Total Addressable Market (TAM): What It Is & How You Can Calculate This
In college, I interned at a MarTech company that sold email marketing optimization software. Using their software, brands could lastly gain visibility into their email program’s deliverability rate or inbox placement, which most email service providers, like Continuous Contact or MailChimp, can’t do.
The business’ biggest revenue stream was a funnel partner program that enabled email service providers to sell my old company’s software to their own customers. And one day, at an all-hands meeting, the CEO showed us a slide that listed each and every email service provider we partnered with and the amount of clients they all had.
He informed us this was our total addressable market. Then, this individual showed us a slide of how much of the market there were captured — it was just one digit percentage. Even though all of us generated $100 million within revenue per year, we were surprised at how little from the market we had secured. It also helped us realize that we still had plenty of area to grow, which motivated us to win as much of the market as possible.
Whether you want to begin a new company and measure its industry’s profit potential or forecast a realistic revenue growth goal for your company, measuring your total addressable market is a crucial 1st step you must take. To help you do this, we’ve put together a guide that’ll teach you exactly what overall addressable market is as well as the best way to calculate this.
Complete Addressable Market (TAM)
Overall addressable market or TAM refers to the total market need for a product or service. It’s the most amount of revenue a business can possibly generate by selling their product or service in a specific market.
Except if they’re a monopoly, most companies can’t capture the total addressable market for their product or service. Even when a company just has a single competitor, it would still be extremely difficult for them to convince an entire market to only buy their own product or service.
That’s why additional also measure their serviceable available market to determine the number of customers they can realistically reach with their marketing and sales stations. Additionally , they gauge their own share of market to comprehend the size of their actual target market.
However , total addressable market is still useful because companies can use TAM to objectively estimate a specific market’s possibility of growth.
How to Calculate W TAMTYM MIEJSCU
There are three ways to calculate your business’ total addressable market.
1 . Top-Down
The particular 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 line-up with your goals and providing — and just how big individuals subsections are.
However , there are limitations here. Data generated by industry groups may not always be kept up to date and might not reflect niche aspects of your market. You may want to hire a market research consulting firm to conduct fresh research that is focused on your need areas.
2 . Bottom-Up
The particular bottom-up approach to TAM computation is based on previous sales and pricing data. First, grow your average sales price by your number of current customers. This will yield your yearly contract value. Then, multiply your ACV by the total number of customers. This will yield your total addressable market. Why don’t see what this looks like in an example.
Say you sell scuba diving fins to dive stores in the state of Ca. You might sell an average of 60 pairs of fins, from $35/pair, to dive stores in California. 60 increased by $35 equals an ACV of $2, 100. Then, you’d multiply your ACV ($2, 100) by total number of dive stores in California (125) for the total addressable market associated with $262, 500.
The value-theory approach is based on how much value consumers get from your product/service and how a lot they’re willing to pay later on for that product/service.
To return to the scuba example, let’s say you manufacture a type of fin that may be lighter than your competitors and has patented technology that makes them easier to get off than anything in the market. You’d identify your own value-theory by estimating just how much dive shops would be ready to pay to carry your excellent product. If normal fins are being sold at $35 some, would dive shops pay $40 or even $45 for the pair of your ultra-lightweight fins?
After you calculate your total addressable market, it’s time to determine whether it’s worth entering the industry or not.
An industry having a market size ranging from $30 million to $200 million per year might be worth getting into. However , if the industry’s marketplace size is under $5 million per year or over $1 billion dollars per year, it’s probably not.
In both situations, it’d be difficult to persuade investors to back your company — a market with a market size associated with $5 million per year may likely be too niche plus an industry with a market size over $1 billion would likely be too saturated.
Know Your TAM Before You Do something
Starting a business or predicting next year’s revenue development is always thrilling. But if you would like to follow a realistic path toward success, you need to first understand what’s actually possible. So let your total addressable market be your Northern Star and guide you via a journey that’s rooted the truth is, not hype.
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