Before arriving into a new business, startup founders should know what total addressable market is and how to analyze it for their products and services. Doing a detailed TAM analysis is a vital step for any startup trying to forecast revenue progress, or gauge the profit possible of a particular industry.
The total addressable market (TAM) is an outstanding metric to look at when you are trying to scale your startup’s growth perspective.
It is the complete revenue opportunity that is offered to the product or service if, 100% market share was accomplished. Creating a possible value proposition involves the size of the investment, competition, growth, and the available market size. All this can be achieved with TAM.
The best way to calculate TAM is by running a bottom-up analysis of an industry. A bottom-up analysis requires counting the total number of customers in a market and multiplying that number by the standard annual revenue of each consumer in that market.
Three ways to calculate TAM is given below::
- Top-down approach
- Bottom-up approach
- Value theory approach
The top-down analysis follows a process of exclusion. It starts by taking a large quantity of population of a known size that includes the target market and utilizing it to narrow down to a particular market segment.
Top-down analysis can be mentioned by an inverted pyramid that shows the large population of a known segment at the top and narrowed down segment at the bottom. This method commonly uses industry reports and research to get the estimates of the population.
It takes a macro view of measuring aspects right at the top of an economy.
Bottom-up analysis rotates around determining local market size and then inducing it upwards to a broader population. The process also allows us to dive deep into the makeup of the market so you can better segment and select its constituent part.
The benefit of using this analysis is the company can explain why it selected a specific customer segment and left others. The organization relies on data from its research on the survey, and therefore the addressable market would be more precise rather than trusting on inarguable data.
Value theory trusts on an estimate of the value provided to consumers by the product and how much of that value can be returned in the product pricing. A company estimates how much profit it can enhance and why it should capture this value through it.
To use this analysis, it is essential to understand what customers find valuable and how much they are willing to pay for that. Secondly, it is necessary to assess how many consumers have located the quantity of value and chose it with other alternatives.
Importance of TAM
When a firm is in the process of releasing a fresh product, a new consumer segment or plan to cross-sell a product to the current customer, TAM helps in breaking down these numbers into manageable levels. An investor should be free in estimating the available market because an exaggerated value may lead to exchanges with less potential for growth.
The ideal market for any industrialist is one with potential growth capacity.
TAM is useful because businesses can use it to estimate the definite market’s potential for growth.
Starting a trade or projecting next year’s revenue growth is always thrilling. But you want to achieve success, let TAM be your star, and guide you through the journey. After you calculate your TAM, it’s time to regulate its worth entering the industry or not.