By Fernando Berrocal
The Total Addressable Market (TAM), also known as the total available market, is the total revenue opportunity that a product or service has if it achieves 100% of the market share. It helps in examining how much time and money a person or startup should devote to a new business venture.
The idea of a total addressable market is essential for startups and established organizations because it allows them to prioritize particular products, client groups, and business prospects based on estimations of effort and financing necessary. TAM may be used by corporate leaders to present a plausible value proposition to potential investors and purchasers of the startup.
Estimating the market size, overall investment amount, competition, projected growth, and available market size are all part of creating a credible value offer. All of this is possible using TAM. When a private equity business wants to buy a startup business, for example, TAM may be used to estimate the income generation potential of a product or service the startup offers.
TAM considers the products and consumer categories that the startup has yet to explore. The evaluation assists in determining the true size of the accessible market as well as the level of competition for the startup's products.
Calculating the Total Addressable Market
The total addressable market is calculated using one of three approaches, these are the following:
- Top-Down: The top-down analysis uses an elimination procedure that starts with a broad population of known size that makes up the target market and narrows it down to a single market segment. An inverted pyramid showing top-down analysis displays a large population of a known segment at the top and a narrowed down segment at the bottom.
A start-up technology company, for example, has developed an app for small businesses that cannot afford premium accounting software. According to industry research, there are one billion businesses in the world, with 30 percent of them lacking access to premium accounting software (30 percent x one billion consumers = 300,000,000 prospective clients).
According to research, 90% of businesses that do not utilize a premium accounting program use a full-time in-house accountant. This raises the total number of possible enterprises to 10% of 300,000,000, which equals 30,000,000. If the company provides the software for free but charges $100 per year for subscriptions, the total addressable market is projected to be $3 billion (30,000,000 x 100). (Figures are based on assumptions).
- Bottom-Up: Because the TAM estimates are generated through primary market research, bottom-up analysis is a more reliable method. It takes advantage of more reliable data about a product's current pricing and use. For example, a startup company with a free accounting mobile app and $100 yearly memberships can calculate the TAM by making a reasonable estimate of the number of businesses in its target market.
The advantage of a bottom-up strategy is that the startup can explain why some client groups were chosen and others were not. The addressable market would be more relevant and accurate if the startup relied on data from its research or survey rather than depending on inconclusive data.
- Value Theory: The value theory is based on a calculation of the product's worth to customers and how much of that value may be represented in its pricing. A startup determines how much value it can contribute and why this value should be captured through product price. When a startup introduces new products to the market or cross-sells specific products to current consumers, value theory is used to determine TAM.
Uber's addressable value may be estimated using the value theory technique. Users who use Uber cabs have the choice of driving themselves, utilizing public transportation or taking taxis from competitors. Since consumers are prepared to sacrifice all of these options in favor of an Uber taxi, the business can assess the value that these users receive from using Uber cabs and figure out how to capture that value in its price.
Differences between Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM)
The various subsets of a market are represented by TAM, SAM, and SOM. The total annual demand (TAM) for a product or service is calculated in terms of yearly revenue. The target addressable market that a company's products or services serve is known as the SAM (Serviceable Available Market). SOM, on the other hand, stands for Serviceable Obtainable Market, or the proportion of SAM that can be attained realistically. To determine the proportions of each sector, considerable market research is required to identify various subgroups within an industry.
Consumer spending on food in the United Kingdom is an example. This market was projected to be worth 200 billion euros in 2014, which represents the total addressable market. Fresh food, as well as alcoholic and non-alcoholic drinks, are sold in the consumer food industry. The serviceable accessible market is the alcoholic drinks sector, which serviced 49 billion euros (SAM). The sector is serviced by several significant manufacturers and suppliers. The serviceable obtainable market is a segment of the alcoholic drinks industry that is supplied by a single producer (SOM).
The TAM's Importance
The Total Addressable Market is an important measure that startups and established businesses use to evaluate the market's potential size in terms of total sales and revenues. When a startup is launching a new product, a new client segment, or planning to cross-sell an existing product to current customers, TAM can help break these figures down into manageable pieces.