Elevate your company strategy to new heights by discovering how to use the TAM tool to estimate your maximum revenue opportunities. Discover the definition of TAM and the formula for determining the total addressable market in this informative blog post. As a CMO, you need to know your TAM before you do anything.

TAM refers to the broadest conceivable consumer base that a product or service can potentially attract. Put simply, what would the size of the market be if all individuals who could benefit from a product or service bought it or began utilizing it (i.e., complete market share)?

While the overall size of the pie remains uncertain due to the influence of other solutions on TAM, the total addressable market (TAM) provides stakeholders with an approximation of the pie prior to its allocation among the organization, its competitors, and potential customers who decline to utilize or purchase any product.

The basic mathematical formula for determining TAM is a straightforward multiplication problem: total target market potential customers multiplied by average revenue per user (ARPU).

Although ARPU is easily modifiable during company planning, the second component of the equation is more complex.

Whether it's government statistics or industry experts, it's common practice to employ external data sources when estimating the overall prospective client base. But those sources hardly never segment the market in accordance with a single company's perspective. These numbers can serve as a starting point; nevertheless, additional effort is necessary to determine a figure that more accurately represents the number of potential customers.

In order to determine the target market, the total addressable market (TAM) is initially calculated using a top-down approach that refines the global population by location and demographic factors. A great deal of guesswork and dependence on data from outside sources, whose definitions of terms might differ, are necessary for this inverted pyramid approach.

Furthermore, it fails to take into consideration items that are so popular that they alter or even create whole new markets.
In contrast, the bottom-up approach works backward, first identifying a small but perfect target market and then expanding that to a large one. Possible justification: extrapolating from a tiny sample of hypothetical consumers.

But it really shines when extrapolated from a small sample of consumers (from a pilot study, for example) to a whole market, industry, or nation. Although the data comes from inside the company and depends on real experience rather than guesswork, it's far more likely to become trusted than estimates made by outsiders.

With no real market data to base its calculations on and a truly creative product that creates a new category, the value-theory approach might end up used as a wild card in the Total Addressable Market calculation. It all starts with figuring out how much more valuable a product or service is and then asking the average buyer to pay for it. Then, take it and double it by the sum of all the people who would see the value in it and choose it over the current options.

There are a lot of people who employ TAM models, including investors, management teams, and entrepreneurs. One thing is certain, though: if you want an accurate TAM—vital for growing and aligning a successful business—the old-fashioned way—using top-down approach and bottom-up approach, or value theory calculations—won't cut it.

Utilizing Bizionic technologies expertise is the most reliable way to construct a TAM that is accurate, practical, and well-informed.

In order to fully understand the market potential, it is crucial to take TAM, Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM) into account simultaneously. If you want a more accurate picture of potential revenue streams, you need to combine TAM with SAM and SOM. Otherwise, TAM is useless. By gaining a deeper understanding of their target market's needs, product marketers may help organizations build more successful goods.

It is exciting to think of starting a firm or expecting a revenue increase next year. However, knowing what is genuinely achievable is the first step toward following a realistic route to achievement.