Your Total Addressable Market (TAM for short) is the total revenue potential for your product or service, and is typically broken down further to the serviceable (SOM) and obtainable (SAM) markets.
Whether you’re developing a board go-to-market strategy, entering a new market, or presenting to investors, the process of calculating your Total Addressable Market (TAM) should determine if you have a viable market, give you a deeper understanding of how that market is distributed, and stand as a cornerstone of your strategic toolkit.
There are two main approaches to calculating TAM we'll explore in this article: top-down and bottom-up.
Calculating a top-down TAM analysis involves taking the overall market size and determining your estimated share of the market. The key here is starting with the ‘top’ of the market- i.e. “What’s the overall spend in this market today?” While good for an overall wind check for your potential opportunity, a top-down TAM calculation is often misleadingly simple. Here’s an example of finding the TAM for the B2B data backup market in North America from the global number and a few key assumptions:
$15 billion Data Backup market - found figure
x 70% of the market as B2B
x 35% of the market in North America
= $3.7B TAM
Going one step further, based on market share in similar markers, you estimate you can capture 15% of the market:
x 15% of the market - estimated capture
= $551 million SOM
A top-down TAM calculation is typically available via a third-party research firm or found in figures you may see from an industry publication, and it can help you determine if the total market size justifies your investment for entry.
While a top-down TAM calculation can give you a quick overview of a market, you’ll need further granularity to make strategic decisions based on the many factors that affect your market and product.
A bottom’s up approach to TAM calculation tends to be more accurate as it calculates estimated potential sales of a product or service and where possible, pulls from your existing sales history.
In its simplest form, a bottom’s up TAM calculation takes the number of potential accounts and multiplies it by the annual price of your product or service.
# 52,000 businesses - Potential customers for B2B SaaS product
x $12,000 - Price of annual contract
= $624 Million TAM
This figure is more helpful and credible than a top-down calculation, as it considers the unit economics of the business and translates more cleanly into a direct path to revenue. However, it needs additional layers of data to refine.
A bottom’s up TAM calculation will take into account:
The bottom’s up approach gives a more accurate assessment of a product’s potential and a more detailed understanding of market drivers, customer segments, and potential market limitations and opportunities. For examples of how to calculate a bottom-up TAM analysis, checkout our post here.
Oftentimes, both a top-down and bottom-up approach are needed for you to effectively understand your market opportunity, both in terms of current spending and potential spending.
If you’re ready to build your TAM, you can gain access to a free B2B market sizing framework with Scalepath’s free market sizing toolkit.
Scalepath's team of consultants are standing by to assist you! Whether you want to do a top-down, or a bottom-up model, our team of experts will efficiently accelerate your analysis, leaving you with the decision support tools you need to make strategic business decisions. Feel free to check out our TAM modeling software as well if you prefer to do it yourself. Happy modeling!
