The Ultimate Guide to Total Addressable Market (TAM)
What is your Total Addressable Market? Do you know? It's a term that can be intimidating, but it doesn't have to be. In this blog post, we'll talk about what TAM means and how it should factor into your sales and business decisions.
What is TAM?
- TAM is the total size of a potential market for the product or service. Companies use TAM to identify the size of a market and estimate how much revenue they can generate from that space.
- Companies often use TAM when deciding whether or not to enter into new markets, as well as using it in M&A decisions. Some other uses of TAM could be deciding how much to spend on marketing or deciding which markets are most profitable.
- This is why the total addressable market for a product or service is an important metric to calculate when figuring out how much space there for in your niche.
How to Calculate TAM?
TAM= Potential Market Size x Competitive Position
Potential Market Size= Number of potential customers in the market
Competitive Position = Your company's share of the total number of possible customers.
For example, your company sells laptops.
Your potential market size (total addressable market) is the number of people who buy a laptop in one year, which would be roughly 60 million Americans.
If your company has 50% of that share means you can reach 30 million customers for this product or service and if there are two other companies with 20% of that share each, they can reach 15 million customers.
Why use TAM?
- It provides a holistic view of the competition and how companies are performing in their markets.
- It offers insights into customer behavior that can inform sales strategy, product development, and marketing plans. This is because TAM will also reveal what products or services customers are more interested in as well as those they have abandoned. It helps us understand why some people switch to competitors' brands while others stay loyal even if we offer them lower prices than our rivals do.
- TAM helps decide where to focus resources for growth opportunities by providing clear data on which regions are underserved (i.e., potential target areas).
- Allows marketers to identify new trends based on changes in consumer's preferences over time through comparative data.
- It is important for marketers to know their total addressable market size, as this will give them a better idea of how large the potential customer base is and what areas they should target in order to meet their marketing objectives.
- TAM helps identify new customers or segments within existing markets that may be targeted by advertising campaigns because it reveals untapped opportunities.
- Marketers can use TAM data when considering whether or not innovation efforts would pay off with higher profits due to product development and promotion expenditures which often require heavy investment before seeing any return on investments.
TAM vs TAM
While we are studying TAM let's also understand the difference between Total Addressable Market and Total Available Market.
The total available market (TAM) includes all consumers - both those reachable and/or interested in your particular products or services as well as inaccessible customers.
When you have limited resources such as budget, time, people skills, etc., it may make sense to focus on only the "addressable" segment of TAM instead of competing against all segments within TAM.
Total Available Market offers companies and business owners the opportunity to sell their products and services to a wider audience.
However, many companies have limited budget or time which makes it difficult for them to reach out to all segments within TAM.
This is where the Total Addressable Market (TAM) comes in as an alternative option that gives business owners access to more customers while saving on costs of marketing campaigns and other promotional activities.
The key takeaway from this article is understanding how you can reach your specific target audiences through Total Addressable Markets rather reaching out to everyone. The goal is to understand the attractiveness of the market segment and how well you can cater to it.
TAM is a smart move to study your opportunities and replace these opportunities into your strengths.