Total addressable market (TAM)

Definition

A total addressable market is a concept in business strategy and market analysis. It refers to the overall revenue opportunity available for a product or service within a defined market. 

What is a total addressable market?

TAM represents the total revenue opportunity available in a specific market segment. It reflects the maximum potential revenue that could be generated if a company achieved 100% market share within that segment. Segmentation can be based on factors such as demographics, geographic location, industry verticals, or customer behaviour.

Calculating TAM involves multiplying the number of potential customers within a market segment by the average revenue that each customer is expected to generate. This can be done using various approaches, including top-down analysis, bottom-up analysis, and value-based analysis.

• Top-down analysis: In top-down analysis, TAM is estimated by considering the overall market size and then narrowing it down to the specific segment of interest.
• Bottom-up analysis: Bottom-up analysis involves estimating TAM by aggregating the revenue potential of individual market segments.
• Value-based analysis: Value-based analysis focuses on the economic value that a product or service delivers to customers. 

While TAM provides valuable insights, it’s important to recognise its limitations. TAM represents the theoretical maximum market opportunity and may not account for factors such as competition, market dynamics, or economic conditions.

Example of a total addressable market

Let’s consider an example of TAM for a company that produces electric scooters targeting urban commuters in a particular city.

• Market segmentation: The company segments the market based on demographics, focusing on working professionals aged 25-40.
• Calculation: The company determines there are approximately 100,000 potential customers fitting this profile. Each customer is estimated to spend an average of R500 annually on alternative transportation options.

TAM = Number of potential customers x Average annual spending per customer

TAM = 100,000 customers x R500 = R50,000,000

The total addressable market for electric scooters in this city is estimated to be R50 million annually. This represents the maximum revenue opportunity if the company were to capture 100% market share.