What is total addressable market (TAM)?
Total addressable market, also called total available market, refers to the total number of potential customers for the company’s products or services. In other words, TAM is the total market demand and as a metric helps indicate the potential of a business opportunity.
TAM is your company's annual revenue if you sold your (current) products to everyone in your target market. Total addressable market is constrained by the type and location of the target customers and the product/service price.
Why VCs care about TAM
VCs care about the total addressable market because it determines the company's upside potential. It's impossible to build a billion-dollar business if the TAM is $100 million.
In an early-stage business, most, but not all, VCs care about TAM. For those who dig in, the VCs focus on the total number of customers in the existing geographic market, the size and likelihood of broader geographic sales, and the product expansion roadmap. Further penetration of current products sold in existing markets gets the most weight in the TAM calculation, while sales of new products in unproven geographies receive the least weight.
The total addressable market is more important to later-stage VCs and Private Equity firms writing big checks to high-value companies. In those scenarios, there might be legitimate situations where a business' growth is constrained because they start to run out of new customers. I recently witnessed this problem when chatting with the CEO of a well-known private SaaS business that dominates its niche. He said, "Guess how big we are?" I said, "Well, you have been around for a while and raised a lot of venture capital, so… maybe $100 million.” He said, “Closer to $50 million... we have run out of companies to sell to." This is a big problem for what looks to be a very successful SaaS business.
So while the TAM estimate might not be the most important factor when raising capital in the startup's early stages, it is something you always need to be thinking about. To evaluate revenue opportunities, VCs are trying to look six years down the road, not six months.
How to quickly expand your total addressable market
International expansion to new markets is the most straightforward way to increase TAM. One of the great things about SaaS is that it requires little to no physical presence to open up new geography. In some cases, simply putting up payment pages in local languages and currencies is all it takes to prove your product has potential customers all over the world. It certainly takes more resources to scale and support those customers over time, but to validate a worldwide TAM, you only need a few customers in a specific market.
Other ways to expand the total addressable market revolve around developing more products to sell to your existing target customers. Product roadmap expansion is critically important in the long run but takes more time and resources than (preliminary) international expansion.
Check out this guide for five key growth strategies successful SaaS companies use to expand their TAM:
Total Addressable Market (TAM) FAQs
Why is the total addressable market important?
The total addressable market is important both for established and new businesses as it estimates the required effort, resources, and market opportunity for a specific product or service. Calculating TAM allows them to create a smart business plan and market strategy to produce a profit.
How to calculate the total addressable market?
There are three ways to perform TAM analysis:
- The bottom-up approach determines the size of the local market and then generalizes it upward.
- The top-down approach first considers the market as a whole before segmenting it down.
- The value theory approach refers to a market research strategy that starts by evaluating willingness to pay based on the products’ value.
What is the serviceable addressable market (SAM)?
The serviceable addressable market (SAM) is a part of the total addressable market that is within the company’s reach.
What is the serviceable obtainable market (SOM)?
The serviceable obtainable market (SOM) is a part of the serviceable addressable market (SAM) that a company can reach.