What Is Total Addressable Market & How Do You Calculate TAM for Your Product?

TAM, however, is critical for any business looking to implement a successful go-to-market (GTM) strategy for a product or service. Understanding the total addressable market can be the difference between putting time and money into an offering that will never get off the ground and launching a line that delivers outstanding ROI. 

So, let’s define TAM, explain why it matters, and present some options for how to calculate it. 

What is total addressable market (TAM)?

Total addressable market (sometimes called total available market) refers to the total market demand of a product or service if you achieve a 100% market share. In a nutshell, if every person or business who might be interested in the product bought it, how much would that market be worth.

TAM meaning in business

So, that’s a straightforward definition of TAM, but what does it really mean for a business like yours? 

TAM is an evaluation of the maximum potential revenue opportunity for your specific product or solution. So, it represents the potential size of the market if every customer were to adopt the offering, achieving 100% market share. 

Now, we think it's important to point out that TAM doesn't actually represent the specific figure associated with your future customers or revenue. Instead, it serves as a theoretical framework that tells you (and your potential investors) the total size of the market before those pesky external factors, like competition and alternative solutions, come into play. 

For example, if you work as a marketing manager for a web analytics company that’s just introduced a new data visualization tool, your TAM would include every business, large or small, that could potentially benefit from better data presentation. We’re talking about industries like finance, healthcare, e-commerce, and more.

Total addressable market vs serviceable addressable market and serviceable obtainable market

To fully understand our total addressable market definition, it’s worth comparing TAM to two other similar concepts. Those are serviceable addressable market (SAM) and serviceable obtainable market (SOM). 

Sorry, there’s two more of those acronyms, but at least we’ve summarized the difference between total addressable market, serviceable addressable market, and serviceable obtainable market in a handy table!

How to calculate total addressable market: Your 4 main options

There’s no one quick-and-easy total addressable market calculation you can carry out. Unlike with some business metrics, there isn’t a total addressable market formula into which you can plug your individual numbers. 

Instead, you have four principle approaches to choose from when calculating TAM:

1) Top-down approach

If you use the top-down total addressable market model, you’re going to be relying on industry data, market reports, and research studies to figure out your TAM. 

This method is all about getting data from those reputable sources we all know and love, like Gartner or Forrester. You’ll use this data to spot any relevant sections of your industry and assess their size.

However, it's important to note that industry-generated data might not always be current or cover the niche aspects of the market you need. 

If you find that’s the case when you’re creating your TAM sizing, consider hiring a market research consulting firm to conduct tailored research. This can provide more accurate and specific insights.

2) Bottom-up approach

The bottom-up approach to TAM uses first-party data from your own sales and pricing information.

First, you multiply your average sales price by your current customer count. This will give you your annual contract value (ACV). You then multiply your ACV by the total number of potential customers in your total addressable market. That’s how you get your TAM.

Here’s a simple formula to help: 

(Total # of customers) x (Average contract value) = Total Addressable Market (TAM).

To put this into perspective, let’s take a look at an example.

If you sell cupcakes to bakeries in California and typically sell 1,000 cupcakes a year at $5 each, your ACV would be $5,000. 

By multiplying your ACV ($5,000) by the total number of bakeries in California (which is around 31,000), your TAM would amount to $155,000,000).

3) Value theory approach

The value theory approach focuses on understanding how much value customers would get from your product or service and how much they’d be willing to pay for it in the future.

Let’s go back to our cupcake example. Imagine you have a special type of cupcake with a secret recipe and amazing taste. Using this approach, you’d figure out if customers would pay more for your premium cupcakes compared to standard ones. For instance, if regular cupcakes sell for $3 each, would customers be willing to pay $7 for your gourmet ones?

To answer this question accurately, you can’t just guess. You’ll need to conduct a competitive pricing analysis, looking at what your direct and indirect competitors offer and their prices.

