
You might sell an average of 60 pairs of fins, at $35/pair, to dive shops in California.
60 multiplied by $35 equals an ACV of $2,100. Then, you’d multiply your ACV ($2,100) by the total number of dive shops in California (125) for a total addressable market of $262,500.
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Source:: HubSpot Blog
