In September 2020, Intricately customer Snowflake marked its debut on Wall Street as software’s largest IPO in history. Snowflake estimated that its total addressable market (TAM) is more than $80 billion – in other words, it calculated that its market growth is nearly unstoppable.
In this blog post, we’ll explain the concept of a total addressable market, its benefits, and how to calculate and use it practically.
What is "Total Addressable Market?"
Total addressable market – also called total available market or TAM – refers to the most revenue a business can generate by selling its product or service in a specific market.
A company would need to operate as a monopoly to win 100% of the market share, but this is the theoretical “size of the prize” a company could go after.
Total addressable market is the total market demand for a product or service, as well as the collection of companies that have the characteristics of your ideal customer profile (ICP) and how much they’re willing to pay for the product.
Why Understanding Your Total Addressable Market Matters
Creating an accurate total addressable market is essential for your entire go-to-market program. Your TAM indicates the breadth and depth of your opportunities. Without it, you won’t know what customers you should be targeting, or how much potential revenue they can generate for your business.
By knowing the size and shape of the market you're selling to, you can break up your TAM into various sub-markets. Then, you and your organization can analyze which sub-markets to pursue – and which to avoid.
Building your TAM with accurate data and building your TAM correctly is important because:
Founders, management teams, and investors use TAM models for different purposes. However, the research and analytical exercise put into calculating a TAM are building blocks for segmenting customers, building a successful roadmap, and getting necessary funding.
A large TAM looks good to investors, but an accurate and precise TAM analysis is more beneficial for scaling a successful company.
How to Calculate Your Total Addressable Market
Traditionally, there are three ways to calculate your total addressable market:
A top-down calculated TAM uses industry reports from sources like Gartner and Forrester to make conclusions about a market. This method is looked down upon by most investors.
It requires little work from the founder, which signifies no sign of a unique understanding of the market, and relies on faith in the analysts at these outside institutions.
While Gartner and Forrester are respectable sources for macro-level research, initial insights, or verifying other calculations, neither should be the sole source of input for calculating your total addressable market.
The bottom-up approach uses evidence based on a company’s early selling efforts. In other words, based on early sales, the company leans on its product's price point and number of units that are expected to sell.
Whereas a top-down strategy is based on current industry size, bottom-up looks at product-market fit factors. It uses a company’s current customer base as proof that customers are adopting the product, as well as reasons why. It builds off of this evidence to demonstrate how this company could capture similar customers in the future.
A company will also look at different market segments, each segment's addressability, and possibly competitors’ sales.
It’s not a perfect approach, however. Basing data on current customers can be limiting. Sample sizing can be limited, or – if you haven’t proven your pricing – you could be basing calculations on faulty assumptions. Assessing current customers alone to develop your TAM could limit your market potential. It’s essential to look at data that demonstrates product adoption, usage, and spending behavior to identify new verticals and prospects outside of your current customer base.
Modern Ways to Calculate Your Total Addressable Market
Total addressable market can be difficult to calculate because it’s a predictive measurement, rather than one based on qualified demand in a pipeline.
Enter: modern data analytics tools. With data on current buyers within an industry, the amount they spend on similar products, overall capacity to spend – and a plan to capture these target accounts – a company has a more accurate view of its TAM.
Traditional ways of calculating total addressable market involve firmographics – revenue, company size, location, and more. Though these data points are important, they’re also lacking.
Today, with rapidly advancing technology, executives need to know how customers will use your product, not just who – the how gives more insight into data usage, current software, and current needs. Advanced platforms like Intricately can offer these insights.