Snowflake estimates that its Total Addressable Market (TAM) is worth more than $80 billion. In other words, Snowflake calculates that its market can grow nearly unrestrained. A company’s total addressable market gives an estimation of how much the market is worth.
Here, we take a look at what TAM is, how to create it, and how to use it practically.
TAM is a crucial component in the account-based marketing and sales playbook. To make an accurate TAM analysis, it’s essential to first complete Step 1: Modernizing Your Ideal Customer Profile (ICP).
What is Total Addressable Market?
Total addressable market (TAM), which is sometimes called total available market, 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.
TAM 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’d be willing to pay for the product.
Why Nailing Your TAM Matters
Your TAM indicates the breadth and depth of your opportunities. Without it, you won’t know what customers you’re targeting and 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 further break down TAM into various sub-markets. Then, you and your organization can analyze what sub-markets to pursue and which to avoid.
Creating an accurate TAM is essential for your entire go-to-market program.
Building your TAM with accurate data and building your TAM correctly is important because:
- It helps lay a foundation: It forces you to think through data systematically. While pushing deeper into your market research and understanding potential customers better, it shows that you’ve taken time to determine your priorities. Founders use this analysis to show investors and management teams how they think about their market, product-market fit, and product roadmap.
- It propels your go-to-market strategy: When done well, understanding your TAM guides your business’s segmentation, distribution, sales, and marketing strategy.
- It enables thinking beyond current markets: While establishing a TAM, some companies will answer questions about growing the total market or developing an emerging market. Will your technology or service disrupt a pre-existing industry? Calculating a TAM helps you with financial planning and sales forecasting in unchartered territory.
Beyond these benefits, analyzing your TAM will enable understanding your ICPs on a deeper level, which leads to results, such as:
- Improved alignment between sales and marketing: Friction over lead quality is reduced when both teams know who is clearly part of the target market.
- Turn TAM into an actionable list of potential buyers: Find accounts for marketers and sales reps that are more likely to fall within your strike zone.
- Improves annual territory planning: By calculating your TAM and referring back to it, you can keep an active eye on customer segments and know when it’s time to expand to new territories or verticals.
- Prevents reps from “going rogue”: Focus your sales reps on the accounts with the highest propensity to buy, and keep them from hunting accounts that will never convert.
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 TAM
There are three traditional ways to identify your TAM:
- Value theory
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, shows no sign of a unique understanding of the market, and relies on faith in the analysts at these outside institutions.
Gartner and Forrester are respectable sources for macro-level research, initial insights, or to verify other calculations, but should not be the sole source of input for calculating TAM.
The bottom-up approach uses evidence based on the company’s early selling efforts. Based on the early sales, the company uses the product's price point and how many units the company expects to sell to calculate TAM.
Whereas top-down is based around current industry size, bottom-up looks at product-market fit factors. It uses its current customer base to show proof that customers are adopting the product and why. It builds off of this evidence to show why it thinks it could capture similar customers in the future.
A company will also look at different market segments, each segment's addressability, and possibly competitors’ sales.
Unlike the top-down approach with a looming statistic, the bottom-up approach takes a more thoughtful approach to consider different factors and explaining how a company understands its market's breadth and approachability.
It’s not a perfect approach, however. Basing data on current customers can be limited. 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 important to look at data that demonstrates product adoption, usage, and spending behavior to identify new verticals and prospects outside of your current customer base.
RELATED: Want to build a new TAM with actionable data on prospects’ product adoption, usage, and spend behavior? Try Intricately today.
Value theory uses conjecture about buyers’ willingness to pay. Founders taking this approach are typically seeking to disrupt a market or form a new one. They draw conclusions about how much value they could offer customers and how much they could charge for that value.
This type of analysis is not data-driven, relying largely on assumptions about potential customers and future purchasing behaviors.
Modern Ways to Calculate TAM
TAM can be difficult to calculate because it’s a predictive measurement rather than a measurement based on qualified demand or events in a pipeline.
This is where modern data analytics tools come in. With data on current buyers in an industry, how much they spend on similar products, how much more capacity they have to spend, and a plan to capture these target accounts, a company has a more accurate view of their TAM.
Past ways of calculating TAM relied on firmographic data—revenue, company size, geography, and more. Though important, these descriptors are limited.
Today, with quickly 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 data platforms can offer this information.
The Cost of Not Doing TAM correctly
Calculating your TAM is crucial for creating an overall roadmap for your sales, marketing, and organization. If you fail to do it correctly, you may leave money on the table.
Pitfalls to Avoid When Calculating TAM
Here are two common pitfalls to avoid when calculating TAM:
- The size of a problem doesn’t necessarily equal the size of a market: Problems don’t always translate to demand for a solution. Companies won’t necessarily pay for a solution to solve their problems. For example, even if your product provides customers cost-savings, time-savings, or greater effectiveness for their teams, it may be difficult to convince prospects to purchase in it if they already have a reliable and proven (if inefficient) existing solution.
- Wrong assumptions about past markets: Decisions made on faulty assumptions lead to leaving money on the table. With the adoption, usage, and spend data available, businesses can’t afford to make go-to-market plans based on guesswork.
Practical Advice for Cloud Sellers: Put TAM to Good Use
To accurately build your TAM, start by sourcing product adoption, usage, and spend data, and keep these ideas top of mind:
- Focus on your smallest viable market first: Define your target customers and their value with laser focus. Don’t worry about all the geographies or features you want to add in the future; focus in on the now. A more precise and accurate reflection of your market will help you gain accounts quicker because you’ll know where to attack first.
- TAM expansion: Once you know your focus market and prove your ability to land those accounts, you can expand your TAM with new use cases, new pricing plans, or expanding into adjacent verticals.
- Consider if there is nascent market potential: This one is more difficult to see when it’s in motion. Many companies want to be the next Apple or Tesla—but they need to use data to prove and scale their idea just like a company entering a pre-existing market.
How Intricately Makes TAM More Accurate
With a data platform designed for competitive market intelligence, you can identify all of the insights that will make the biggest impact on your market planning:
- Products: Get a comprehensive view of the technologies a company is using.
- Spend: Estimate a company's spend by product, use case, and category.
- Geography: Correlate digital presence to their physical location.
- Change over time: Dig deep into how delivery, spend, and products change over time, by customer, provider, or product.
- Insights: Identify key events, contract renewal dates, spend thresholds, and changes in the configuration of the account.
TAM helps you understand the size of your market opportunity and the resources you should allocate to product development, marketing, and sales. As you scale, Intricately doesn’t only help you reach more accounts; it helps you reach the right accounts.
Understand your TAM with Intricately and power strategic sales and marketing decisions with data from forecasting and planning to execution.