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What does total addressable market mean?

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Last editedAug 20202 min read

Total addressable market definition

Total addressable market (TAM) is the overall revenue opportunity that’s available for products and services, assuming 100% of market share is achieved. It’s a great way to determine how much funding is necessary for new companies or new lines of business, while it’s also an effective means of calculating your business’s level of competition. In other words, total addressable market should be a key part of your business’s future planning.

Total addressable market vs. total available market

When you’re researching total addressable market, you may encounter another term: total available market. You’ll see these terms used interchangeably, which is because they mean exactly the same thing. So, when it comes to total addressable market vs. total available market, there’s nothing to worry about – the terms are synonymous with each other!

How to find total addressable market

Want to know how to do a total addressable market calculation? There are three main methods that you can use: the top-down method, the bottom-up method, and the value theory method.

Top-down method

With the top-down method, you’ll follow a process of elimination. Essentially, you need to take a large population that comprises the target market and narrow down to a specific segment of the market. Generally, this method uses data from market research companies.

For example, imagine a start-up is offering an office address for business correspondence to freelancers who work from home. Industry research indicates that there are 2 million freelancers in the UK, 60% of whom use their home address for business. This means that there are 1,200,000 potential clients. However, 10% of these freelancers say that they don’t need a dedicated business address, leaving 1,080,000 potential clients. If the business plans on charging £200 a year for the service, the estimated TAM would be £200 x 1,080,000, or 216,000,000.

Some investors dislike this method as it requires you to use a ‘pre-packed’ figure from another source. In addition, it assumes your product isn’t going to be disruptive.

Bottom-up method

The bottom-up method requires you to do your own research into the market, working on a granular level to complete a global total addressable market calculation.

For example, if a stationary manufacturer has a 25% share of the market and registered annual revenues of $50 billion, we can extrapolate from these two figures that the TAM for the stationery industry is around $200 billion.

Value theory method

The value theory method is ideal for products or services that don’t exist yet, but will lead to an evolution in the market. Put simply, it requires you to estimate the value provided by this new and improved product, as well as how far the value will be reflected in pricing.

For example, if you were attempting to work out the total addressable market for movie streaming sites like Netflix, back when movie rentals were a strictly physical affair, you would estimate the value of access to a large library of films from the comfort of your home, before extrapolating that figure to the total number of movie watchers to find the total addressable market for the product.

Who can benefit from doing a total addressable market calculation?

Start-ups entering the market, existing businesses launching new product/business lines, and investors searching for viable opportunities can benefit from measuring the total addressable market. Because TAM considers the entire market, not just the market that your proposed product/service already taps into, it can help to identify additional opportunities that haven’t already been exploited by your firm.

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