TAM in Marketing: Keep it or Drop it?

Total addressable market (TAM) calculations... UGH! This is the MBA stuff right? These are the nasty, weird, hard to calculate figures to estimate the size of the market that you are going after right? Most of us feel they are gross. But, believe it or not, they are important to your business!

A TAM is the overall revenue opportunity to sell your product or service, if you were able to capture 100% of that market. In case you were wondering, it's simply not possible to capture the complete market unless you're a monopoly. But, it is very interesting to know this figure for your business plan or strategy. Like a total eclipse, it is important to understand what full coverage would look like for your market. Specifically, this is extremely important if you have a number of different options that you could possibly pursue. No matter how large a company, there are never enough resources to pursue every option available. A TAM helps you prioritize.

This is not to suggest that the TAM will be the only factor that you need to consider when developing your business strategy. Despite that, it is one key factor to consider. Once you're in a regular pace of working out your time in marketing you can start looking at more granular calculations as well. Several authors have written about the SAM (serviceable addressable market), and the serviceable obtainable market (SOM). There are also a few traditional ways to calculate your TAM, although we will only touch on them in this article.

TAM, SAM, and SOM

You'll find the general construct (diagram) model below applicable to many different businesses, and in various articles. It defines the relationship between the TAM, SAM, and SOM.

TAM defines the full potential for the entire target market. In essence it takes into account the full number of customers who could possibly be interested in the specific product or service offering. All of this information is extremely important to larger companies that have multiple product lines and possible market directions. But, it is also important for startups. First of all, it helps determine areas of greatest demand for a product. That can guide your launch direction. Total market demand is indicative for pointing you to where there is the greatest potential of generating annual revenue. This of course, will be of interest to potential investors as well. That's always a concern for startups seeking funding.

SAM is the portion of the market that you can acquire. For example, if you had calculated an evenly distributed global TAM $1 billion but only have resources in North America and Europe then clearly the SAM will be a smaller figure than TAM. In our case, perhaps the SAM is $400 million. An SAM can be quite important to ensure you are pursuing market opportunities that are realistic for your company to capture.

Finally, the SOM is a further subset of the SAM. This is the market potential that you are most likely capable of capturing. In our example, consider the market of selling sprockets. While the SOM for North America and Europe maybe $400 million your market research may find this figure to be evenly split between silver and blue versions. And, if your company were specialized at only developing blue versions then the SOM or your company would only be $200 million (presuming you had already accounted for competition and any other relevant factors).

Calculating Total Available Market

In this article we won't delve into the detailed calculation methods to estimate TAM. However, at a high level your approach will either be a top down, bottoms up, or a value-based orientation.

Top-down methods use industry data, research reports, and market studies to assess a TAM. Analysts that report top-down analyses are Gartner, Forrester, IDC, Yankee Group, and various others. Market and industry associations are also good reference-able sources of such data.

Bottoms-up methods use various sources of data to estimate the addressable market size. An example here is to use industry census data from places like the department of labour in the US, office of National Statistics in the UK, or Statistics Canada. Honing in on an industry you can determine how many companies are in your addressable market for that particular country, for example. Then it might be as simple as a matter of calculating the number of companies you found multiplied by your ACV (annual contract value).

Finally the value theory approach seeks to find the value that your customers perceive of your product or service offering. Based on that you use the value-based pricing in your bottoms up calculation rather than the ACV. This method is a little trickier as it requires significant market research to determine the price sensitivity of the overall customer base. This is definitely NOT a method I recommend, as it introduces additional variability, and personal estimations into the mix. Using a top down or bottoms up approach, provides enough variability with adding yet another layer. Us the value based approach ONLY if you have copious volumes of data on your market (if you are running a retail marketplace like Amazon, for example).

Know Your Target

We are in an era in which 60% of marketers are observing that customer acquisition costs have increased over the past few years (Hubspot, 2020). That means demand generation dollars have to be spent wisely and in the right places. So whether you consider this a short term or long term project, calculating and knowing your TAM in marketing, is the first step to create an effective strategy for your company. This is important because research by Cascade in 2020 showed that 68% of leaders thought their organization was good at creating strategy. This doesn't seem alarming until you realize that in 2012 that figure was 80%.

All told a good starting point for your business plan or marketing strategy is to understand the markets that you will address. Much as calculating TAMs, SAMs, and SOMs are time consuming, and can be quite difficult, they will help you determine the direction that is best for your product and service offering. Unlike the eclipse photo above, don't expect to forecast the TAM, then to think you will have total coverage of the market. In that light to answer the question we started off with, yes knowing your TAM in marketing is important to set your target sights, and strategic direction. Between keeping it and dropping it, I suggest keeping!

For more on Go To Market (GTM) Planning, there is a helpful course from LinkedIn. This is NOT a paid endorsement. I purely think it will be a resource that marketers will find useful.