Your Starting Point
It’s always important to know your market before you start promoting a new business. Figuring that out, however, could take extensive time and research. The size of the market available to you will impact the time and funds you devote to marketing a particular product or service. This is why you need to know the total addressable market (TAM, also known as “total available market”).
Let’s break down exactly what TAM is and how you can use it in your marketing strategy for the best success.
What Is Total Addressable Market (TAM)?
TAM is the sum of the entire potential market for a product or service if you had no competitors in your industry. For instance, if you sell a line of makeup, the total addressable market would be the entire global market for makeup.
Of course, the chance of having 100% market share for your product or service is nearly impossible. There will always be competition, and your marketing campaign will always be limited by the amount of reach you can afford. By looking at TAM, you can then work to narrow down your market until you find your target audience.
New businesses or businesses launching a new product or service use TAM to get a sense of how much funding should be dedicated to marketing. It can also be used in creating a proposal to pitch your product or service to investors and business partners.
How To Calculate TAM
There are a few different ways to calculate TAM: bottom up, top down, or value theory.
- Bottom Up. This starts with your own customer base. The amount of customers you have in a year by the cost of your product or service. This gives you your annual contract value (ACV). Then multiply your ACV by the number of total customers in the market for your product or service.
- Top Down. Top down calculations are done primarily through market research. In top down calculations, you research industry data through relevant databases and gather a sense of the total available market from those findings.
- Value Theory. Value theory allows for some educated guesses. To calculate TAM by value theory, conduct research to determine how much customers would be willing to pay for your product or service. Multiply that by the total amount of customers in the market, and you have TAM.
Let’s use the makeup example again: imagine you are promoting a makeup kit and your market research concludes that customers would be willing to pay $30 per kit. Multiply this by all of the customers in the market for makeup kits. A 2020 survey found that roughly 107 million women wear makeup in the United States. If you sell your product only to the United States, your TAM would be 3.2 billion.
How TAM Can Help Your Marketing Strategy
So what do you do with that information? Knowing the total value of the market, even if you will never hold 100% market share, is important for a number of reasons. Here are some of the ways you can use it in your marketing strategy:
Helps You Figure Out Your Market Goals and Target Audience
If you know TAM for your product or service, you can figure out how much of that market you need to reach in order to make the desired profit. You can use this to set target goals for marketing, such as bringing in a certain amount of customers within the first quarter.
Knowing the total market can also help you narrow your analysis until you figure out your target audience. Consider your marketing budget and how much of that TAM you can realistically reach. Do research to determine which customers would most resonate with your new product or service. From there, you can hone your target audience and develop a way to reach them.
Clarifies Your Pitch to Investors and Potential Business Partners
As a startup, you need money. You likely need investors to sign on to your idea and help you fund the execution. For that, you’ll need to be able to pitch your product or service. Showing the data with regards to TAM speaks to investors in their own language: that of financial opportunity. It shows them what a wide pool you’re working with and what you plan to do with it.
Helps Existing Businesses Grow Their Audience
If you run an existing business and you want to grow your customer base, it can help to do your TAM research. TAM will show you the potential throughout the entirety of the market. This may open your eyes to a portion of the market that you hadn’t considered before. Additionally, if you have a local business with one location and have decided to open more locations or broaden your service area, your total addressable market itself will broaden, opening up new opportunities.
Finding the right customers for your business requires you to understand your market. That understanding begins with total addressable market.