TAM Analysis: A guide

Author: John Williams

From being mere places of exchange to being a global phenomenon, the market has gone through a myriad of evolutions to become what it is now. However, the word ‘market’ is an all-encompassing one, having in its fold local, international, and online markets.

Due to these divisions, analyzing the size and workings of different markets has become an essential task for businesses looking to stay ahead of the curve. Total Addressable Market (TAM) is one such market research tactic. TAM, also known as the Total Available market, is the overall market demand for the product or solution.

But before we delve into the nuances of TAM, let us understand what market sizing is.

Market Sizing

Do you want to realize your market size? Ascertaining market size can assist you in discovering how large your business is in comparison to the market. As an entrepreneur, you can even see how much potential it has. It is a precarious idea to comprehend, and as a businessman, you can’t plan for it.

Market sizing is a process to assess the market potential for your solution or service. It is an essential practice for organizations gearing up for the launch of a new product. With the assistance of statistical surveying sources and information base, market sizing can help you:

• Find your potential customer base
• Know which category your competitors belong to
• Profile a potential client
• Define trends in the market
• Find out how products similar to yours are doing in the market

Many marketing professionals fail to demarcate where one market ends and the other begins, which is the main reason why market sizing thrives as a concept but fails when applied. That’s why it is imperative to pair up market sizing with TAM, or Total Addressable market, which is the final piece of the puzzle.

What is TAM? Why is it Important?

For a young entrepreneur or a seasoned veteran of the market, it is always a good practice to analyze whether your business is commensurate with the size of the market. This is where TAM comes into the picture.

TAM or Total Addressable market refers to the chunk of the total market that is approachable and which can be used to generate revenue. It also assists in identifying which businesses are looking to buy your product, and what is the real sales potential of your product or solution.

Why is it important? According to a survey conducted by Field Agent in 2018, over 50% of regular grocery shop visitors use a shopping list. How does grocery shopping relate to TAM? Well, if you were to extrapolate the grocery shop to the market, then the grocery list becomes the list of all players in the market, and TAM is the list of all potential targets.

In a nutshell, TAM conveys the highest possible revenue and number of customers a business can achieve when catering to a specific market.

TAM Analysis: How to calculate TAM?

Now that you know why TAM’s important, you might be looking to calculate it for your business model.

Before calculating TAM, it is crucial to find answers to the following questions:

• How do your target and existing customers define themselves?
• What industries must your products cater to?
• Where do those industries operate from?
• What is the size of the company you’re looking to sell to?
• Are there any new players in the market?
• Which part of the industry is expected to grow the most?

It’s always a good practice to indulge in some detailed market research before you go on about calculating TAM. An adequately defined target audience is an essential prerequisite for determining an accurate and meaningful TAM.

After taking care of all the underlying variables, marketers can choose between the two prominent methods for TAM calculation.

The Top-Down Approach

The top-down path is generally taken when you already have a large amount of data and what to slice down that data to your actual product. This reduction typically follows a three-step process.

• First, the entire market or macroeconomy is identified for your product.
• Then, a segment is defined within that macro-economy that focuses on a particular area of your choice.
• Lastly, the segment is sliced down to potential customers based on accessibility and addressability.

For instance, let’s say Veeno, an online wine distributor, wants to estimate its TAM. First, the company would need to consider the entire wine market, which is a whopping 300 billion dollar industry. But a single company can’t cater to that large an industry. So, with the help of market research, it finds out that 25% of the total wine market is based on wine sales made in restaurants and bars. The other 64% is based on offline sales, which leaves only 11%, or 33 billion dollars, which is the market share for online sales of wines, and hence the total addressable market, or TAM for Veeno.

Sounds easy? Although the top-down approach may seem pretty straightforward, the approach is accompanied by its many shortcomings, which can lead to a misestimation of TAM. Here are the caveats you should be wary of:

• The fact that a third party collects the data you’re referring to, and which may or may not be specific to your company’s TAM
• TAM has the potential of changing drastically if your product is creating disruption

The Bottom-Up Approach

This approach is considered the more reliable one out of the two, and for apparent reasons. Instead of referring to the data collected by third-parties, the company relies on its market research to identify the niches wherein it can sell.

The bottom-up approach also follows a three-step process, which is elucidated below:

• The first step is to glean all the relevant information about your product and which market fringes you’re looking to sell it to
• The next step is to analyze competitor’s data along with your own to determine customers that you can win over
• The last step remains the same, which is to classify the customers further based on their accessibility and addressability

The Bottom Line

All in all, TAM or Total Addressable market is an essential statistic to employ for both startups and veteran organizations, and one which can give your company a serious edge in the cut-throat competition, and help your sales team to bring the conversions to an all-time high.