TAM Analysis Market Research
What is Total Addressable Market (TAM) Analysis?
TAM is the total addressable market for your product or service. It’s the total number of people in your space who can become buyers. It is a theoretical monetary value. This value represents all the selling opportunities for your organization. You derive it from calculating the universe of potential users for a product or service.
Why is TAM Analysis Important?
Figuring out your total addressable market (TAM) is worthwhile in various ways. It’s for more than just estimating the size of your opportunity. The process can also allow you to dive deeply into your market’s makeup. It will enable you to better segment and target its constituent parts.
How to Calculate TAM
You can do TAM in a couple of ways. The first is the Bottom-up approach, which is the best method because it uses actual data from your company. The formula to calculate TAM is Revenue Per User x Number of Total Possible Users. You can use primary market research plus a customer profile. That way, you can determine how many buyers exist in the market.
There’s also the top-down approach, an inverted-pyramid style. This method looks at secondary market research. It tells you how many customers fit into specific segments and how many meet your market criteria. You’ll also see the size of your industry. You’re taking a huge swath of people and whittling down to your end user.
Then, there’s the value theory approach. A firm does a rough calculation of how much value it can add. It also looks at why it should capture this value through product pricing. Companies use value theory to calculate TAM for new products coming to the market. They also use it when cross-selling certain products to existing customers.
Why Businesses Need Total Addressable Market Analysis
After calculating TAM, it’s time to decide if that industry is worth entering. An industry with a market size in the median range can be worth the investment. But if the industry’s size is too small or too big, it may not be. It would take much work to convince investors to fund your company. If the market size is too small, it might be too much of a niche category, and if it’s too large, it might be too crowded.
Determining TAM is vital for a would-be startup. It’s doubtful your startup will operate as a monopoly. Thus it would be best if you shared the TAM. You’ll have to split it even if you gain only one competitor. The amount of the TAM you end up with is your market share. You’ll undoubtedly have a small market share if you have many competitors. You’ll split the TAM into many small pieces in such a case.
The serviceable obtainable market is another market indicator. It helps determine the amount of revenue you can bring in your product or service. But the TAM shows you the amount of room for potential growth.
Key Success Factors for Finding Your Target Market
When defining your TAM, you need to know: What size companies will you sell to? Has there been growth in the market? Are there new players? Larger budgets? Where will development take place?
Use your B2B database to spot firms in your TAM. Filter them by company size, location, and industry. Your filters should be enough to close in on a target market. Yet, it would be best if you did not have so many filters that your market prospects become too small.
Divide your TAM into smaller TAMs based on headcount and industry. That will help you to focus on which accounts to target first. The micro-TAMS will help you see where you win big and often, compared to markets with higher loss rates and smaller deal sizes.
About TAM Analysis
We’ve seen how important it is to calculate TAM, especially if your business model is new to the market. You’ll need to do Quantitative and Qualitative Market Research. You’ll also need Competitive Analysis to come up with a Go-to-Market Strategy.
UX and Strategy Market Research would also be helpful. So would Market Entry, Market Opportunity, and Market Sizing Research. It’s also vital to use Focus Groups, Surveys, and Interviews. These tools help you to feel the pulse of your potential customers.