What Total Addressable Market (TAM) Is & How to Calculate It

What Is Total Addressable Market?

Total addressable marketplace (TAM) is the magnitude of yearly gross your concern would gain if you achieved a 100% marketplace share.

In different words, it's an idealistic fig representing each the wealth you’d marque if everyone who could perchance bargain your merchandise oregon work did bargain it. 

You tin get astatine your full addressable marketplace utilizing the pursuing formula:

TAM = fig of imaginable customers successful your marketplace x mean gross per customer 

There are a fewer antithetic ways to find some components. We’ll spell implicit those aboriginal successful this article.

The Difference Between TAM, SAM, and SOM

TAM represents the full marketplace request for your merchandise oregon work if you achieved a 100% marketplace share. 

Service disposable marketplace (SAM) is the request for your merchandise oregon work wrong the information of the marketplace you’re susceptible of serving based connected factors similar geographical reach, product/service limitations, and regulatory restrictions.

Service obtainable marketplace (SOM) is the request for your merchandise oregon work wrong the information of your marketplace that you tin realistically seizure based connected factors similar competition, selling reach, and budget.

Let’s exemplify these concepts utilizing a institution that makes task absorption bundle for small- and medium-sized businesses arsenic an example.

• The TAM for this institution volition beryllium based connected each small- and medium-sized businesses worldwide
• The SAM would beryllium based connected the information of that radical the institution is capable to serve. Like lone businesses successful the U.S.
• The SOM is based connected who the institution tin feasibly get among those U.S. small- and medium-sized businesses. Perhaps they usage humanities information and find that’s 15% of the full market.

Why Is It Important to Understand TAM?

There are a fewer reasons wherefore you should look astatine full addressable marketplace earlier oregon adjacent aft launching your business:

• It validates your idea. For soon-to-launch companies, TAM helps corroborate whether your merchandise oregon work has a ample capable marketplace worth to enactment your business. A important TAM proves there’s existent request for what you’re offering.
• It conveys marketplace imaginable to investors and stakeholders. Investors and stakeholders privation to cognize a business’s maturation potential. Having an knowing of TAM helps you pass the imaginable returns to pull backing oregon unafraid buy-in for decisions.
• It informs your assets needs. Knowing the market’s size and gross imaginable helps you marque decisions astir however overmuch to put successful things similar merchandise development, selling campaigns, and income efforts

How to Calculate Total Addressable Market: 3 Methods 

There are 3 main approaches to calculating TAM:

Top-Down Approach

The top-down attack to determining TAM starts with the planetary fig of customers, narrows that down to your existent marketplace based connected your astir basal criteria, and multiplies that worth by your mean gross per customer. 

Effectively, you request to trust connected third-party sources similar manufacture reports to constrictive down to your existent market. 

A top-down attack looks similar this:

1. Identify the full fig of imaginable customers
2. Determine however galore of those customers really autumn wrong your marketplace based connected manufacture reports oregon different insights
3. Calculate your mean gross per lawsuit (or your estimation of it)
4. Multiply the fig of customers successful your marketplace by the mean gross per lawsuit to get your TAM

Let’s accidental you’re launching a caller task absorption bundle for small- to medium-sized businesses. You commencement with uncovering the full fig of businesses successful the world—perhaps that’s 400 million.

You past constrictive it down by focusing lone connected those that are small- to medium-sized businesses—let’s accidental that’s 350 million.

And you expect the mean lawsuit volition walk $1,000 per twelvemonth connected your software.

So, your TAM would be:

TAM = 350 cardinal x $1,000 = $350 billion

Advantages of a top-down approach:

• Provides a speedy and casual mode to estimation the wide marketplace size and opportunity
• Useful for aboriginal signifier startups wherever interior show information whitethorn not beryllium disposable yet

Disadvantages of a top-down approach:

• Relies heavy connected secondary data, which tin beryllium outdated oregon inaccurate
• The last TAM estimation whitethorn beryllium inflated if your marketplace isn’t refined enough

To simplify uncovering the accusation you need, usage Semrush’s Market Explorer tool. Which lets you hunt information for up to 110 markets and automatically gives you an estimated colonisation you tin usage to cipher your TAM.

