Total Addressable Market: What Is a Total Addressable Market?

The total addressable market refers to the entire potential demand for a particular good or service. Businesses attempt to calculate the total addressable market (often known by the acronym TAM) as they chart a roadmap for launching their product or service. They also use a TAM analysis to project potential revenue growth over time.

It’s very rare for a single company to seize the total available market for a good or service. Nonetheless, businesses routinely conduct TAM analyses to see whether the total annual revenue opportunity in a target market can lead to long-term profits.

The total addressable market metric can be calculated in three ways.

1. 1. Top-down approach: A top-down TAM calculation begins by imagining the largest possible market size and then whittling it down to a narrowly targeted group of potential customers. For instance, a company that sells acoustic guitars might begin by estimating the number of customers interested in any sort of musical instrument. Their industry research might show that twenty percent of those customers are interested in guitars in general, and half of that group is specifically interested in acoustic guitars instead of electric guitars. At that point, they have identified their customer demographic and its potential market opportunity. However, the actual TAM is the number of people who would buy any instrument at all.
2. 2. Bottom-up approach: A bottom-up analysis estimates a market fit based on local market research. Business leaders can see data regarding a certain market—like how many customers use a particular rideshare service in El Paso, Texas—and then use that as a means to estimate the total addressable market for all rideshares in El Paso, in Texas, or even the nation at large. Of course, just one vendor in the rideshare market will never capture every single customer in that market, but investors may use a TAM analysis to find its theoretical ceiling.
3. 3. Value theory approach: A value theory TAM analysis centers pricing and innovation in the question of a new product's potential value to the market. For instance, if a new burger chain thinks it can claim a subset of the existing fast-food market, it must assess the existing market for burgers and consider the specific value it brings to that market in terms of both product specifics and pricing.

Many stakeholders in a business market benefit from TAM analyses.

• Investors: The total addressable market metric matters to potential investors who only want to pump money into a business if they believe it taps into a very large potential market. Even a company with a small market share in a massive TAM can make notable profits. Thus, founders often note market sizes in their pitch decks when presenting their business proposals to investors.
• Business leaders: TAM matters to business leaders as they try to chart a growth plan that incorporates everything from hiring and capital investments to supply chains and marketing. Nearly all future plans for a business rely on accurate projections of revenue and growth, and TAM analyses help enable these projections.
• Partners: TAM matters to potential business partners as they assess the value of joining forces with another company. For instance, if a restaurant decides to partner with a food delivery service, it must decide whether that delivery service has a high enough TAM to merit the burdens that will come along with the partnership.

A TAM analysis is one way to project a market for a good or service. Other metrics include the serviceable addressable market (SAM) and the serviceable obtainable market (SOM).

• TAM: The total addressable market metric describes the entire market for a good or service. This type of market analysis includes assessing all possible vendors and all possible customers.
• SAM: A serviceable addressable market, also called a serviceable available market, is the portion of the market that could conceivably be serviced by a company's specific offering. For instance, a guitar company would consider its own applicable TAM (the total number of people who would buy any instrument) and its own applicable SAM (the total number of people who would buy a guitar). If their specialized market segment is still fairly large, the company stands a good chance of turning a profit.
• SOM: The serviceable obtainable market represents the market size that a company can realistically expect to win if everything goes right. The business's SOM represents a fraction of its SAM. The bottom-up approach used to calculate a TAM can also apply to the expected revenue from a SOM. A company uses this approach by determining the annual contract value of gaining one customer and then multiplying that amount by the total number of customers they might hope to attain in a serviceable obtainable market.

Businesses and investors use total addressable markets to assign market potential and financial valuations to companies. TAM helps founders craft a business model along with short-term, medium-term, and long-term business plans. TAM also matters to investors because market size determines profit.

In general, tiny markets may turn investors off. Even if a company can capture nearly all of a specific market, it will not do much good if that total addressable market is very small. Conversely, if a company can only capture a small share of a total market, but that total addressable market is massive, the company could still stand to make large profits.

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