Total addressable market (TAM)
What is the total addressable market (TAM)?
Total addressable market (TAM) refers to the overall revenue opportunity that is available to a business if it achieves 100% market share for a specific product or service. TAM is typically calculated in terms of annual revenue or number of units sold, representing the largest possible demand for a solution within a defined market.
Key takeaways
Maximum potential market
TAM represents the total demand for a product or service if every potential customer makes a purchase in a market.
Foundation for strategy
Understanding TAM helps businesses prioritise opportunities, shape go-to-market strategies, and guide product development priorities.
Key metric for investors
TAM is a critical figure in investor presentations, as it signals the growth potential and scalability of a business.
Used to define segments
TAM provides the baseline for identifying more focused markets, such as Serviceable Available Market (SAM) and Serviceable Obtainable Market (SOM).
Why does the total addressable market matter?
Total addressable market (TAM) is far more than just a theoretical number — it's a vital tool in business planning and analysis. By estimating TAM, companies can determine whether the market is large enough to justify investing in a new product, pursuing entry into a new region, or scaling operations.
- Strategic clarity: TAM offers a clear picture of the full market potential, helping business leaders make informed decisions about resource allocation and expansion.
- Investor confidence: Businesses with a well-defined TAM can demonstrate the scope for growth and scalability, which is critical when attracting investments.
- Competitive evaluation: Knowing the TAM enables benchmarking against competitors and helps understand market saturation and white-space opportunities.
How is TAM calculated?
TAM can be estimated using several methods:
- Top-down approach: Uses industry research reports to estimate total market size, then filters for addressable segments.
- Bottom-up approach: Multiplies the number of potential customers by the average revenue per customer, based on primary data or pilot sales.
- Value theory: Estimates what customers would theoretically be willing to pay for a solution, extrapolating this across the overall market.
Why is TAM estimation important in business?
Accurately estimating TAM allows companies to:
- Size up new business ideas before committing significant resources.
- Plan long-term growth strategies and assess diversification options.
- Understand risk by measuring the gap between the current market share and the total opportunity.
Real-world examples
Case study: Airbnb’s market sizing
When Airbnb was in its early stages, it estimated its TAM by calculating the total annual spending on accommodations globally, then narrowing it to the budget-travel segment. This provided a clear target and helped secure funding by showcasing substantial upside potential.
Example calculation: SaaS product
Suppose a SaaS company charges $100 per user annually and there are 30,000 target businesses in its segment.
TAM = 30,000 users × $100/user/year = $3,000,000 per year
This simple calculation gives a snapshot of the maximum annual revenue potential in that market if every target company became a customer.
Disclaimer: The information provided in this business glossary is for educational purposes only and should not be considered as financial advice. Always consult with qualified financial professionals before making investment decisions.
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What is the total addressable market (TAM)?
Total addressable market (TAM) refers to the overall revenue opportunity that is available to a business if it achieves 100% market share for a specific product or service. TAM is typically calculated in terms of annual revenue or number of units sold, representing the largest possible demand for a solution within a defined market.
Key takeaways
Maximum potential market
TAM represents the total demand for a product or service if every potential customer makes a purchase in a market.
Foundation for strategy
Understanding TAM helps businesses prioritise opportunities, shape go-to-market strategies, and guide product development priorities.
Key metric for investors
TAM is a critical figure in investor presentations, as it signals the growth potential and scalability of a business.
Used to define segments
TAM provides the baseline for identifying more focused markets, such as Serviceable Available Market (SAM) and Serviceable Obtainable Market (SOM).
Why does the total addressable market matter?
Total addressable market (TAM) is far more than just a theoretical number — it's a vital tool in business planning and analysis. By estimating TAM, companies can determine whether the market is large enough to justify investing in a new product, pursuing entry into a new region, or scaling operations.
- Strategic clarity: TAM offers a clear picture of the full market potential, helping business leaders make informed decisions about resource allocation and expansion.
- Investor confidence: Businesses with a well-defined TAM can demonstrate the scope for growth and scalability, which is critical when attracting investments.
- Competitive evaluation: Knowing the TAM enables benchmarking against competitors and helps understand market saturation and white-space opportunities.
How is TAM calculated?
TAM can be estimated using several methods:
- Top-down approach: Uses industry research reports to estimate total market size, then filters for addressable segments.
- Bottom-up approach: Multiplies the number of potential customers by the average revenue per customer, based on primary data or pilot sales.
- Value theory: Estimates what customers would theoretically be willing to pay for a solution, extrapolating this across the overall market.
Why is TAM estimation important in business?
Accurately estimating TAM allows companies to:
- Size up new business ideas before committing significant resources.
- Plan long-term growth strategies and assess diversification options.
- Understand risk by measuring the gap between the current market share and the total opportunity.
Real-world examples
Case study: Airbnb’s market sizing
When Airbnb was in its early stages, it estimated its TAM by calculating the total annual spending on accommodations globally, then narrowing it to the budget-travel segment. This provided a clear target and helped secure funding by showcasing substantial upside potential.
Example calculation: SaaS product
Suppose a SaaS company charges $100 per user annually and there are 30,000 target businesses in its segment.
TAM = 30,000 users × $100/user/year = $3,000,000 per year
This simple calculation gives a snapshot of the maximum annual revenue potential in that market if every target company became a customer.
Disclaimer: The information provided in this business glossary is for educational purposes only and should not be considered as financial advice. Always consult with qualified financial professionals before making investment decisions.
Get paid globally. Keep more of it.
No FX markups. No GST. Funds in 1 day.