What is Total Addressable Market?
See how to figure out your total addressable market and why it matters
Every company needs to know how big their potential market is so that they understand the full size of their market opportunity.
Knowing your total addressable market (TAM) helps drive better, smarter decisions about where to allocate your funds and how to grow. A well-researched TAM shows you understand your market and have set realistic growth plans.
Here’s a closer look at what TAM is and how to calculate it.
What is Total Addressable Market?
Your total addressable market (also known as total available market) describes the maximum potential market size for a product or service like AiSDR.
In other words, it’s how much revenue your solution can capture if you achieved 100% market share.
Here’s how you can calculate your TAM.
Total Addressable Market = Number of potential customers in your market x Average revenue per customer
You can think of your TAM as answering the question: “If every possible customer purchased your product, how large would your market be in terms of revenue?”
Why is TAM important?
TAM is something that every business should track, regardless of whether they’re an early-stage startup, an SMB, or even a mature enterprise.
However, a “good” TAM is entirely dependent on your context, as well as your company’s goals, industry norms, and growth potential.
As a general rule of thumb, while larger TAMs are more attractive for high-growth businesses and investors, smaller TAMs are still valuable for niche markets or specialized products.
At the end of the day, the right TAM size is one that’s (a) enough to support your long-term goals, and (b) builds a path to reaching those goals.
Total addressable market vs market size
TAM gives you a big-picture view of your market potential. By comparison, market size shares a more immediate and realistic understanding of activity in your target segment.
| TAM | Market size |
| Total revenue available if you capture 100% of the market | Current revenue generated by a specific segment over a certain period |
| Broader, theoretical scope encompassing the entire potential market | Narrower scope focused on existing market conditions |
| Evaluates overall market potential to aid strategic planning, market entry, & investment | Evaluates the current market to aid budgeting, sales forecasting, & ops planning |
How do you calculate your TAM?
Even the best-calculated TAMs aren’t 100% accurate measures of future success. That’s because your competitors will always manage to steal a slice of the pie.
That said, TAM is a good starting point for understanding how many might purchase your product.
Here’s a closer look at the three most common ways of calculating your total available market.
| Top-down | Bottom-up | Value theory |
| Quickest & easiest | Best for SMBs & enterprises | Best for startups |
| Data is pulled from 3rd parties | Data is pulled from 1st-party research | Data is pulled from customer insights |
| Calculation uses demographics & geography | Calculation uses an analysis of your client base | Calculation uses pricing estimates from potential buyers |
| Limited accuracy | Better accuracy | Limited accuracy |
Top-down TAM calculation
The top-down approach to calculating your TAM involves taking the total number of potential customers and applying demographic and geographic filters to narrow down your results.
Imagine you’re planning a sales campaign that targets university-age students in Seattle:
- You know Seattle has a population of 760,000.
- You also know that 11.9% of Seattle’s population is between 18 and 24.
- Your market opportunity (population * % of population between 18-24) is 90,440.
Pros of top-down
Accessing the data you need to figure out a top-down TAM is pretty simple and straightforward. You can pull data from lead databases, websites, institutions, and even market reports.
This makes top-down TAMs quick and easy to calculate.
Cons of top-down
Data from third parties is sometimes inaccurate or out of date, or the resources you subscribe to are missing critical filters you need.
Top-down also doesn’t account for products or services that create a new market landscape, such as smartphones enabling constant internet access.
It also can inflate your TAM if you haven’t narrowed down your market enough.
Bottom-up TAM calculation
As you can imagine, bottom-up is the opposite of top-down. Rather than starting broad and narrowing down, you start with a smaller market and move upwards.
The data is where bottom-up gets tricky. You have to rely on your own research, such as a local survey or micro-campaign.
Returning to your Seattle sales campaign, let’s say:
- You run a sales campaign offering ticket packs to UW Huskies games, selling 10,000.
- You charge a fee of $10 per pack sold.
- 10,000 x $10 = $100,000
Pros of bottom-up
Bottom-up uses the sales data you generate, which makes the final calculation more likely to be accurate and relevant for your company. This in turn makes it more convincing for investors.
Cons of bottom-up
Since you’re making assumptions based on small market segments, the TAM you calculate can be misleading, especially if you plan to expand or change your business model.
Factors such as population density, local preferences, and consumer spending can vary from state to state or country to country. (After all, you’re not likely to sell many UW Husky tickets in Pullman where WSU reigns supreme.)
Value-theory TAM calculation
The value-theory approach asks how much a buyer would be willing to pay for something based on the value delivered.
You then multiply this by the total number of people or companies that see the same value and who would be willing to choose your solution over others.
If you want to use this method, you’ll need to ask yourself a few questions:
- How many people will get value from your solution?
- How much are they willing to pay for it?
If 100 people will gain value and they’re willing to pay $1,000, your TAM is $100,000.
Pros of value theory
If you’ve created a unique product or service that’s creating new markets or reshaping existing markets, value theory is the route you want to go.
This approach is particularly suitable for companies that lack marketing data or resources for running their own research, such as startups or scaleups.
Value theory is also helpful if you’re testing new features or making adjustments to your product roadmap.
Cons of value theory
Value theory is heavily reliant on conjecture and educated guesswork. This means your conclusions will never be 100% accurate, but it can help in finding product-market fit.
Value theory can also struggle to factor in competition, adoption, and price sensitivity.
What are the benefits of calculating TAM?
Knowing your total addressable market unlocks several benefits beyond helping you refine your go-to-market strategy.
Some of the biggest benefits are:
- Identifying new revenue opportunities – TAM highlights potential new markets and customer segments you can target for growth.
- Attracting investors – Well-defined TAMs show growth potential, making your company attractive from an investment standpoint.
- Planning outreach – TAM helps guide budgets, scaling sales teams, and product development, while driving greater focus in campaigns.
- Refining positioning – Your TAM helps determine if a market can support multiple players and informs differentiation in crowded markets.
- Setting realistic goals – Knowing your TAM helps set achievable revenue targets and prevents overestimations of growth potential.
