All Roads Lead To TAM
4 min read
May 10, 2023
All Roads Lead To TAM
Some marketing concepts are timeless, and TAM is one among them.
Total Addressable Market, or TAM, as the name suggests is a measure of how much money we can make by operating in a given market.
Of course, it is different for service and product companies, and of course, it is also different for B2B and B2C companies. But, let's break it down a bit.
1. Pick a region where you want to sell.
2. Estimate the size of the market in that region. At scale, you can use research reports, but if you're testing something at a smaller scale, DO NOT extrapolate. For example, if the eCommerce retail market in India is estimated to touch $10billion (arbitrary number) by 2025, do not backward integrate and think that your business will grow at the same pace.
3. So, what do you do if you're just starting out? Customer interviews. Get your ideal consumer profile nailed, and do lots of focused interviews.
4. Extrapolate your market size based on these interviews and conversations.
The different ways of calculating TAM
Now, if a calculation has been used for decades, that’s probably because it works. It is important to understand how it applies to your context.
But first, the basics.
The basics follow either a top-down approach or a bottom-up approach to calculating TAM. One of them is more accurate, can you guess which one?
It isn’t the
The top-down approach
In this method, which is what we discuss on the episode in growth, you start by knowing how big the market opportunity is, you divide it by the number of direct competitors, and you get your TAM.
In other words,
TAM = Total revenue available to me in this market/ number of competitors I have today
I think it’s pretty easy to see why this one isn’t very accurate. Your total revenue availability is an estimate and not a fact.
Why do we mention this, then? Because no one actually sits down and does this when starting a business, and having some estimate to go on is better than having nothing at all. A picture of your TAM will tell you
1. Whether the opportunity is actually big enough to pursue
2. Whether you are the right person/ team/ product to be pursuing it
3. The amount of time and resources it will potentially take to complete said pursuit
The bottom-up approach
Here, we get more specific. This formula is widely used because it works. However, new companies find it difficult to use, because the calculation goes like so:
TAM = Total number of customer/ accounts in your industry X Average contract value
Of course, if you haven’t yet sold anything so you don’t have a contract value, leave along the average of that contract value. In such cases, start with approach #1 and move to this one as soon as you have served at least 3 accounts in a year.
Questions you should frequently ask about TAM
Now, numbers are set points on a map, but your business is the entire map. Therefore, it is important to consider these numbers in conjunction with other numbers.
1. How does TAM work if I’m a B2C company?Here’s the thing about B2C- people are not as loyal to the brand as we think they are. What they have instead is affinity for the product. Surf Excel vs. Ariel. H&M vs. Zara.And therein lies your opportunity. Make a good product, and your TAM is actually everyone who will potentially buy that product. Be wary, though- such optimism must still be grounded in reality. For example, if you’re selling Kombucha, your market is also ‘anyone who drinks a beverage when it is hot’. And that can be a challenging notion to comprehend.
2. What if my average contract value is very high/ I sell an enterprise-grade product?Get as specific about your TAM as you possibly can, and then get more specific. Churn rate is usually low with enterprise clients, and in this market, relationships are everything. So if you have a competitor, and they already own an account, the chances of you poaching that account are very low.Unless, of course, you are a market disruptor. But are you, really?
3. How does TAM work in cases where churn is very high?FinTech companies and BFSI orgs usually experience a high churn, as do telecom and internet service providers. The first thing I’d look at is this- is a high churn common in my industry, or am I an outlier?If it is common across the industry, your TAM still stays the same, it’s just that you’ll have to apply some very aggressive tactics to either retain existing customers, or keep bringing new ones into the mix.