What is TAM (Total Addressable Market) and how to calculate it

Total Addressable Market is the total market demand (meaning all revenue) for a product or service during a year. Today we will help you understand it and calculate it!

My recommendation would be to use the bottom-up approach when calculating TAM. This will stop us from falling into a lot of mistakes related to considering value that you are unable to capture (i.e., the 1% fallacy – ‘if I only get the 1% of this $100B market we will have $1B in revenue!’).

Another important thing to keep in mind is what your TAM is not. Your TAM is not:

• The size of the problem (i.e. Americans have $21B in unused gift cards)
• The size of the entire market where your product or service will be (i.e. global real estate market size is valued at $3.69T when you are only selling bricks)
• It is not the size of the market of a different product in your space (i.e., restaurant spending when you are an app to make reservations)

Tam is the potential revenue you could generate, and it is calculated using the following formula:

For this formula to make any sense, first you have to validate your assumptions:

Customers

Define the number of target customers that really fit the characteristics (location, size, other attributes) of what you are looking for in the geographic region you are looking for.

You can get an estimate of this number using information from the ‘current market size’ of your product or service.

 Price

How are you calculating your price? Make sure to consider the following elements to make sure you are both competitive and that your unit economics make sense:

• Cost associated with producing and delivering the product or service
• Prices of similar products or services
• Perceived value of your product to the customer and their Willingness to Pay (WTP). A professor of mine once told me that to convince customers to use your product, your price would have to be <10% of the costs associated to the problem your product would be solving. This would be their WTP for your product.
• Demand for your product (and the available supply of substitutes or competitors)
• Desired profit margins and evaluating how these would impact volume and revenue

Fernando Moreno
Growth Partner