How to determine Total Addressable Market (TAM) with Analysis in 2024

Dec 2, 2023 | Blog, Sales and Marketing

buyer intent best practices

What is the size of your potential market?  Who are these companies? Where can I find them?  These are all important questions for both new business entrepreneurs and established fortune 500 companies alike.  Measuring the TAM for your business helps determine a go-to strategy for sales.  In this brief but to the point article, we will address how to determine your TAM, what to do with the data and how to utilize the data to optimize your sales efforts.

What is TAM?

TAM refers to the total revenue opportunity that is available for a product, solution or service.  Essentially, for B2B organizations, it is the total number of companies that would buy and utilize what you offer.  Imagine who would buy your product or service if you had a monopoly on the market place, meaning zero competition.  This would be 100% of the TAM for your product or service.  Now add in the competition and the business they take away from your bottom line and you can calculate the percentage that you have in your Total Addressable Market.  

 How can you Calculate your TAM?

There are 3 ways to determine your TAM.  Top-Down, Bottom-Up and Value Theory. 

The Top-Down Approach TAM

The Top-Down approach utilizes industry research like Gartner or Forrester analysts to estimate the size of a market based on revenue.  Unfortunately this is usually highly inaccurate for a number of reasons.  First, data from these types of analyst reports becomes outdated very quickly because they are not updated frequently enough to give an accurate representation of the marketplace.  Second, it discounts disruptors, meaning it can’t keep up with the trends of a specific market quick enough to discover and report on new ways of providing solutions, products, and services. 

The Bottom-Up Approach to TAM

The Bottom-Up Approach takes into account an algorithm to calculate the TAM based on your previous sales and pricing data.  

Total Number of Customers x Annual Contract Value = TAM

For example, If there are 50,000 companies that are potential customers for your SaaS product, and you sell that SaaS product for $10,000 per annual contract, this would be 50,000 x $10,000 = $500 Million TAM.

This is a much better approach to the Top-Down but refinements can be made to make this a much more accurate representation of the Marketplace.  Refinements could include:

  • How much are people willing to pay (meaning, what is the ceiling price for what you currently offer)?
  • What is my ICP – your ideal customer profile is useful to determine every possible market segmentation?
  • What are potential distribution channels or partner channels? (this can be a separate TAM if you know the size and selling potential of these channels?
  • What percentage of the marketplace can I reasonably capture based on my size of company and resources available to us today?

The more of this information you know, the better the calculation will be and it will prove to show a much more accurate picture of your TAM compared to the Top-Bottom approach.

Value Theory Approach to TAM

The Value Theory Approach to TAM relies on estimates to determine what a customer is willing to pay and how much of the value is associated with the product, service or solution.  This is particularly geared toward new features or products and what value is associated within.  For example, in the automotive industry, luxury versions of a vehicle offer more features to the consumer but at a higher price.  Knowing this, they can utilize a calculation similar to the example below.

A Luxury car offered by company A sells for $90,000 and we can estimate to sell 35,000 cars = $3.15 B

A Basic car offered by company B sells for $55,000 and we can estimate to sell 50,000 cars = $2.75 B

The perceived value of the luxury version equals more profit with less sales.  The features of the luxury vehicle represent the value of what the customer is willing to pay and the market share associated with it.  Assuming these are the only 2 auto companies on the planet to simplify this model, the TAM is 3.15B + 2.75B = 5.9B then company A’s market share of the TAM is 3.15B/5.9B = 53% 

So what is the best Approach to TAM?

The idea of TAM is to get as close to an accurate number as possible.  To do this, most companies avoid the Top-Down approach and utilize a combination of the Bottom-Up approach and the Value-Theory approach.  Doing this will allow your business to gain a better understanding of where you sit in the market and will help your company grow toward new offerings and solutions that can help capture a bigger piece of the pie.  It helps companies scale and determine the perceived value of their products and services within a specific market segmentation.  

Where can I find more opportunities within my TAM?

Knowing your TAM is a necessary exercise to help understand your marketplace, but knowing what companies to sell to within your marketplace depends on not only your TAM but also your ICP (Ideal Customer Profile) within that marketplace.  Oftentimes companies know which companies they should target, usually by segmentation, i.e. size, revenue, technologies utilized,  etc.  A good exercise for sales is to look inward at your current customer set and mimic the data to find alike companies.  Once you have this data, you should do the same exercise at the employee level, i.e. what decision maker titles do you work with.  Once you have done both, you can easily plug in this data to a data platform like Lead411 and find the right opportunities to pursue.  In addition, Lead411 can find which of these companies are currently seeking your type of products, services and solutions based on intent data.  To take it one step further, Lead411 can narrow down these companies to the ones that are currently growing and spending money, making a sales team’s job extremely easy.  If you would like to learn more about how Lead411 can help your company grow, check out a demo using the button below.

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