09. Total Addressable Market

Total Addressable Market

TAM, or total addressable market, is a measure of the revenue opportunity for a product.
Keep in mind that TAM is not a measure of your revenue or future revenue. Instead, it allows you to understand the size of the market if you had 100% of the market. A larger TAM indicates a larger opportunity, with more demand for a particular product. However, just because there’s a large TAM does not mean that a product is guaranteed to be successful…
There are lots of other factors that will come into play, like competition.

TAM = Average revenue per user X total number of potential users in the market

There are several approaches to calculating TAM:

• Top Down
  • You start with a high level view of the economy, and then narrow that down based on factors like demographics. For example, you usually will start will everyone in the world and narrow down that audience to people who are interested in your product.
• Bottoms Up
  • This involves using known data points that you have (data from early customers and sales) that you could extrapolate to represent a larger market opportunity. For example, if you are already selling a product in one region and were considering selling it globally.
• Value Theory
  • Generally used for new product categories where you don’t have much information to base estimates on. This involves conducting market research to understand how much people would pay for your product and how many potential customers you have.

Further Readings

• How to calculate your total addressable market and make a great TAM slide for investors