Total Addressable Market (TAM)
I have found the concept of total addressable market (TAM) useful ever since a mentor introduced me to it.
Total addressable market explores how many people or organisations exist that you can offer your product and/or service to.
TAM in Business-to-Business (B2B) Marketing
Let’s say that I am looking to create and promote a software product that helps small to medium businesses (SMBs) in Australia. To begin any sort of product development or marketing, I want to understand how many businesses may be interested.
I begin by turning to available market research, and according to Deloitte, there are approximately 2.1 million small to medium businesses in Australia.
From here, I can further define what a ‘small to medium business’ means to me. Am I targeting all sizes of SMBs? And all industries? The choices I make here need to directly relate to the value proposition of my product.
Let’s say my software targets hospitality SMBs in particular, and that I am only interested in companies with under 20 employees.
My total addressable market then pulls down from 2.1 million SMBs to 67,748 SMBs that are in the hospitality industry. I can further narrow this to hospitality SMBs with under 20 employees, as based on available research, it seems around 44% of SMBs have under 20 employees.
Now, If I apply this percentage to my hospitality data:
67,478 x 0.44 = 29,690 organisations
I can now approximate my total addressable market to be around 30,000 organisations.
TAM in Business-to-Consumer (B2C) Marketing
The same principles can be applied in business-to-consumer (B2C) marketing.
Let’s say that I am interested in offering a subscription clothing service to females ages 30 to 50 in Sydney. My service may courier new items to each subscriber based on their personal preferences once a month.
I would then examine the following data points to approximate my TAM:
Q: What is the population of Sydney?
A: Approximately 5.64 million
Q: Which areas do I wish to target?
A: I wish to test my service in Paddington alone before expanding it out further.
Q: How many females live in Paddington?
A: Paddington had 12,911 residents as of the 2016 census. 52% of the suburb was female, which equates to 6,714 females.
Q: How of these 6,714 females are ages 30 – 50?
A: 36.5% of the entire suburb fell between these age ranges in the 2016 census. If we presume that 52% of this group was also female, we can assume the following:
12,911 x 0.365 = 4,713 people aged 30 – 50 in Paddington
4,713 x 0.52 = 2,451 females aged 30 – 50 in Paddington
My TAM then becomes 2,451 females. Yes, once again this is an assumption, but it’s an assumption based on existing data sources.
I could also continue to qualify my total addressable market further by looking at data such as shopping preferences, income levels and much more.
Why is TAM so important?
Total addressable market is important to understand as it can help you determine whether your desired revenue is actually achievable, as well as how much of the market you will have to reach in order to meet your business goals.
For example, if you have decided that your 12-month revenue goal is $100,000, you can work back through the numbers to validate your assumptions.
You may know that your TAM is 10,000 people and that your landing pages are likely to convert 1% of visitors. You may also know that your average order value (AOV) is $100.
With these figures, you can work through some basic math to understand how many people you need to convert via your landing page.
You can also confirm whether the market is big enough to support your business goals, regardless of the channels you use.
Let’s begin by confirming how many people you need to convert on your landing page:
$100,000 (revenue goal) / $100 (AOV) = 1,000
So I need to convert 1,000 people through my landing page.
From there, I can work out whether my TAM is likely to support this or not:
1,000 (conversions) / 0.01 (1% landing page conversion rate) = 100,000
So I would need to send 100,000 people to my landing page from my target audience to create $100,000 in revenue. Given that my total addressable market is only 10,000 people, I can confirm that this is an unachievable business goal at this point. I simply don’t have a large enough market to generate my revenue goal and I will need to re-think my approach.
The Limitations of TAM
Note that total addressable market doesn’t take into account the competitive landscape nor whether your value proposition is relevant, but it will allow you to understand whether your back of the envelope or spreadsheet revenue calculations can actually be achieved with reasonable accuracy.
Understanding the Value of TAM
You can use the concept of total addressable market to make an informed decision as to whether it’s appropriate for you or your business to go ahead with any product development, advertising or make any other relevant decisions based on this anticipated revenue. It’s a wonderful tool to have in your marketing toolkit and I wish you the best of luck in using it!