Calculating Your Company’s Total Addressable Market (TAM): A Step-by-Step Guide
Introduction to Total Addressable Market (TAM)
The total number of people (or schools, businesses and so on.) worldwide is the basis of the calculation of the total addressable market. Then, it gets reduced based on geography along with demographic characteristics until it gets to the market that is targeted.
TAM or Total Addressable Market calculation TAM is the opportunity for total revenue which is available for products and services when the company reaches 100 percent market share. It’s a great measure to assess the growth potential of a company. A total market reflects the demand on the market for a specific product and identifies the opportunities available.
TAM aids companies and businesses decide on the level of work and money that should be put into an upcoming business line. Today, markets are changing at a rapid pace, making TAM the most vital and important measurement. It makes companies and businesses aware of the ambiguity between their demands.
A step-by-step procedure for finding the the Total addressable Market (TAM)
How do you calculate the to calculate the total addressable market among the most essential aspects to comprehend the entire potential for revenue is expressed through the term total addressable market (TAM). Market size remains crucial to determining the growth potential of a business whether it is a start-up, established or new firms. A total amount of market that can be addressed (TAM) is calculated according to the following:
TAM= Average Revenue * Number of clients in the market segment targeted.
To determine TRM there’s three main collection methods, and a third method
Top-Down Method
The top-down strategy is an inverted pyramid. It is generally depicted in three steps which are as follows:
Definition of The Macro Economy – This identifies the size of a population known to be large that has the market target.
Definition of Market Segment It is a matter of restricting the vast population to ensure that the focus stays on a particular market segment.
The definition of addressability refers to distinguishing potential customers from the specific market segment.
To put it in simple terms, the top-down analysis could be described as an elimination procedure that includes a huge number of people from the populations that are in the market in question and reduces it to specific market segments. The addressable market calculations used in this method are based on research conducted by market research companies.
Bottom-Up Method:
The bottom-up method is built on price data and prior sales. This method is more precise and relies on first-party information to give more precise estimates of growth in the market as well as the revenue.
By using this method an organization or business can justify the reason why they picked certain segments of customers over the others. The market with the addressable option is more reliable and precise because the business relies on precise and accurate information. The information generated by this approach is internally and based on real-world experiences and therefore more reliable in comparison to the top-down method.
Value Theory
This method calculates the value users get who use the product or service and also the price that customers will purchase the service or product in the near future. The value theory approach is the best choice when there isn’t any actual information about the market to build the decision on and also if the product is unique.
With this approach, businesses are more cautious about what consumers find appealing and what price they’re willing to spend for the value. This strategy is introduced when a business introduces new services or products, or cross-sells specific products to customers who are already loyal.
Importance of Total Addressable Market (TAM)
To assess the overall size of the market it is necessary to calculate the market’s total addressable (TAM) can be considered one of the primary measures. TAM assists in breaking down the achievable levels when a company or company launches the first products or services, preparing to cross-sell a previously sold products or services, or even launching an entirely new segment of customers. It becomes easier for companies to test their the assumptions made based on growth or revenues by estimating how many potential buyers could be able to purchase the product. Businesses must be aware of TAM better to make better choices based on revenue as well as the amount of time.
Wrapping up Total Addressable Market
A total addressable market (TAM) assists companies in determining the way in which marketing and sales efforts could be distributed differently depending on the objectives. An in-depth study of the market’s total addresses can be one of the best methods to attract investors. It is possible to use TAM analysis to help promote the product and learn about the areas to concentrate the most effort on.
