Total Addressable Market: Calculate Your TAM

Understanding the total addressable market is a crucial element of any successful business strategy. It serves as a quantitative estimate of the maximum potential market size and represents the overall revenue opportunity available to your product or service.

In this article, we delve into the concept of the total addressable market, provide real-world examples, explain how to find and calculate your total addressable market and discuss how to use this data to your advantage in your business strategy. Whether you’re a startup seeking to understand your market better or an established business aiming to diversify, comprehending and calculating your total addressable market is an essential step to your business success.

Let’s explore how this fundamental concept can change the way you perceive your growth opportunities.

What is a Total Addressable Market?

Total addressable market, often referred to as TAM, is a metric that represents the overall revenue opportunity that’s available to a product or service if 100% market share were achieved. Think of it as a way to measure the total demand for your offer.

For B2B companies, understanding the TAM is critical as it helps in strategic decision-making processes. It allows you to understand the maximum potential of your business in its target market and helps you to assess the potential return on investment of different growth strategies—like outbound lead generation—so you can prioritize accordingly.

What is an Example of a Total Addressable Market?

To put TAM in perspective, let’s say you are the CEO of a company that developed an innovative cloud-based CRM solution designed specifically for small businesses in the U.S. In this case, your TAM would be 33.2 million—the number of US-based small businesses as of 2022. However, if your CRM is geared towards a smaller niche like SaaS companies, your TAM would be closer to 17,000.

Granted, this is a simplistic example of TAM and only demonstrates the total market size. In a moment, we will show you how TAM is calculated using a quick and easy formula, but first, let’s go over how to find your TAM.

How to Find Your Total Addressable Market

1. Define Your Product or Service

The first step to finding your TAM is to have a clear definition of your product or service. Assess the problems your product or service solves and who it will benefit the most. If your company is already established and you have a solid definition for your solution, consider any target markets you might want to penetrate in the future.

2. Identify Your Customer Segments

Next, you’ll need to identify each target market based on your ideal customers. When defining customer segments, B2B companies need to consider factors such as:

Industry,
Location,
Employee headcount,
Annual revenue, and
Tech stack (when applicable).

Having multiple customer segments is encouraged as it will help you prioritize your lead generation efforts. The more precise you are in building your customer segments, the more accurate your TAM will be.

3. Determine the Market Sizes

After identifying the customer segments, the next step is to determine the size of each segment. This can be done through market research. There are several ways to conduct market research, including surveys, interviews, focus groups, and analysis of secondary data. You can also use existing market research reports from firms such as Gartner, Forrester, and IDC.

At Martal, we use intelligent prospecting and database tools to determine the TAM for each of our client’s customer segments. These platforms are updated frequently to ensure an accurate estimation of the target market size.

5. Estimate the Average Contract Value (ACV)

Next, estimate the average contract value (ACV). This is calculated by dividing the total revenue by the number of users. For new businesses, this can be a prediction based on pricing strategies and projected sales.

6. Calculate the TAM

Finally, to calculate the TAM, multiply the market size by the ACV. This will give you the total revenue that could be generated if you captured 100% of the market.

Here is the formula:

TAM = Market Size * ACV

7. Validate Your Findings

Lastly, validate your findings by cross-referencing them with other data sources, like industry reports and academic studies. You can also consult with experts in the field for their opinion.

Calculating your TAM is not a one-time task. As your business evolves, your TAM might change. Therefore, it’s important to regularly review and update your TAM calculation.

Remember, TAM is a powerful tool for understanding the potential growth and profitability of your business, but it’s just one factor to consider when making strategic decisions. Other aspects such as competition, cost structure, and your ability to deliver also play a critical role.

An Example of How to Calculate Your Total Addressable Market

Staying in line with our previous illustration, we’ll assume that your CRM solution is, in fact, targeting US-based SaaS companies. Furthermore, you have found that most SaaS companies do not adopt a CRM till they have more than 10 employees, which cuts your market size down from 17,000 to 8,500. You also must weed out your 1,700 competitors. That gives you the final market size of 6,800 businesses.

With an average CRM cost of $1,500 per year, we can estimate your TAM to be:

6,800 SaaS Companies * $1,500 per Company/per year = $10.2 million per year

This $10.2 million figure represents the maximum potential revenue your company could earn each year if you were able to reach and sell your CRM solution to every SaaS company in your market at the average price point of $1,500 annually.

Keep in mind that TAM is an idealistic figure. In reality, it’s unlikely that any company could achieve 100% market share due to competition, market saturation, and other business constraints. However, knowing your TAM can still be incredibly valuable for strategic planning and decision-making.

How to Use Your Total Addressable Market Calculation

Whether you’ve been in business for ten days or ten years, knowing your TAM can make it easier to navigate through tough business decisions that affect your company’s growth and profitability.

You can use the results of your TAM to determine which customer segments have the most revenue potential, as well as decide how best to allocate your sales and marketing resources.

Your TAM can also be helpful in estimating how quickly you can expect results from outbound lead generation. While large companies with deep prospect pools or relatively low ACVs may see results in as little as 30-90 days, companies will shallow prospect pools or high ACVs may take as much as six months or longer to gain traction.

Want to Know Your Total Addressable Market?

Before partnering with a new client, we complete a TAM analysis to provide an accurate estimate of the effectiveness of our outbound lead generation services.

If you are still trying to figure out where to start, our sales experts at Martal Group are more than happy to help you build out customer segments so that you can discover the most profitable market fit for your product or service.

If you’d like to have your TAM analyzed by Martal, schedule a free consultation with our team today.