Why Total Addressable Market is a Key Metric in Your Business

TOTAL ADDRESSABLE MARKET

By Angelina Smith | Articles | 0 Comments

The market is a world in itself. It encompasses a whole universe within itself and subjects to every kind of industry and customer in it. Total Addressable Market, also known as Total Available Market (TAM) is a valuable, revenue-oriented piece of that market that is available to your business for trading.
Let’s take an example to understand the term TAM better when you go to a grocery store, do you check each product on the aisle? No, because usually, people have a decent idea about their preferences for what they have come. Based on this information, you will find that not all the products in the store are useful for you, but just some of them are. Most people go to stores with a list of grocery items as that saves time, energy, and of course, money. TAM is somewhat like that. It is finance-oriented and saves time too.

A new start-up company should be able to make a note of the target audience who seem most relevant to them based on their business and target through marketing plan accordingly. TAM is advantageous for the businessman and its customers. It is essential to convey your message to the right audience to fetch successful results.

Total Addressable Market (TAM) is a complete package of all possible opportunities for your products and services. It is generally measured through revenue generated. However, it can also be treated as a collective number of people who converted into your customers.

How to calculate TAM?

Four prime methods are applicable to calculate your total addressable market.

The up-down approach:
This method can be best explained as a “selection through elimination” way. You take up some calculated population that defines your target market at the starting point. Gradually, it narrows down to a more specific segment of the target market. It is leaning down by eliminating a piece of the population to measure your TAM. You use segments like geographic, demographic, and economical to make eliminations of the irrelevant market segments. At times, third-party companies are employed by businesses to use this aspect when it is needed to identify TAM. The advantage of this practice is that the starting point (the macro data and statistics used) can be accurate if adequately documented.

The Bottom-top Approach:
This is the inverse model of the first method, i.e., a top-down approach. We begin with granular data, and the outcome is scaled-up to a more prominent organization of the population. This method is considered to be more refined and accurate. It is the most preferred practice.The only setback of this practice is that substantial anticipations are being made from a small dataset, confusing the scenario often.

The value theory approach:
Value theory method is generally used by companies when they want to roll out a new or non-existent service into the market. This practice helps the companies to calculate the value of the product and whether it should the add unique benefit through product pricing. In brief, it is the estimation of value that needs to be done in this approach.

External research approach:
It is the quickest and most reliable way of finding your TAM. The business can refer to the data that was already collected by professional agencies. These data reports are detailed and authentic. They benefit your company by providing a complied and credible database curated by skilled professionals. The only drawback of this approach is that you don’t know these agencies directly and how they fetched these details. The transparency may pop up as an issue.

Why does Total Addressable Market matter?

TAM matters for its tremendous advantages. It helps in research work to better identify your total available market if leveraged in the right way. It can bring a lot of benefits.
1. Aids in setting goals: TAM analysis helps in setting achievable business goals and the method to capture them. It can make anticipations on the kind of revenue that can be achieved by the set of the population if addressed rightly. TAM also lets you obtain realistic business goals.
2. Add a competitive edge: By adding a percentage of TAM, your competitors can help you set your business goals. You can identify and analyze the marketing strategies used by your competitors. This will help develop counter-strategies that may add efficiency to your business and provide you with an extra edge.

3. Build client loyalty: Target marketing is a way to good marketing. With estimated and calculated steps, you may likely build customer loyalty that will benefit your market dominance in the future.

Best practices for building a sturdy TAM

1. Be precise while choosing your target market and segment accordingly
2. Do not seek success by approaching a small population of a large market
3. Seek research and past information of your competitors to have an edge
4. Be lean in quantity but large on quality to have customer loyalty

Conclusion:

TAM or Total Addressable Market is a crucial metric for all businesses, be it start-ups or established ones. It aids in estimating the market scale, scope of revenue, and sales. TAM brings accurate numeric data into manageable levels.