If your company is the only water company in a desert region, you can sell to everyone living in that region who needs water. Moreover, as the only water supplier in that area, everyone who needs water has to buy from you. So, the number of actual customers you have is probably pretty similar to the number of potential customers you could have; your total revenue is close to your total addressable market (TAM).
TAM is the amount of potential revenue your company could earn if everyone with a demand for your product or service actually bought it.
For most companies, the amount of achievable revenue is nowhere near TAM, but understanding your total market can help inform how to define the target market you’ll focus your marketing and sales strategy toward.
How to Define Your TAM
The process for defining your total addressable market (TAM) is different for new and existing businesses.
If you’re an established company, you already have customers. You can use your existing customer base to define the types of companies that buy your product or service and the average customer lifetime value (CLV) of those customers.
Then, you can multiply your average CLV by all of the companies that match the definition of potential customers.
However, if your customer base consists of multiple segments whose transactions with your company vary, that average might not be very accurate. To drill into your data further and get a more accurate estimate, you can split your TAM into market segments or personas.
For example, instead of looking at the overall total number of companies who can purchase your product or service, you can divide those companies into small, medium and enterprise companies and use the average CLV for each segment.
Looking at your average CLV by segment will help you get a more accurate understanding of your TAM.
If you’re an established company, you can analyze your contact database to determine the criteria of each market segment and the average CLV for those customers. Then you can apply the criteria of each market segment to companies outside of your customer base to learn your TAM.
If you’re a new company that doesn’t have an existing customer base, you can gain an estimate of your TAM through market research.
Researching your TAM is an important piece of preparing to go to market. When introducing a new product or service into a market, you need to know there’s a real demand for your solution and that it’s sizeable enough to warrant the creation of a solution.
While it might be difficult to define your TAM in terms of revenue prior to going to market because your price point might change when you start selling, you can determine how big of an opportunity is in terms of potential buyers. To do that, you need to create a profile of the firmographics your solution targets and define criteria for the market segments your product can address.
Once you have your customer profile or segments built out, there are several tools you can use to research and find existing companies that match those criteria. You can use a sales intelligence software like DiscoverOrg, LeadIQ, Lead 411 or DataFox. You may also utilize reports from market research companies like Forrester or Dun & Bradstreet.
You can also use these tools to create purchased lists for outbound outreach; However, you can still gain value through the marketing intelligence they provide without using them that way.
If you don’t want to pay for a tool or report, you can also conduct market research yourself using LinkedIn, public government records and industry reports.
Benefits of TAM
Conducting research to determine your total addressable market (TAM) can be time-consuming, but when leveraged correctly, the information gained can more than make up for the time invested.
Knowing your TAM can help you:
- Set realistic goals for your company
Understanding the total existing market can inform how much of that market you want to try and capture and how much revenue you could potentially gain. If you don’t have a monopoly on the market you’re selling to, your revenue will never be 100% of TAM, so you know your revenue has to be below that. Depending on the other players in the space and how much need there is for your solution, you can determine what percentage of TAM you can realistically obtain and use that as your revenue goal.
- Position yourself differently than competitors
Knowing what percentage of TAM your competitors have can help you differentiate yourself from them. For example, if you’re going after small, medium and enterprise size companies, but a competitor owns most of the enterprise segment of the market, you can start by targeting small and medium companies before competing with them for the enterprise ones.
- Guide your company’s growth trajectory
You can begin by targeting sub-segments of your TAM where you can initially find product-market fit. Over time, you can increase the portion of the market that you target. If you reach a point where your growth is plateauing, you can then look at how to expand your product or service offering to reach a larger TAM.
TAM is the sum of all the potential revenue your company could bring in. While generating all of the potential revenue is unlikely, understanding your TAM can help you determine whether going to market with your product or service can be profitable.