Total addressable marketplace (TAM) is an estimation of however overmuch you could gain if you could merchantability your merchandise oregon work to each imaginable lawsuit successful your market.

The basal look for calculating TAM is:

Understanding TAM helps you fig retired the size of your marketplace and the magnitude of wealth you could marque if you captured each of it.

TAM is besides a cardinal metric for startup investors. It shows whether a concern thought has a large capable opportunity. Investors often look for a TAM that is “just right” — not excessively large oregon excessively small. A TAM that’s excessively ample mightiness mean the marketplace is crowded with pugnacious competition, portion a TAM that’s excessively tiny could mean constricted country for growth.

In this guide, you’ll larn however to estimation TAM utilizing 3 methods, wherever radical often marque mistakes, and however to refine your estimations to marque them plausible to investors oregon stakeholders and actionable for your business.

There are 3 approaches to calculating TAM. Depending connected the disposable marketplace data, your concern model, and your stakeholders/investors, you should see utilizing the top-down, bottom-up, oregon worth mentation approach.

1. Top-down approach

The top-down attack starts with wide marketplace information and narrows it down to estimation the marketplace size for your circumstantial merchandise oregon service.

This attack is utile erstwhile there’s reliable, wide manufacture information available.

How to use

1. Estimate the wide marketplace size successful which your merchandise operates, usually obtained from manufacture reports oregon research.
2. Apply a percent that represents the information of the marketplace your merchandise tin realistically capture.

Example

If the planetary smartphone marketplace is valued astatine $500 billion, and you are launching a caller smartphone accessory, you mightiness estimation that your merchandise could people 5% of the market, which gives you a TAM of $25 billion.

2. Bottom-up approach

The bottom-up attack builds the TAM by starting with specific, idiosyncratic information related to your concern and scaling it up.

This method is large erstwhile you person elaborate cognition of your lawsuit basal and pricing. As acold arsenic I know, investors similar this method, which offers the astir close and actionable TAM estimation.

How to use

1. Estimate however galore imaginable customers determination are successful your people market. You tin bash this by utilizing sources similar manufacture reports, census data, oregon probe from trusted organizations (more information sources astatine the extremity of the article).
2. Multiply this fig by the mean gross you expect to gain from each lawsuit (ARPU - Average Revenue Per User).

Example

Let’s accidental you person subscription-based bundle that helps tiny businesses negociate their finances. You place that 2 cardinal tiny businesses could payment from your software. If your ARPU is $600, your TAM would beryllium 2 cardinal customers × $600 = $1.2 billion.

3. Value mentation approach

The worth mentation attack estimates TAM based connected the worth your merchandise provides to customers and however overmuch they mightiness beryllium consenting to wage for it.

This attack is particularly utile if you’re introducing a merchandise oregon work that disrupts existing markets; accepted marketplace size calculations whitethorn not accurately bespeak the potential.

How to use

1. Assess the worth oregon outgo savings that your merchandise delivers to the customer.
2. Estimate however overmuch customers would beryllium consenting to wage for that worth and standard it crossed the full market.

Example

Suppose you person developed a caller energy-efficient lighting strategy that saves companies $10,000 per twelvemonth successful vigor costs.

If 100,000 companies could usage your lighting system, and each is consenting to wage $5,000 for it (because they’ll prevention $10,000), your TAM would beryllium 100,000 companies × $5,000 = $500 million.

There’s besides a 4th enactment — a mediate crushed mentioned by rather a fewer radical who offered their insights for this article.

You whitethorn brushwood the TAM, SAM, and SOM terminology and request to use it if an capitalist requests it.

People who similar this attack dainty TAM arsenic a “pie successful the sky” fig and further refine it with SAM and SOM portions of it.

• TAM (Total Addressable Market) is the full marketplace if you could merchantability to everyone, everywhere. Your biggest imaginable opportunity.
• SAM (Service Addressable Market) is the information of the TAM you tin really people based connected wherever you run and who your merchandise is for. For example, if you’re a section java store successful New York City, your SAM mightiness beryllium java drinkers successful NYC, not each java drinker worldwide.
• SOM (Service Obtainable Market) is the realistic portion of the SAM that you tin really triumph over, considering the contention and your strengths. Continuing with the java store example, your SOM mightiness beryllium the fig of customers you tin realistically pull successful your neighborhood, fixed factors similar adjacent competitors, your unsocial offerings, and selling efforts.

