Whether you are a new company trying to figure out the market profit potential or an established company forecasting a realistic growth of your business, measuring your Total Addressable Market is one of the most crucial things that you should know to achieve your desired goals. Total Addressable Market is an excellent metric to look at when you are trying to gauge the company’s growth potential. It is basically the total opportunity available to the business to grow.
Also known as the Total Available Market or TAM, it is a calculation that represents the overall revenue opportunity for your company’s product or service. The concept of the Total Addressable Market is of high significance for startups as well as established business because it helps you figure out the estimates of effort and funding required to achieve your organizational goals. The metric uses the total market size, the available market size, the overall investment, the competition, the expected growth, and the customer segments that remain untapped to calculate the Total Addressable Market.
There are three general methods of calculating the Total Addressable Market:
- Top-Down Analysis
The top-down analysis is a total addressable market calculation that uses industry research that has already been conducted. This is often the existing work done by various market research firms. The process of top-down analysis usually involves taking a large population of a known size that comprises the target market and then narrowing it down to a specific segment of the market. The method can be represented by an inverted pyramid with the total population on the top and target segment at the bottom. However, to draw particular results about specific markets, the research must be supplemented with extra assessments such as surveys.
- Bottom-up Analysis
The bottom-up analysis is a better and more reliable method of calculating the total addressable market as it gives you a more accurate estimate of the revenue sums and market growth. This method of calculating the total addressable market also included other salient features such as market growth after your company enters the market. The bottom-up approach relies on having good data, the current data, and the usage of the product.
- Value Theory
The value theory method of calculating the total addressable market is estimated on the value provided by the product or service to the customers. This method relies much more on supposition and guesswork but can be useful at times. This method calculates the value of the product or service provided to the users and specifically capturing that value through the pricing of the product or service. This method helps best in getting a sense of the total addressable market when you are about to launch a novel product to the market that has the potential to create its own category. This method of estimating the total addressable market comes in handy when you launch new upgrades or features of an existing product or service.