How to Estimate It and Source Data

Complete addressable market (TAM) is an estimation of how a lot you may earn in the event you may promote your services or products to each potential buyer in your market.

The essential formulation for calculating TAM is:

TAM = (Complete Variety of Potential Prospects) × (Common Annual Income per Buyer)

Understanding TAM helps you determine the dimensions of your market and the sum of money you may make in the event you captured all of it.

TAM can be a key metric for startup buyers. It reveals whether or not a enterprise concept has a sufficiently big alternative. Buyers usually search for a TAM that’s “good” — not too large or too small. A TAM that’s too massive may imply the market is crowded with robust competitors, whereas a TAM that’s too small may imply restricted room for progress.

On this information, you’ll learn to estimate TAM utilizing three strategies, the place folks usually make errors, and find out how to refine your estimations to make them believable to buyers or stakeholders and actionable for your online business.

There are three approaches to calculating TAM. Relying on the accessible market information, your online business mannequin, and your stakeholders/buyers, it’s best to think about using the top-down, bottom-up, or worth concept strategy.

1. High-down strategy

The highest-down strategy begins with broad market information and narrows it right down to estimate the market dimension in your particular services or products.

This strategy is beneficial when there’s dependable, broad business information accessible.

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1. Estimate the general market dimension wherein your product operates, often obtained from business experiences or analysis.
2. Apply a proportion that represents the portion of the market your product can realistically seize.

Instance

If the worldwide smartphone market is valued at $500 billion, and you might be launching a brand new smartphone accent, you may estimate that your product may goal 5% of the market, which provides you a TAM of $25 billion.

2. Backside-up strategy

The underside-up strategy builds the TAM by beginning with particular, particular person information associated to your online business and scaling it up.

This methodology is nice when you’ve got detailed information of your buyer base and pricing. So far as I do know, buyers favor this methodology, which gives essentially the most correct and actionable TAM estimation.

 

A couple of birds within the hand is price billions within the TAM. Early-stage (pre-Collection-B) startups shouldn’t fear an excessive amount of about calculating a exact TAM. So long as it’s in the suitable ballpark for his or her thesis, buyers care much more concerning the traction you may present with paying clients. That’s why bottom-up is much extra convincing than hand-wavy top-down strategies that solely depend on discovering a sufficiently big pie to assert as your market. 

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1. Estimate what number of potential clients there are in your goal market. You are able to do this by utilizing sources like business experiences, census information, or analysis from trusted organizations (extra information sources on the finish of the article).
2. Multiply this quantity by the typical income you count on to earn from every buyer (ARPU – Common Income Per Person).

Instance

Let’s say you’ve got subscription-based software program that helps small companies handle their funds. You determine that 2 million small companies may gain advantage out of your software program. In case your ARPU is $600, your TAM can be 2 million clients × $600 = $1.2 billion.

3. Worth concept strategy

The worth concept strategy estimates TAM based mostly on the worth your product gives to clients and the way a lot they is likely to be prepared to pay for it.

This strategy is particularly helpful in the event you’re introducing a services or products that disrupts current markets; conventional market dimension calculations could not precisely replicate the potential.

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1. Assess the worth or price financial savings that your product delivers to the client.
2. Estimate how a lot clients can be prepared to pay for that worth and scale it throughout the whole market.

Instance

Suppose you’ve got developed a brand new energy-efficient lighting system that saves firms $10,000 per 12 months in power prices.

If 100,000 firms may use your lighting system, and every is prepared to pay $5,000 for it (as a result of they’ll save $10,000), your TAM can be 100,000 firms × $5,000 = $500 million.

There’s additionally a fourth choice — a center floor talked about by fairly just a few individuals who provided their insights for this text.

 

I’d say one of the best methodology to estimate TAM is often a mix of top-down and bottom-up approaches. The highest-down methodology offers you a giant image view utilizing business experiences and market analysis, whereas bottom-up allows you to construct from the bottom up utilizing your personal information and buyer insights. This mixed strategy helps steadiness out the weaknesses of every methodology. 

You might encounter the TAM, SAM, and SOM terminology and want to use it if an investor requests it.

