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

What Is Complete Addressable Market?

Complete addressable market (TAM) is the annual income what you are promoting would earn for those who captured 100% of your market. TAM represents all attainable income if each potential buyer buys your services or products.

You’ll be able to calculate your TAM with this components:

TAM = variety of potential prospects in your market x common income per buyer 

Later on this article, you can find other ways to estimate every part.

The Distinction Between TAM, SAM, and SOM

• TAM: The full market demand for those who obtain 100% market share
• Service Obtainable Market (SAM): The demand in your product throughout the market you may serve based mostly on constraints like geography, product limits, and rules
• Service Obtainable Market (SOM): The portion of the SAM you may realistically seize, factoring in competitors, advertising attain, and price range

Instance: A challenge administration software program firm focuses on small and medium-sized companies (SMBs).

• TAM consists of all SMBs worldwide.
• SAM consists of SMBs the corporate can serve (e.g., U.S.-based).
• SOM consists of the fraction the corporate can realistically purchase (e.g., 15% of U.S.-based SMBs).

Why Is It Vital to Perceive TAM?

Complete addressable market is a vital measure to know as a result of:

1. TAM validates your thought. If you’re launching a brand new enterprise, TAM signifies whether or not the market is massive sufficient to assist your enterprise. A big TAM implies actual demand.
2. TAM conveys market potential. Traders and stakeholders wish to see attainable progress. Understanding TAM helps you reveal potential returns and safe funding or buy-in.
3. TAM informs useful resource wants. Understanding the market dimension and income potential guides choices on product growth, advertising budgets, and gross sales methods.

Easy methods to Calculate Complete Addressable Market: Three Strategies

Listed below are the three principal approaches to calculating complete addressable market:

1. High-Down Method

The highest-down method begins with a broad market dimension (from trade studies or different knowledge). You then slender it right down to your precise market, multiply your precise market by your common income per buyer, and get TAM.

Right here’s the best way to calculate TAM utilizing the top-down method:

1. Discover the overall variety of potential prospects.
2. Use exterior sources to slender that quantity to your particular market.
3. Calculate your common income per buyer (or estimate it).
4. Multiply the narrowed buyer depend by your common income per buyer.

Instance:

• Complete companies worldwide: 400 million
• Slender to small- and medium-sized companies: 350 million
• Common annual spending per buyer: $1,000
• TAM: 350 million × $1,000 = $350 billion

Benefits:

• Fast to calculate
• Useful for early-stage startups that lack inner knowledge

Disadvantages:

• Depends on exterior knowledge, which can be outdated or incomplete
• Can inflate TAM for those who don’t refine your goal market sufficient

Use Semrush’s Market Explorer tool to analysis market dimension and get inhabitants estimates that allow you to calculate TAM.

2. Backside-Up Method

The underside-up method makes use of inner knowledge (e.g., present income and prospects). It then scales the interior knowledge to estimate the overall market worth.

Right here’s the best way to calculate TAM utilizing the bottom-up method:

1. Depend your present prospects and complete annual income.
2. Discover your common income per buyer (annual income ÷ variety of prospects).
3. Estimate what number of potential prospects exist in your market.
4. Multiply the variety of potential prospects by your common income per buyer.

Instance:

• Present variety of regulation agency prospects: 50
• Annual income from these 50 companies: $125,000
• Common income per buyer: $2,500 ($125,000 ÷ 50)
• Estimated complete regulation companies in your market: 100,000
• TAM: 100,000 × $2,500 = $250 million

Benefits:

• Makes use of actual gross sales knowledge, making estimates extra correct
• Typically extra convincing for buyers

Disadvantages:

• Requires present knowledge, which startups could lack
• Could overlook expansions or adjustments in what you are promoting mannequin

3. Worth-Concept Method

The worth-theory technique estimates TAM by figuring out the worth you present and the quantity prospects can pay for that worth. You then multiply what prospects can pay by the variety of potential prospects.

Right here’s the best way to calculate TAM utilizing the value-theory method:

1. Determine the issue your services or products solves.
2. Quantify the worth of fixing that downside for one buyer.
3. Estimate how a lot prospects can pay in your resolution.
4. Discover the overall variety of potential prospects with this downside.
5. Multiply your proposed worth by the overall variety of potential prospects.

Instance:

• An AI-driven stock administration system saves a median retail retailer $50,000 yearly.
• Retailers are keen to pay $4,800 per yr for that resolution.
• You estimate 100,000 shops have this downside.
• TAM = 100,000 × $4,800 = $480 million

Benefits:

• Good for modern merchandise with out historic knowledge
• Highlights how pricing aligns with delivered worth
• Helps form a pricing technique

Disadvantages:

• Requires assumptions about worth and willingness to pay
• Could not think about competitors, adoption charges, or worth sensitivity

Get the Insights You Have to Reach Your Market

TAM is a vital metric for evaluating market potential. You’ll be able to calculate TAM simply with Semrush’s Market Explorer instrument:

1. Open the instrument, select “Analyze Class,” and choose your goal trade or area of interest.
2. Click on “Analysis a market,” or choose “Create Listing” and enter competitor domains.

3. The instrument estimates your market dimension. Multiply the market dimension by your common income per buyer to search out your TAM.
4. Achieve additional insights, reminiscent of key market gamers and viewers knowledge.

Attempt the Market Explorer instrument immediately to know your market and place what you are promoting for achievement.