Total addressable market

1. Total addressable market

Welcome to this lesson that will help you understand a total addressable market or TAM. We'll discuss TAM, serviceable available market, SAM, and serviceable obtainable market, SOM.

2. Total Addressable Market (TAM)

If you are a startup or launching a new product, you need to understand the Total Addressable Market, TAM, to understand if the new product or service is viable. You could have a profitable idea but if the TAM isn't large enough it may not make sense to pursue that idea.

3. TAM: What is the entirety of the market?

Using data and available statistics to calculate a TAM is pretty straightforward. Before we get there, let's be sure to understand what TAM represents. TAM seeks to answer "how big is the largest possible market?"

4. SAM: What part of the market can your company get?

Within the total addressable market lies the serviceable available market, SAM. SAM refers to the amount of the TAM market you can reach given your business model. For example, you may only want to offer your service as a web application so you can't reach potential customers that prefer face-to-face interactions. Essentially, SAM is the proportion of the market that fits you and your company strategy.

5. SOM: What proportion of market can you reach?

Lastly, you have the serviceable obtainable market, SOM. This is a proportion of the SAM you can reasonably be assured to obtain. Maybe you identified a large TAM market, maybe you identified a lot of potential customers preferring your sales process within SAM. However, if you are limited by inventory, sales people or some other manner, your potential profit is limited to the serviceable obtainable market, SOM. SOM answers the question, what proportion of the market can you reach or service?

6. Calculating TAM

Now that you have the context of TAM, SAM, and SOM, let's learn how to calculate TAM. TAM calculations are often swag math. This means the inputs are the best estimates from reputable sources but are often up for debate. Additionally the math isn't hard, but it's still a data-driven decision to decide to enter a market. There are multiple ways to calculate TAM. Two popular methods include the top-down and bottom-up approaches.

7. TAM: Top-down market sizing

Top-down methods start with large data points then use factors like geography, age, and income to reduce the market. For example, you may want to market a new candy bar that is safe for diabetics. A top-down approach starts with 330m Americans. Next, multiply 330m times 10.5% representing the number of diabetics in the US, almost 35m. The most popular candy bar in America sells 250m bars among 330m citizens representing .75 bars per person. For simplicity, let's assume $1 margins per bar and you arrive at a TAM of $26.25M.

8. TAM: Bottom-up market sizing

Let's switch our TAM to a bottom-up calculation. A bottom-up approach uses granular provable data points that will then be extrapolated upwards. News reports, company filings or even creating your own survey for potential customers represent bottom-up data inputs. For example, let's perform a bottom-up market analysis by comparing using a candy company's data to extrapolate from. The major candy company has $8b in annual revenue. The company offers 63 different candy bars, approximately $127m for each bar. Overall the company states 10% of sales are "sugar-free" targeting the diabetic market. With the same $1-margin the bottom-up TAM is $12.7m annually. As with all TAM calculations, one could argue this major company is not focused solely on the diabetic market and a different manufacturer's data should be used. On the other hand, this company has major resources, sales relationships and large marketing budgets so using this company as the TAM foundation maybe appropriate.

9. TAM to the moon!

Next, you'll be calculating your own TAM. In reality, you would also work on your SAM and SOM but these exercises give you an understanding of how entrepreneurs understand and interpret business opportunities.

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