Individuals who favor this strategy deal with TAM as a “pie within the sky” quantity and additional refine it with SAM and SOM parts of it.

• TAM (Complete Addressable Market) is the overall market in the event you may promote to everybody, in all places. Your largest potential alternative.
• SAM (Service Addressable Market) is the portion of the TAM you may really goal based mostly on the place you use and who your product is for. For instance, in the event you’re an area espresso store in New York Metropolis, your SAM is likely to be espresso drinkers in NYC, not each espresso drinker worldwide.
• SOM (Service Obtainable Market) is the real looking piece of the SAM that you would be able to really win over, contemplating the competitors and your strengths. Persevering with with the espresso store instance, your SOM is likely to be the variety of clients you may realistically entice in your neighborhood, given elements like close by opponents, your distinctive choices, and advertising and marketing efforts.

TAM is often used to make a compelling story concerning the potential for progress, so it’s simple to be over-optimistic and make errors that might make your TAM look higher.

Right here’s an instance. I used a device that calculates TAM mechanically based mostly on a URL to seek out the market dimension for netflix.com. The device advised me that there are 7B individuals who “want it (…) even when they’re not prepared or capable of make a purchase order” and 6.3B able to make a purchase order. One thing that I discover exhausting to imagine since there are an estimated 5.3B folks with web entry worldwide.

Additionally, the best way that the device defines my potential clients doesn’t sound convincing to me, both, not to mention logical.

Different errors it’s best to keep away from:

• Falling into the “the whole lot entice”. That is when companies assume that their services or products may enchantment to everybody available in the market, main them to calculate TAM based mostly on a very broad viewers.
• Sizing the issue as a substitute of the market. This occurs when companies give attention to the overall quantity of people that may profit from their resolution with out contemplating what number of are realistically prepared to pay for it.
• Overlooking market tendencies and dynamics. The market can develop or contract, shopper preferences can change, authorities laws can affect the market, and so forth.

The essential information sources for TAM calculations are business experiences you will discover on platforms like Statista and census information (just like the US census data). Nevertheless, there are different locations the place you may search for extra detailed information.

Discover the market utilizing search information

Search information is details about what persons are in search of on-line. It may well assist you to perceive what clients need, the place curiosity is rising, and what areas are most energetic.

Google Developments gives a few of that information without spending a dime. For instance, you may test if curiosity in a plant-based food plan remains to be robust and the place within the US you may discover essentially the most clients.

However that’s how far this device goes. You don’t know what phrases are “inside” the subject or how in style a key phrase is (the numbers in Google Developments are relative). Additionally, typically Google received’t have the info, similar to for the time period “child meals subscription”.

Alternatively, you should use Ahrefs. I’m positive you’ll discover extra search phrases there and much more information factors. Let me take you thru three examples.

Gauge demand with search quantity

Search quantity is an estimation of the typical month-to-month variety of searches for a key phrase over the most recent recognized 12 months of information.

Excessive search volumes counsel a bigger potential market. Low search volumes, counsel a smaller market (or that you’ll want to be extra inventive to seek out clients).

For instance, whereas Google Developments didn’t have any information on “child meals subscription”, Ahrefs’ Keywords Explorer reveals that there are an estimated 1.2K searches per 30 days within the US of that time period. Plus, it reveals you the forecast for that key phrase.

In case you’d be planning to start out a brand new enterprise on this area of interest, you’d want compelling arguments to justify a excessive TAM estimate, as a result of the present demand for such a service seems to be comparatively low.

Study what folks need and the way they search for it

Keyword research can let you know what folks need wherein international locations. All you’ll want to know is just a few broad phrases associated to your product.

For instance, for plant-based merchandise, you may simply sort in “plant-based, vegan” after which go to the Matching phrases report back to see the recognition of sure varieties of merchandise. It’s also possible to see if the demand for these merchandise has grown or fallen during the last three months.

So, in the event you discover that the demand for many vegan merchandise has elevated, you may assume that your TAM goes to develop within the close to future as a result of extra folks appear to be .

It’s also possible to use the device to mechanically translate these key phrases and see what search phrases folks use to seek out the identical merchandise all over the world and the way in style they are.

And in the event you’re not sure what key phrases folks may use to discover a services or products like yours, simply use the AI suggestion function.