Bottom-Up Approach

The bottom-up attack to calculating TAM uses your company’s interior information astir gross based connected existent customers and expands it to a larger radical of imaginable customers to estimation the wide marketplace value.

Here's however this attack works:

1. Determine your existent fig of customers
2. Identify your yearly revenue
3. Calculate your mean gross per lawsuit by dividing yearly gross by the fig of customers
4. Estimate the full fig of imaginable customers successful your marketplace by conducting research
5. Multiply your mean gross per lawsuit by the full fig of imaginable customers to find your TAM

Imagine you connection a B2B SaaS merchandise to instrumentality firms.

You presently person 50 instrumentality firms arsenic customers. And these customers person generated a full yearly gross of $125,000. That means your mean gross per lawsuit is $2,500 ($125,000 / 50).

After thorough research, you estimation determination are astir 100,000 instrumentality firms successful the full marketplace that could perchance usage your software.

So, your TAM would be:

TAM = $2,500 x 100,000 = $250 million

Advantages of a bottom-up approach:

• Provides much close estimates due to the fact that it's based connected existent income data
• Can beryllium much convincing to investors for the aforesaid reason

Disadvantages of a bottom-up approach:

• Requires existing income data, which whitethorn not beryllium disposable for startups
• May not relationship for imaginable marketplace expansions oregon pivots successful the concern model

Value-Theory Approach

The value-theory attack calculates TAM by estimating however overmuch customers are consenting to wage for your offering based connected the worth it provides and applying that to the full fig of radical you deliberation could beryllium successful that market. 

Here's however you tin usage this attack to estimation your full addressable market:

1. Start by identifying the occupation your merchandise oregon work solves
2. Quantify the worth of solving this occupation for a azygous customer
3. Estimate however overmuch customers would beryllium consenting to wage for your solution
4. Estimate the full fig of imaginable customers with this occupation by conducting research
5. Multiply the estimated terms by the fig of imaginable customers

For example, ideate you’re starting a caller AI-powered inventory absorption system. 

The occupation it solves is inefficient inventory absorption that leads to moving retired of banal and/or overstocking. You mightiness estimation that it saves an mean retail store $50,000 annually. 

Assuming retailers would beryllium consenting to wage astatine slightest $4,800 per twelvemonth for this solution, you terms it astatine that.

If you behaviour probe and find determination are 100,000 retail stores that could payment from your software, your TAM would beryllium $480 cardinal ($4,800 x 100,000).

Advantages of a value-theory approach:

• Useful for genuinely innovative products oregon services that can’t trust connected humanities data
• Focuses connected the existent worth delivered to customers, which tin beryllium important for investors
• Helps successful processing a pricing strategy

Disadvantages of a value-theory approach:

• Relies heavy connected assumptions astir the worth provided and customers' willingness to pay
• May overestimate the marketplace if the worth proposition isn’t accurately assessed
• Doesn't relationship for factors similar competition, marketplace adoption rates, oregon pricing sensitivity

Get the Insights You Need to Succeed successful Your Market

TAM is an important metric for knowing the imaginable your marketplace offers, truthful each concern should wage attraction to it.

One of the easiest ways to cipher your full addressable marketplace is by utilizing Semrush's Market Explorer tool.

Open the tool, click connected the “Analyze Category” tab, and take your people manufacture oregon niche.

Then, click the “Research a market” button. 

(Alternatively, you could take the “Create List” enactment and participate a fewer competitors’ domain names to proceed.)

The instrumentality volition springiness you an estimation of your full addressable market’s size. Which you tin past multiply by your mean gross per lawsuit to get your TAM.

Plus, it includes a batch of different invaluable insights. Like who the cardinal players are and what the assemblage is like.

Try it today.