How to calculate Total Addressable Market (TAM)?

The total addressable market or TAM refers to the total market demand 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. In other words, TAM is a way to calculate how much money you can make from selling your product or service.

Imagine that you want to open a SaaS business.

The Total Addressable Market in this case would be the global market for your specific SaaS business; that includes all service providers, other SaaS companies, government entities, or end customers who would see value in your business idea and be ready to spend on it.

It is not just a number which you can guess or look up on the internet, but there are specific methods to calculate it but before I go into those details, let me explain why do you need to calculate it in the first place!

Why calculating the Total Addressable Market (TAM) is important?

Calculating TAM is the first step if you want to execute an effective marketing or sales strategy, especially if you are planning to implement Account-Based Marketing (ABM) to close deals of higher value. It is an extremely helpful tool if you are looking to enter new market segments or regions.

Once you’ve established your SaaS business in one country, you can branch out to another one until you cover the entire region and as your company grows you can also cover all regions across the whole world. In order to do this, you need to exactly know how much of the market is out there looking to spend on a solution like yours in each region and that is why knowing your TAM is extremely crucial.

Here’s why it is important to know your TAM:

• It is a quantifiable measure of how much your business could grow which can help you in your financial projections
• To understand the dollar value of the market looking for a product like yours i.e. product-market fit
• To gauge your competitive landscape
• To develop a targetted marketing strategy
• To show the monetary value of your business idea to your investors.

Unless your SaaS business is 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 to convince an entire market to only buy your product or service.

That’s why most companies also measure their serviceable available market to determine how many customers they can realistically reach using their existing marketing and sales channels. Additionally, they gauge their market share to understand the size of their actual target market.

However, the total addressable market is useful because businesses can use TAM to objectively estimate a specific market’s potential for growth.

How to calculate your Total Addressable Market (TAM)?

There are three ways to calculate your business’s total addressable market.

1. Top-Down

The top-down approach uses industry data, market intelligence reports, and research studies to identify the TAM. In this approach, you might use industry data from Gartner or Forrester to identify which segments of your industry align with the product or service you are offering — and just how big those segments are.

In addition to gathering data using market intelligence services, Intent data can be actively used to gauge the portion of your market looking for a product or service like yours at that point in time. Bambora is an excellent tool for intent data.

When buyers start to gather information about the strategy they are planning to implement or find solutions for their pain points, they visit websites, read articles, download ebooks and whitepapers — and generally accumulate a lot of digital footprints as they consume content across the internet.

Organizations that aggregate these behavioral signals — are able to gauge their market size purely based on these intent signals of the buyer. Generally, this is an extremely powerful tool that can be used by your sales team to jump on a deal faster before your competition reaches out to them.

Buying intent indicators represent a huge opportunity to gauge the market size almost instantaneously.

2. Bottom-Up

The bottom-up approach to TAM calculation is based on previous sales and pricing data. This can be done using data from your CRM and marketing automation systems.

Here are the steps to calculate your TAM:

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.

This method looks at your current pricing model and usage of your product/service which makes it more tangible to size the market. A software startup successfully selling automation software at $X per employee per month might reasonably take the number of employees in its target market and multiply that by pricing to estimate its TAM.

3. Value Theory

The value-theory approach is based on how much value consumers receive from your product/service and how much they are willing to spend in the future for that product/service.

Let’s say that your automation software product has a patented technology that makes it 10x faster to run business processes than your competitors and has several other benefits which make it easier for buyers to choose one over the other. In this case, you would identify your value theory by doing a survey to find out how much would your potential customers be willing to pay for your product. Would they be willing to pay a higher price than your competitors?

How big is your slice of the pie?

Once you have calculated your Total Addressable Market (TAM), it is important to evaluate if your efforts are worth entering the market. An industry with a market size ranging >$200 million a year is probably a lucrative market to enter. However, if the market size is <1 million a year indicates that you might need to rethink your GTM and product strategy. Sometimes, market size of >2 Billion might also indicate that the market may be too saturated with other products.

TAM tells you what is realistic and if it is worth all the effort to go after the market. It’s an extremely important tool for anyone who is planning to start their own business.