What, Really, is A Total Addressable Market (TAM)?
As explained in my previous post, market sizing doesn’t just tell us how much we can sell. It tells us what to make, how much to make, what to invest, who to hire, how to get to market, why customers buy, how to price, what our support needs will be, and more. Failure to adequately size markets means failure in understanding markets – and vice-versa.
The cornerstone concepts to understand – and be able to apply – in market sizing are Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM). This post focuses on the concept and reality of TAM.
Contrary to many perspectives, TAM is not how much we can, or should expect to, sell.
TAM shows us potential market scale and scope. Properly developed, TAM indicates the theoretical total market that could exist for a product, assuming unencumbered access and unlimited operational resources available to every business selling into the market.
Note the key terms “unencumbered access,” “unlimited operational resources,” and “every business.” Very few such markets exist, yet a surprising number of Sales and Marketing leaders and planners (and startup executives) incorrectly use TAM as the core of their business plan.
TAM is The Big Picture
So if TAM doesn’t tell us how much we’re going to sell, what good is it? Because TAM tells us how many potential buyers exist, where they are, what they want, and how they want to buy.
TAM’s value is in helping to scope a market, including buyers, competitors, conditions, and other parameters. This helps businesses focus on what they can and should develop, sell, and support, and enables realistic vision of, and planning for, how that can and should be done. This in turn:
- Focuses stakeholders on offering roadmap and evolution;
- Provides a foundation for business strategies including investment, Sales, Marketing, resource planning, and IT;
- Helps shape and refine metrics for assessing market fit (and the scope of change needed to fit into a market);
- Provides rigor for assessing competitors; and
- Attracts investors.
TAM Enables Consensus on Market Vision and Ability to Execute
A well-executed TAM exercise shows the shape, depth, and consistency of potential markets. This enables business leaders to build consensus on offering development, delivery, and go-to-market strategy including pricing, partners, and positioning.
The value of TAM comes from understanding that it is an indication of market scope, not simply a metric of potential sales. It helps us identify and understand the factors bounding our markets, and our abilities to service those markets. As one Syndicate colleague phrases it: TAM tells us how many fish an ocean might hold, but not necessarily what types of fish, where the fish are, or what type of boat we’ll need.
Next in this series: Serviceable Addressable Market (SAM) sizing. TAM shows us strategic scope, while SAM tells us what it’s going to cost to succeed.
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