To get the most out of the products and services, businesses must first determine the demand of the market. The total addressable market (TAM) is defined as the size of a specific market or opportunity offered by an organization, product, or service. Without the proper knowledge of the total addressable market, a company’s outreach may be wasted and resources misused.
In this article, we will be discussing the importance of the total addressable market and how to calculate it with some examples.
What is the Total Addressable Market
In simple words, The total addressable market is often known as the total market demand for a product or service. It’s the most money a firm may make selling their product or service in a certain market.
Both start-ups and existing companies must know the path and processes one should undertake before entering a market and developing their product. A company wants to ensure that it can reach as many customers as possible through marketing efforts to maximize its revenue. The larger the TAM, the more interest there is in your product or service. The larger it is, the easier it is to make a profit.
It can also help to understand the competition and competitors’ moves so can set a competitive price and market share.
How to Calculate the Total Addressable Market
The two common ways you can calculate the total addressable market, here are they
- Top-Down method
This method uses industry data, market reports, and research studies to calculate the TAM. You might utilize industry data from Gartner, Forrester, or other consulting groups to figure out which segments of your market align with your objectives and offers, as well as how big they are.
However, there are some limitations as well! The data may not always be up to date and may not represent specialized aspects of your market. To determine if one product is better than another, you may want to engage a market research consulting firm to perform new research on some specific areas.
- Bottom-up method
The bottom-up approach to TAM calculation depends on past sales and pricing information. First, you have to multiply your average sales price by the number of current customers. This will tell you how much money you will make each year from this agreement. Then, multiply your ACV (Annual Contract Value) by the total number of customers and it will give you an idea of your total addressable market.
Formula: TAM = Total number of customers x ACV (Annual Contract Value)
It is pretty simple! Let’s say you have plans to sell 500 ACs. You want to sell $600 per AC. So your ACV will be
$600 x 500 = $30,000
Now let’s say you want to sell those ACs to 50 stores in your area. So your TAM will be
Total number of customers x ACV (Annual Contract Value)
50 x $30,000 = $1,500,000
So there you have it. As you can see, TAM is a very important number to know. It is the total addressable market for your product or business. This can help you to understand how much money you may make in a certain market and period.