TAM: An Important Analysis for Investors, Strategy teams, and Start-ups
Claire de Weerdt shares an article that could help grow both your market and, consequently, your business in 2023.
The size of the market a business is operating in is something strategy teams, investors, and start-ups all find value in assessing. For strategy teams and executives, understanding market size can enable better strategic decisions and for investors it can help identify if a target is attractive or not. For start-ups, showing a significant and growing TAM can be a critical datapoint to secure financing.
However, where does this number come from? Can you simply quote a market research report or google Statista for a quick and easy answer? Or, is something more nuanced required? Below, I will explore what TAM is, and how I calculate it. (below examples are primarily for B2B applications).
According to the Corporate Finance Institute, “The Total Addressable Market (TAM), also referred to as total available market, is the overall revenue opportunity that is available to a product or service if 100% market share was achieved”. The TAM is typically expressed on a per year basis and is an estimate.
Calculating TAM can be done by defining your market, getting the right source data, integrating assumptions, and applying logic through a model. Details are listed below:
- Define your market
Before getting into the calculations, you want to have a clear definition of the market you’re trying to size. This is based on a single product + business model combo. For example, if you’re an auto dealer looking to assess the market for car purchases, rental revenue and rental customers would be excluded from the TAM you’re assessing, as renting cars is a different business model. Additionally, you want to be clear on the geography, if the majority of business is in the US, for example, you may want to limit the scope to US only.
Using an aggregated TAM – make sure the TAM is only the core market and does not include adjacencies or markets for additional business models.
Not limiting scope – it will take the same amount of work to analyze a TAM for a product that comprises 90% of the business as a product that comprises 10%, so you can half your costs by only looking at the 90%.
Key points include:
- Key assumptions
- Get the right source data
- Common pitfalls
Read the full article, How to Calculate the TAM (Total addressable market), on Linkedin.