Study out of your opponents

By finding out the key phrases your opponents are focusing on, you may uncover untapped niches or areas the place demand is excessive however competitors is decrease.

For instance, say you’re a SaaS firm providing a mission administration device. In case you used Ahrefs’ Site Explorer, you’ll discover that considered one of your opponents ranks for phrases like “engineering mission administration software program”. This might point out a distinct segment market with distinctive wants, the place there’s appreciable demand however much less competitors.

When you’re at it, go to the Natural Rivals tab to see who else competes for a similar viewers. Likelihood is, you might discover some new potential opponents.

Use S-1 filings and quarterly experiences from public firms

Public firms’ quarterly experiences (10-Q) and S-1/F-1 filings supply wealthy information for estimating TAM. They supply detailed breakdowns of income by product line, geographic area, and market section, together with insights into market share and progress potential.

For instance, if an organization generates $500 million from a specific service and claims 10% of the market, you may estimate the TAM at $5 billion.

Each experiences also can present steering on future progress tendencies, serving to forecast your TAM’s evolution.

You should utilize AI like ChatGPT to research the paperwork for you (they are often fairly advanced). Right here’s a pattern evaluation of an over 500-page F-1 submitting by an Esports firm.

Interview potential clients

Whereas experiences offer you large numbers, speaking to actual folks offers you the sensible insights wanted to regulate these estimates.

• By talking on to clients, you may gauge whether or not they really want your product and the way possible they’re to undertake it.
• Interviews assist you to slender down the client segments most concerned with your resolution. Possibly not everyone seems to be a match, but when sure industries or firm sizes present extra curiosity, you may focus your TAM on these segments.
• Asking clients what they’d really pay in your product offers you actual information. If you understand what your goal clients are prepared to spend, you may multiply that by the variety of related clients to estimate your income potential and refine your TAM.

Use PitchBook for funding and market information

PitchBook gives broader market information and funding tendencies. It gives dependable data on market valuations, funding rounds, and business progress, which helps you gauge the general dimension and progress potential of a market.

PitchBook additionally helps determine key gamers, making it simpler to estimate how a lot of the market is presently being captured and what stays untapped.

For instance, based mostly on Stripe’s post-valuation of $152 billion and an assumed 30% market share, Stripe’s TAM can be roughly $506.67 billion (TAM = valuation/market share).

Different instruments for SaaS firms

In case you’re in SaaS, there are a pair extra sources of information you might discover particularly helpful: BuiltWith and Latka SaaS Database.

BuiltWith is a device that reveals you what applied sciences web sites are utilizing. This device is nice for figuring out your ideally suited buyer as a result of you may see which firms use sure instruments or platforms that align together with your product.

Enter a competitor into BuiltWith, and search for the checklist of their clients. For instance, listed below are among the websites that use Salesforce. You may type the checklist by workers or visitors to seek out the dimensions of the corporate you assume you may get on board. 

The following one is Latka SaaS Database. In case you can’t discover a SaaS firm on PitchBook or BuiltWith, there’s an opportunity you will see that it on Latka. It’s a SaaS-specific database that tracks metrics like income, buyer progress, churn charges, and funding for hundreds of firms.

Understanding your opponents’ income and the variety of clients they serve may help you higher estimate the dimensions of your potential market.

• Use opponents’ ARPU or ACV (Annual Contract Worth) to estimate your personal future metrics.
• Use the competitor’s income or valuation and apply a market share estimation to calculate TAM.

Closing ideas

Keep in mind, TAM is in the end an estimation. It’s pure to be barely off, and also you’ll most likely have to reevaluate yearly, after vital modifications available in the market or after introducing new merchandise.

 

Typically, TAM calculations aren’t very correct. At greatest, you’re counting on partially recognized variables (variety of potential clients and common lifetime buyer worth). Industries additionally change so shortly that TAM calculations can grow to be irrelevant inside a matter of months.

What’s maybe extra necessary than the precise quantity is the methodology behind your TAM calculation. A well-thought-out strategy demonstrates how severely you are taking the enterprise and the hassle you’ve put into understanding the market.

Obtained questions or feedback? Discover me on LinkedIn.