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What is Total Addressable Market (TAM)?
The total addressable market, often known as TAM, is the complete market demand for a product or service.
How to Calculate TAM in the Practical World
Let’s say you’re selling a digital marketing tool. You could technically have any-size customer anywhere in the world.
TAM = (annual revenue per customer/contract) x (number of total possible customers/contracts).
SAM (Serviceable Addressable Market)
The SAM formula is account-product fit based on
✅ Technographics
✅ Firmographics
✅ Scale
✅ Persona-product fit based on titles
✅ Teams execs
✅ Budget holders
✅ All-time ACV (annual contract value)
SOM (Serviceable Obtainable Market)
Your SOM is what percentage of your SAM you can grab.
Three methods to calculate TAM:
- Value Theory
- Top Down
- Bottom-up
1. Value-theory
- Focuses on adding value, especially how to add value and reasons that help you capture the market.
- Based on assumptions about customer willingness to pay
2. Top-Down Approach
- Starts with the highest size estimate possible
- Uses industry research and reports.
3. Bottom-up Approach
- Uses data from early selling efforts
- Divide your average sales price by the number of current clients. This is the yearly worth of your contract.
- Then, divide the value of your annual contract by the number of clients.
Modern Ways to Calculate TAM
- TAM was formerly calculated using firmographic data like revenue, company size, region, and so on
- Today, it’s not just who needs your product. It is more about when will they need it and how will they use it.
- Along with firmographic data, the two most crucial insights to calculate your TAM are technographic and buyer intent data.
- Modern data platforms offer this data.
Know Your TAM Before You Take Action
If you want to follow a realistic path toward success, you need to understand what’s actually possible. So let your total addressable market be your North Star and guide you through a journey rooted in reality, not hype.
