The total addressable market (TAM) is the maximum potential market size of a specific product or service. It is the total potential revenue that can be generated by a company from its target customers with a specific product or service. Consequently, in order to calculate TAM, marketers need to review their customer base and identify which segments are most likely to buy their product or service. They also need to review their competitors’ customer bases and identify which segments they don’t cover yet. In this blog post, we will explain what is Total Addressable Market and how to calculate it. Keep reading!
What is the Total Addressable Market?
The total addressable market (TAM) is the maximum potential market size of a specific product or service. It is the total potential revenue that can be generated by a company from its target customers with a specific product or service. A simplified example would be a market research company that specializes in the analysis of pharmaceutical companies. This research company can identify the total addressable market for their pharmaceutical research by identifying the potential pharmaceutical companies that would request their services.
How to Calculate Total Addressable Market?
The first step towards calculating the total addressable market is to identify your customer base i.e. your target customers. The next step is to identify which segments are most likely to buy your product or service. You can do so by assessing the following: – Customers’ demographics and psychographics (e.g., age, gender, income, education, etc.). – Customers’ attitudes, motivations, and needs. – Customers’ behaviors, influencers, and barriers to purchase. – Customers’ buying decision process. – Key competitors’ customer base. – Key competitors’ target segments that they don’t cover yet. After assessing all of the above, you can then proceed to calculate your total addressable market. The formula for calculating the total addressable market is given here:
Total Addressable Market = Total Target Customers x Share of Potential Customers where Total Addressable Market = the total potential revenue that can be generated by a company from its target customers with a specific product or service. In this example, we are calculating the total addressable market for pharmaceutical research companies. Total Target Customers = the total potential pharmaceutical companies that would request the research services of a pharmaceutical research company.
Limitations of TAM Calculation
There are a few limitations to calculating the total addressable market. First and foremost, one cannot generalize and assume a single total addressable market for all products or services. This is because different products or services have different potential customers. Another limitation of calculating the total addressable market is that it doesn’t take into account the entire customer journey. This means that it doesn’t consider the different stages of the buying journey such as awareness, consideration, purchasing, and retention. Finally, calculating the total addressable market isn’t an exact science. It is an estimated figure that is based on assumptions and judgments. This means that it is not 100% accurate.
Key Takeaway
The total addressable market is the maximum potential market size of a specific product or service. It is the total potential revenue that can be generated by a company from its target customers with a specific product or service. A simplified example would be a market research company that specializes in the analysis of pharmaceutical companies. This research company can identify the total addressable market for their pharmaceutical research by identifying the potential pharmaceutical companies that would request their services. The first step towards calculating the total addressable market is to identify your customer base i.e. your target customers. The next step is to identify which segments are most likely to buy your product or service. You can do so by assessing the following: customers’ demographics and psychographics (e.g., age, gender, income, education, etc.), customers’ attitudes, motivations, and needs, customers’ behaviors, influencers, and barriers to purchase, customers’ buying decision process, key competitors’ customer base, key competitors’ target segments that they don’t cover yet. After assessing all of the above, you can then proceed to calculate your total addressable market.