Whether you want to start a new company and gauge its industry’s profit potential or forecast a realistic revenue growth goal for your business, measuring your total addressable market is a crucial first step you must take. To help you do this, we’ve put together a guide that’ll teach you exactly what total addressable market is and the best way to calculate it.
Total Addressable Market (TAM)
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.
Unless they’re 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 for them to convince an entire market to only buy their product or service.
That’s why most companies also measure their serviceable available market to determine how many customers they can realistically reach with their marketing and sales channels. Additionally, they gauge their share of market to understand the size of their actual target market.
However, total addressable market is still useful because businesses can use TAM to objectively estimate a specific market’s potential for growth.
How to Calculate TAM
According to MIT’s Global Startup Labs program, the best way to calculate total addressable market is by running a bottom-up analysis of an industry. A bottom-up analysis involves counting the total number of customers in a market (which you can do by adding up the amount of customers each company in this market has) and multiplying that number by the average annual revenue of each customer in this market.
After you calculate your total addressable market, it’s time to determine whether it’s worth entering the industry or not.
According to MIT’s Global Startup Labs program, an industry with a market size ranging from $20 million to $100 million per year is worth entering. However, if the industry’s market size is under $5 million per year or over $1 billion per year, it’s probably not.
In both situations, it’d be challenging to persuade investors to back your company — an industry with a market size of $5 million per year would likely be too niche and an industry with a market size over $1 billion would likely be too saturated.
Know Your TAM Before You Take Action
Starting a business or projecting next year’s revenue growth is always thrilling. But if you want to follow a realistic path toward success, you need to first understand what’s actually possible. So let your total addressable market be your North Star and guide you through a journey that’s rooted in reality, not hype.
Originally published Mar 8, 2019 7:44:43 AM, updated March 09 2019