10/24/2024 | Press release | Distributed by Public on 10/24/2024 02:21
What Is Total Addressable Market?
Total addressable market (TAM) is the amount of annual revenue your business would earn if you achieved a 100% market share.
In other words, it's an idealistic number representing all the money you'd make if everyone who could possibly buy your product or service did buy it.
You can arrive at your total addressable market using the following formula:
TAM = number of potential customers in your market x average revenue per customer
There are a few different ways to determine both components. We'll go over those later in this article.
The Difference Between TAM, SAM, and SOM
TAM represents the total market demand for your product or service if you achieved a 100% market share.
Service available market (SAM) is the demand for your product or service within the portion of the market you're capable of serving based on factors like geographical reach, product/service limitations, and regulatory restrictions.
Service obtainable market (SOM) is the demand for your product or service within the portion of your market that you can realistically capture based on factors like competition, marketing reach, and budget.
Let's illustrate these concepts using a company that makes project management software for small- and medium-sized businesses as an example.
Why Is It Important to Understand TAM?
There are a few reasons why you should look at total addressable market before or even after launching your business:
How to Calculate Total Addressable Market: 3 Methods
There are three main approaches to calculating TAM:
Top-Down Approach
The top-down approach to determining TAM starts with the global number of customers, narrows that down to your actual market based on your most basic criteria, and multiplies that value by your average revenue per customer.
Effectively, you need to rely on third-party sources like industry reports to narrow down to your actual market.
A top-down approach looks like this:
Let's say you're launching a new project management software for small- to medium-sized businesses. You start with finding the total number of businesses in the world-perhaps that's 400 million.
You then narrow it down by focusing only on those that are small- to medium-sized businesses-let's say that's 350 million.
And you expect the average customer will spend $1,000 per year on your software.
So, your TAM would be:
TAM = 350 million x $1,000 = $350 billion
Advantages of a top-down approach:
Disadvantages of a top-down approach:
To simplify finding the information you need, use Semrush's Market Explorer tool. Which lets you search data for up to 110 markets and automatically gives you an estimated population you can use to calculate your TAM.
Bottom-Up Approach
The bottom-up approach to calculating TAM uses your company's internal data about revenue based on current customers and expands it to a larger group of potential customers to estimate the overall market value.
Here's how this approach works:
Imagine you offer a B2B SaaS product to law firms.
You currently have 50 law firms as customers. And these customers have generated a total annual revenue of $125,000. That means your average revenue per customer is $2,500 ($125,000 / 50).
After thorough research, you estimate there are roughly 100,000 law firms in the entire market that could potentially use your software.
So, your TAM would be:
TAM = $2,500 x 100,000 = $250 million
Advantages of a bottom-up approach:
Disadvantages of a bottom-up approach:
Value-Theory Approach
The value-theory approach calculates TAM by estimating how much customers are willing to pay for your offering based on the value it provides and applying that to the total number of people you think could be in that market.
Here's how you can use this approach to estimate your total addressable market:
For example, imagine you're starting a new AI-powered inventory management system.
The problem it solves is inefficient inventory management that leads to running out of stock and/or overstocking. You might estimate that it saves an average retail store $50,000 annually.
Assuming retailers would be willing to pay at least $4,800 per year for this solution, you price it at that.
If you conduct research and determine there are 100,000 retail stores that could benefit from your software, your TAM would be $480 million ($4,800 x 100,000).
Advantages of a value-theory approach:
Disadvantages of a value-theory approach:
Get the Insights You Need to Succeed in Your Market
TAM is an important metric for understanding the potential your market offers, so every business should pay attention to it.
One of the easiest ways to calculate your total addressable market is by using Semrush's Market Explorer tool.
Open the tool, click on the "Analyze Category" tab, and choose your target industry or niche.
Then, click the "Research a market" button.
(Alternatively, you could choose the "Create List" option and enter a few competitors' domain names to proceed.)
The tool will give you an estimate of your total addressable market's size. Which you can then multiply by your average revenue per customer to get your TAM.
Plus, it includes a lot of other valuable insights. Like who the key players are and what the audience is like.
Try it today.