Total Addressable Market (TAM)

Total Addressable Market is the size of the opportunity for your product or service in the market. Calculating TAM is a crucial part of research you should perform before entering or expanding into a new market. Since you cannot capture everyone, it is good to have an idea of the potential market size for your product or service.

You can calculate this number through three main methods: the top-down approach, the bottom-up approach, and the value theory approach.

The top-down approach involves starting with research about a given industry compiled by research specialists such as Gartner or IDC. This is the method that involves the most guesswork and estimation and is not recommended for detailed market analysis. In the bottom-up approach, you look more at specific market segments that you are going after, add them up and then multiply by the annual price. It is a more nuanced analysis of the market you are going after. Finally, the value theory approach calculates TAM through an analysis of the potential value a product or service could bring to customers, by comparing it against a similar or substitute product or service.

TAM is an umbrella term that can be further narrowed down into SAM (Serviceable Available Market) which focuses on the market share specific to your product or service, and SOM (Serviceable Obtainable Market) which is the realistic market share for your product or service. A complete market share analysis would look at all three numbers.