TAM is typically utilized to marque a compelling communicative astir the imaginable for growth, truthful it’s casual to beryllium over-optimistic and marque mistakes that could marque your TAM look better.

Here’s an example. I utilized a instrumentality that calculates TAM automatically based connected a URL to find the marketplace size for netflix.com. The instrumentality told maine that determination are 7B radical who “need it (…) adjacent if they’re not consenting oregon capable to marque a purchase” and 6.3B acceptable to marque a purchase. Something that I find hard to judge since determination are an estimated 5.3B radical with net entree worldwide.

Also, the mode that the instrumentality defines my imaginable customers doesn’t dependable convincing to me, either, fto unsocial logical.

Other mistakes you should avoid:

• Falling into the “everything trap”. This is erstwhile businesses presume that their merchandise oregon work could entreaty to everyone successful the market, starring them to cipher TAM based connected an overly wide audience.
• Sizing the occupation alternatively of the market. This happens erstwhile businesses absorption connected the full fig of radical who mightiness payment from their solution without considering however galore are realistically consenting to wage for it.
• Overlooking marketplace trends and dynamics. The marketplace tin turn oregon contract, user preferences tin change, authorities regulations tin power the market, etc.

The basal information sources for TAM calculations are manufacture reports you tin find connected platforms similar Statista and census information (like the US census data). However, determination are different places wherever you tin look for much elaborate data.

Explore the marketplace utilizing hunt data

Search information is accusation astir what radical are looking for online. It tin assistance you recognize what customers want, wherever involvement is growing, and what regions are astir active.

Google Trends provides immoderate of that information for free. For example, you tin cheque if involvement successful a plant-based fare is inactive beardown and wherever successful the US you could find the astir customers.

But that’s however acold this instrumentality goes. You don’t cognize what presumption are “inside” the taxable oregon however fashionable a keyword is (the numbers successful Google Trends are relative). Also, sometimes Google won’t person the data, conscionable similar for the word “baby nutrient subscription”.

Alternatively, you tin usage Ahrefs. I’m definite you’ll find much hunt presumption determination and a batch much information points. Let maine instrumentality you done 3 examples.

Gauge request with hunt volume

Search measurement is an estimation of the mean monthly fig of searches for a keyword implicit the latest known 12 months of data.

High hunt volumes suggest a larger imaginable market. Low hunt volumes, suggest a smaller marketplace (or that you volition request to beryllium much originative to find customers).

For example, portion Google Trends didn’t person immoderate information connected “baby nutrient subscription”, Ahrefs’ Keywords Explorer shows that determination are an estimated 1.2K searches per period successful the US of that term. Plus, it shows you the forecast for that keyword.

If you’d beryllium readying to commencement a caller concern successful this niche, you’d request compelling arguments to warrant a precocious TAM estimate, due to the fact that the existent request for this benignant of work appears to beryllium comparatively low.

Learn what radical privation and however they look for it

Keyword research tin archer you what radical privation successful which countries. All you request to cognize is simply a fewer wide presumption related to your product.

For example, for plant-based products, you could conscionable benignant successful “plant-based, vegan” and past spell to the Matching presumption study to spot the popularity of definite types of products. You tin besides spot if the request for these products has grown oregon fallen implicit the past 3 months.

So, if you find that the request for astir vegan products has increased, you could presume that your TAM is going to grow successful the adjacent aboriginal due to the fact that much radical look to beryllium interested.

You tin besides usage the instrumentality to automatically construe these keywords and spot what hunt presumption radical usage to find the aforesaid products astir the satellite and however fashionable they are.

And if you’re unsure what keywords radical could usage to find a merchandise oregon work similar yours, conscionable usage the AI proposition feature.

Learn from your competitors

By studying the keywords your competitors are targeting, you tin uncover untapped niches oregon areas wherever request is precocious but contention is lower.

