What is your Total Addressable Market and Why is it Necessary?

As a B2B company, your marketing and sales team needs to generate leads that can be fed into your pipeline to create sales and revenue. 

Before you can generate these leads, you need to identify your Total Addressable Market. Otherwise, your team wastes time on a process that has little chance of success. This failure leaves your competitors with ample time to snap up new accounts while your team is floundering through a quagmire of uninterested leads. 

What does a Total Addressable Market (TAM) mean?

Your Total Addressable Market is the amount of revenue you can earn if the demand for your products or services is 100% in a specific market. In other words, you dominate a market. This is an unlikely scenario, simply due to competitive factors, but it does allow you to gauge a specific market’s potential for growth.

First, you need to define your TAM by asking the following questions.

• What is the target market?
  Not every company needs your products or services. So you need to narrow down the potential companies that could benefit from making a purchase. Not just those who can afford your products or services but everyone who could benefit, as this is your Total Addressable Market. 
  
• What industries are relevant to selling your products or services?
  Many products and services are aimed at specific industries but that doesn’t mean that they are of no interest to other industries. So include all the industries that may benefit from your products or services in your TAM. 

Why is defining your TAM necessary? 

A clear definition of your TAM allows you to estimate the potential sales and revenue you can earn from your products or services in a specific market. To achieve these goals, you need to understand the size of the market, develop a long-term plan to achieve these goals and possibly, interest investors to fund your company’s growth in this market.

• Understand the market size: This is essential for developing a long-term plan because if you’ve already gained a large market share, there’s little room for further growth. It’s still a valuable market space that requires attention but does it require such a concerted effort? Maybe you’re better off exploring other markets?
• Develop a long-term plan: If the market you’re exploring is large with lots of growth potential then it makes sense to develop a long-term plan focused on generating more leads, sales and revenue. However, if it’s a small market with lots of competition then it makes sense to develop a plan to explore other markets with more potential for growth. 
• Attract investors: Investors like low-risk opportunities so they want to know the size of the potential market and your vision for achieving the forecasted revenue. Calculating your TAM provides all of this information to potential investors. 

What are SAM and SOM? How are they different from TAM? 

As already defined, TAM is the total number of customers who would buy your products or services if you had 100% of the market share. However, while TAM is important, and given that total dominion over a market is unlikely to occur, you also need to know your SAM and SOM.

• SAM: Your Service Available Market (SAM) subsets your TAM by geographic or demographic data, as well as by customer preferences. This creates smaller and more focused markets for your campaigns. For example, you might sell high-end office furniture. So your TAM is every business in the world that has an office. Your SAM, however, would be all businesses in Australia that prefer to purchase high-end office furniture as this gives you a much better sense of the revenue you can expect. 
  
• SOM: Your Serviceable Obtainable Market (SOM) is an even smaller subset of SAM as it defines the segment that you can realistically target. SOM can be based on the size and expertise of your sales and marketing team and your available resources. For example, you might want to push out a nationwide campaign but you don’t have the available resources. After some research, you decide that the Sydney and Melbourne markets have the greatest potential for growth so they are included in your SOM. 
  
• SAM vs SOM vs TAM: SAM is a subset of TAM, while SOM is a subset of SAM, however, they are all subsets of a market. TAM is the revenue you can expect if you sold to the total market. SAM is the section of TAM that you would like to service, whilst SOM is the portion of SAM that you can realistically service. TAM, SAM and SOM are key metrics when developing your marketing and sales strategy, as well as when setting realistic revenue targets and selecting profitable markets.

Strategies to calculate your TAM

There are three ways you can calculate your TAM. The top-down approach focuses mainly on other people’s research, the bottom-up approach mainly focuses on your research and the value-theory approach relies mainly on guesswork. 

1. Top-down approach: This strategy uses third-party reports or data to calculate the size of the total market. This is your TAM. If this data is out of date or incorrect, then your TAM will also be misleading.
   
2. Bottom-up approach: This is labour intensive but more accurate than the top-down approach. First, multiply your average sales price by your number of current customers. Then multiply this number by the total number of customers if you dominated the market. This is your TAM. 
   
3. Value-theory approach: This requires you to quantify how much value customers receive from using your products or services and how much they are willing to pay. This is your TAM. To use this approach you need to access up-to-date market research that identifies these metrics.

How DataList finds your TAM

Why not let DataList find your TAM? Combining existing databases, human researchers and the latest technology we identify your TAM. We can even provide you with Golden Records –accurate, up-to-date and reliable B2B contact data, ready to hand over to your sales team.

If you’re ready to find out your organisation’s TAM, don’t hesitate to contact us today!