Let’s say you do believe customers would pay $7 for your cupcakes, now you have to get into the maths. 

Assuming about 20% of all cupcake lovers in your area prefer premium cupcakes, and there are approximately 1,000,000 potential customers, that means there are 200,000 people interested in your cupcakes. 

So, you’d take your premium cupcake price ($7) and multiply it by the number of customers in that segment (200,000). Your final Total Addressable Market (TAM) is $1,400,000.

In reality, this approach to calculating TAM probably wouldn’t be used for products as simple as cupcakes. It is a model suitable for more complex offerings, however, such as if you’re looking to calculate SaaS total addressable market figures. 

4) Another option: External tools

Finally, like all aspects of business nowadays, you can find a number of automation tools to help you completely streamline this process. 

This will save you time and effort that you can then use to work on your pitch deck to potential investors, flesh out your new product or service offerings, or create engaging marketing campaigns.

The best thing about this option is that you won’t even need to spend a penny. With tools like Dealfront’s TAM Calculator, you can complete your TAM calculations in minutes completely free of charge. 

Just enter the relevant information into the fields as required, then let the total addressable market calculator do the hard work for you!

Total addressable market example

So far, so theoretical, but what does it all mean in the real world?

Let’s go back in time to show you how TAM played an extremely important role in shaping the trajectories of one of the most iconic hospitality tech companies currently operating: Airbnb.

It’s 2009 and Airbnb is just getting off the ground. At this point, the idea of staying in someone else's home while traveling is unheard of, and the traditional hotel industry is dominating the hospitality sector.

Airbnb's founders saw an opportunity to disrupt the market by connecting travelers with unique accommodation options offered by individual hosts. However, before they could convince investors to buy into their vision, they needed to understand the TAM for their platform.

Using TAM analysis in their initial pitch deck to investors, the founders were able to provide a concrete idea of what they could achieve with their business. 

The result? The founders walked out of their pitch presentation with $600K in funding and went on to propel Airbnb to Unicorn status and beyond.

Why is TAM important?

Not all businesses are going to be able to emulate the success of Airbnb. However, calculating total addressable market is still a crucial step toward successfully launching a product or service. Here’s why:

1. It validates your business idea

You might have a business idea that you think is a winner. TAM can help reveal whether it holds as much promise as you initially believed or give you that much-needed reality check by providing data on the market's size and potential customer base.  

For example, if you want to launch a content marketing agency, TAM analysis can help you see if there’s enough demand for one in your chosen location setup.

2. It expands your thinking beyond current markets

TAM makes you think beyond where sales are currently happening. For instance, you might start considering ideas that could expand the overall market or create entirely new ones. 

Think about it: Does your product or service have the potential to shake up an existing market? Getting a handle on your TAM can work wonders for financial planning and forecasting, especially when you're looking to break into new, uncharted territories.

3. It accelerates your go-to-market (GTM) plans

When you calculate and use TAM effectively, it can significantly speed up your GTM strategy. 

It helps you figure out how to break down your market, distribute your product, sell it, and market it to potential customers, which in turn can lead to faster market entry and increased competitiveness.

4. It provides better understanding of your ICPs

Getting your TAM right also means gaining a better grasp of your Ideal Customer Profile (ICP). 

This brings several advantages, such as reducing conflicts between sales and marketing teams by ensuring alignment on promising leads. It also provides your marketing and sales teams with a clearer list of potential customers to target, enhancing their chances of success.

How to determine total addressable market with Dealfront’s help

So, there you have it. Our complete guide on TAM analysis, packed with all of the information you need to start using this powerful method for your business growth and success.

Discover the true size of your TAM in seconds with the Dealfront TAM Calculator from the most accurate B2B database in Europe. 

With access to information on over 40 million companies, you can get immediate, customized results and explore potential opportunities with free access to 25 enriched company profiles, including contact details, from your TAM.

Try it now and fuel your business growth!

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