In college, I interned at a MarTech company that sold email marketing optimization software. With their software, brands could finally gain visibility into their thư điện tử program’s deliverability rate or inbox placement, which most email service providers, lượt thích Constant contact or MailChimp, can’t do.

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The business’ largest revenue stream was a channel partner program that enabled email service providers khổng lồ sell my old company’s software lớn their own customers. Và one day, at an all-hands meeting, our CEO showed us a slide that listed every single e-mail service provider we partnered with và the amount of customers they all had.

He told us this was our total addressable market. Then, he showed us a slide of how much of the market we had captured — it was a single digit percentage. Even though we generated $100 million in revenue per year, we were shocked at how little of the market we had secured. But it also helped us realize that we still had plenty of room to lớn grow, which motivated us khổng lồ win as much of the market as possible.

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Whether you want lớn start a new company and gauge its industry’s profit potential or forecast a realistic revenue growth goal for your business, measuring your total addressable market is a crucial first step you must take. Lớn help you vì this, we’ve put together a guide that’ll teach you exactly what total addressable market is & the best way lớn calculate it.


Total Addressable Market (TAM)

Total addressable market or TAM refers khổng lồ the total market demand for a sản phẩm or service. It’s the most amount of revenue a business can possibly generate by selling their hàng hóa or service in a specific market.


Unless they"re a monopoly, most companies can’t capture the total addressable market for their hàng hóa or service. Even if a company just has one competitor, it would still be extremely difficult for them to lớn convince an entire market khổng lồ only buy their hàng hóa or service.

That’s why most companies also measure their serviceable available market khổng lồ determine how many customers they can realistically reach with their sale and sales channels. Additionally, they gauge their giới thiệu of market khổng lồ understand the kích cỡ of their actual target market.

However, total addressable market is still useful because businesses can use TAM khổng lồ objectively estimate a specific market’s potential for growth.

How to Calculate TAM

There are three ways to lớn calculate your business" total addressable market.

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1. Top-Down

The top-down approach uses industry data, market reports, và research studies to identify the TAM. In this approach, you might use industry data from Gartner or Forrester lớn identify which subsections of your industry align with your goals & offering — & just how big those subsections are.

However, there are limitations here. Data generated by industry groups may not always be kept up lớn date & may not reflect niche elements of your market. You may want to hire a market research consulting firm to conduct fresh research that is focused on your need areas.

2. Bottom-Up

The bottom-up approach khổng lồ TAM calculation is based on previous sales and pricing data. First, multiply your average sales price by your number of current customers. This will yield your annual contract value. Then, multiply your ACV by the total number of customers. This will yield your total addressable market. Let"s see what this looks like in an example.

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Say you sell scuba fins to lớn dive shops in the state of California. You might sell an average of 60 pairs of fins, at $35/pair, to lớn dive shops in California. 60 multiplied by $35 equals an ACV of $2,100. Then, you"d multiply your ACV ($2,100) by the total number of dive shops in California (125) for a total addressable market of $262,500.

3. Value-Theory

The value-theory approach is based on how much value consumers receive from your product/service và how much they"re willing to lớn pay in the future for that product/service.

To return lớn our scuba example, let"s say you manufacture a type of fin that"s lighter than your competitors và has patented technology that makes them easier to lớn get off than anything else in the market. You"d identify your value-theory by estimating how much dive shops would be willing to pay to lớn carry your superior product. If normal fins are being sold at $35 a pair, would dive shops pay $40 or even $45 for a pair of your ultra-lightweight fins?

After you calculate your total addressable market, it’s time khổng lồ determine whether it’s worth entering the industry or not.

An industry with a market kích cỡ ranging from $30 million khổng lồ $200 million per year might be worth entering. However, if the industry’s market kích thước is under $5 million per year or over $1 billion per year, it’s probably not.

In both situations, it’d be challenging khổng lồ persuade investors to back your company -- an industry with a market kích cỡ of $5 million per year would likely be too niche & an industry with a market size over $1 billion would likely be too saturated.

Know Your TAM Before You Take Action

Starting a business or projecting next year"s revenue growth is always thrilling. But if you want to follow a realistic path toward success, you need khổng lồ first understand what"s actually possible. So let your total addressable market be your North Star và guide you through a journey that"s rooted in reality, not hype.