For example, accidental you’re a SaaS institution offering a task absorption tool. If you utilized Ahrefs’ Site Explorer, you would find that 1 of your competitors ranks for presumption similar “engineering task absorption software”. This could bespeak a niche marketplace with unsocial needs, wherever there’s sizeable request but little competition.

While you’re astatine it, spell to the Organic Competitors tab to spot who other competes for the aforesaid audience. Chances are, you whitethorn find immoderate caller imaginable competitors.

Use S-1 filings and quarterly reports from nationalist companies

Public companies’ quarterly reports (10-Q) and S-1/F-1 filings connection affluent information for estimating TAM. They supply elaborate breakdowns of gross by merchandise line, geographic region, and marketplace segment, on with insights into marketplace stock and maturation potential.

For example, if a institution generates $500 cardinal from a peculiar work and claims 10% of the market, you tin estimation the TAM astatine $5 billion.

Both reports tin besides supply guidance connected aboriginal maturation trends, helping forecast your TAM’s evolution.

You tin usage AI similar ChatGPT to analyse the documents for you (they tin beryllium rather complex). Here’s a illustration investigation of an implicit 500-page F-1 filing by an Esports company.

Interview imaginable customers

While reports springiness you large numbers, talking to existent radical gives you the applicable insights needed to set those estimates.

• By speaking straight to customers, you tin gauge whether they really request your merchandise and however apt they are to adopt it.
• Interviews assistance you constrictive down the lawsuit segments astir funny successful your solution. Maybe not everyone is simply a fit, but if definite industries oregon institution sizes amusement much interest, you tin absorption your TAM connected those segments.
• Asking customers what they’d really wage for your merchandise gives you existent data. If you cognize what your people customers are consenting to spend, you tin multiply that by the fig of akin customers to estimation your gross imaginable and refine your TAM.

Use PitchBook for concern and marketplace data

PitchBook offers broader marketplace information and concern trends. It provides reliable accusation connected marketplace valuations, backing rounds, and manufacture growth, which helps you gauge the wide size and maturation imaginable of a market.

PitchBook besides helps place cardinal players, making it easier to estimation however overmuch of the marketplace is presently being captured and what remains untapped.

For example, based connected Stripe’s post-valuation of $152 cardinal and an assumed 30% marketplace share, Stripe’s TAM would beryllium astir $506.67 cardinal (TAM = valuation/market share).

Other tools for SaaS companies

If you’re successful SaaS, determination are a mates much sources of information you whitethorn find particularly useful: BuiltWith and Latka SaaS Database.

BuiltWith is simply a instrumentality that shows you what technologies websites are using. This instrumentality is large for identifying your perfect lawsuit due to the fact that you tin spot which companies usage definite tools oregon platforms that align with your product.

Enter a rival into BuiltWith, and look for the database of their customers. For example, present are immoderate of the sites that usage Salesforce. You tin benignant the database by employees oregon postulation to find the size of the institution you deliberation you could get on board. 

The adjacent 1 is Latka SaaS Database. If you can’t find a SaaS institution connected PitchBook oregon BuiltWith, there’s a accidental you volition find it connected Latka. It’s a SaaS-specific database that tracks metrics similar revenue, lawsuit growth, churn rates, and backing for thousands of companies.

Knowing your competitors’ gross and the fig of customers they service tin assistance you amended estimation the size of your imaginable market.

• Use competitors’ ARPU oregon ACV (Annual Contract Value) to estimation your ain aboriginal metrics.
• Use the competitor’s gross oregon valuation and use a marketplace stock estimation to cipher TAM.

Final thoughts

Remember, TAM is yet an estimation. It’s earthy to beryllium somewhat off, and you’ll astir apt request to reevaluate each year, aft important changes successful the marketplace oregon aft introducing caller products.

What’s possibly much important than the nonstop fig is the methodology down your TAM calculation. A well-thought-out attack demonstrates however earnestly you instrumentality the concern and the effort you’ve enactment into knowing the market.

Got questions oregon comments? Find maine connected LinkedIn.