The total revenue opportunity for a specific product or service is known as the Total Addressable Market or TAM. This figure is especially important when you’re developing go-to-market strategies and presenting to potential investors.
TAM helps you develop attainable goals and eliminate dead-end leads. It gives you a realistic picture of the current market and even helps you predict future trends.
How can you calculate TAM?
You should begin by taking stock of the information you already have. Think about your current and potential customers. Consider what you already know about your market. To help you get started brainstorming, we’ve included some questions below.
- What industries would find value in your products?
- What size companies purchase your products?
- Where are these businesses located?
- What are the characteristics of your existing customers?
- What growth is expected and where?
- How is the market growing and changing?
Once you know the answers to these questions, you’re ready to calculate your TAM.
The Top-Down method uses industry research to predict the size of your addressable market. Secondary market research is frequently used to calculate the size of your industry as well as how many end users meet your market criteria. However, to get a more accurate perception of your market, you may want to consult third-party consultants.
The Top-Down approach can provide valuable insights into your addressable market. However, your findings will lack specificity and, as a result, may not provide any actionable insights.
The Bottom-Up method is a more effective way to calculate your TAM. It enables you to build market boundaries and sales goals using the data you already have. It’s more cost-effective than purchasing third-party research and it provides a more accurate prediction of market growth and revenue sums.
In the Bottom-Up method, TAM = (Annual Contract Value) x (Total # of Accounts)
If you’re looking for more specific results, consider multiplying your Annual Contract Value (ACV) by the number of accounts in large enterprises (EE), mid-markets (MM), and small to medium-sized businesses (SMB).
TAM = Sum of (ACV x EE #) + (ACV x MM #) + (ACV x SMB #)
This equation factors in the size of your accounts and thus provides a more accurate calculation of market size.
What can you do with a TAM estimate?
Calculating your TAM can help you prioritize business opportunities with a greater chance of success. More specifically, it can help you:
- Segment leads and create targeted lists
- Develop go-to-market strategies
- Improve your conversion rate
- Boost customer retention
Whether you’re meeting with investors, launching a new product, or updating your sales goals, understanding your Total Addressable Market is crucial. The more you know about your market, the easier it will be to develop effective sales strategies.
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