The Total Addressable Market (TAM) represents the overall revenue opportunity available to a company within a specific market or industry. The metric estimates the maximum sales potential that a product or service could achieve by capturing 100% market share.
TAM helps businesses understand the opportunity size in their target market and provides a basis for strategic decision-making, such as market entry, product development, and resource allocation.
Here’s a Total Addressable Market example.
Suppose the average price for your SaaS product is $150. Your market research shows that 50 Marketing Directors, 30 Marketing Professionals, and 20 sales managers are interested in the product.
TAM = (50 + 30 + 20) x $150 per product
TAM = 100 x $150 per product
TAM = $15000
According to this calculation, the Total Addressable Market for your SaaS product is $15000.
TAM, or Total Addressable Market, is significant in SaaS. Here’s why.
· TAM estimates the maximum revenue a SaaS company can generate by capturing 100% market share. It helps businesses understand the size of the opportunity in their target market and if it is profitable to enter the market.
· Estimating TAM also allows SaaS companies to make informed decisions about product development, pricing, and market positioning.
· Further, knowing the size of the Total Addressable Market helps SaaS companies allocate their resources more effectively.
There are different total addressable market formulas. It depends on what method you use to calculate TAM or Total Addressable Market.
This method uses industry research, reports, and market analysis to estimate the overall market size. Using this method, the Total Addressable Market calculation can be done as follows:
TAM = Total Market Size × Target Market Percentage
This method involves estimating TAM based on the potential number of customers and the average revenue per customer. Start by identifying your target customer segments and estimate the number of potential customers within each segment.
Calculate TAM by using the formula below:
TAM = Number of Potential Customers × Average Revenue per Customer
This method calculates TAM by estimating the total value that your product or service can create for customers. This method uses the Total Addressable Market as the Total Value Generated for Customers.
Though you may use any of these methods of Total Addressable Market calculation, each of these methods has its pros and cons. The accuracy of your TAM estimate may depend on the quality and reliability of the data used in the calculations.