Total addressable market

Total addressable market (TAM), also called total available market, is a term that is typically used to reference the revenue opportunity available for a product or service. TAM helps prioritize business opportunities by serving as a quick metric of a given opportunity's underlying potential.[1]

Total Available Market (TAM), Served (or Serviceable) Available Market, and Target Market.

One approach is to estimate how much of the market any company can gain if there were no competitors. A more encompassing variation is to estimate the market size that could theoretically be served with a specific product or service. TAM can be defined as a global total (even if a particular company could not reach some of it) or, more commonly, a market that one specific company could serve (within realistic expansion scenarios). This focuses strategic marketing and sales efforts and addresses actual customer needs. The inclusion of constraints such as competition and distribution challenges then modifies the strategy to frame it with realistic boundaries, reducing the market down to the serviceable available market (SAM), the percentage of the market that can be served (either by that company or all providers) out of the TAM.[1] This is occasionally referred to as PAU (Potential Active Use).

Difference between TAM, SAM and SOM

Total addressable market (TAM), or total available market, is the total market demand for a product or service,[2] calculated in annual revenue or unit sales if 100% of the available market is achieved.

Serviceable available market (SAM) is the portion of TAM that is reachable and can potentially be served by a company's products or services.[2]

Serviceable obtainable market (SOM), share of market, or Target Market, is the percentage of SAM which is realistically reached.[2]

For example, the total UK consumer expenditure on food in 2014, which is the total addressable market of food, was £198 billion (including catering, alcoholic drinks, non-alcoholic drinks and other foods).[3] The serviceable available market for alcoholic drinks, which producers of alcoholic beverages target and serve, is £49 billion.[3] Since the market for alcoholic drinks is not a monopoly, the share of market for a company producing alcoholic beverages can never reach 100% of SAM.[4]

Importance

The total addressable market shows the potential scale of the market. Estimating TAM is the first step for entrepreneurs to start up their business. It is important to estimate TAM objectively instead of exaggerating or underestimating this value with subjective attitudes, as it is vital to allocate a suitable market with potential growing capacity. Investors often tend to look for markets with high TAM values, showing confidence in such markets with great potential to increase demand for their products and services. This is a reasonable deduction, while on the other hand, a high value of TAM is not necessarily a good sign, as the total available market does not mean the high degree of demand obtained. Some other factors, such as competition level in the market, accessibility of resources, etc. would also affect the performance of the company. Hence SAM and SOM are also critical indicators to measure if the market is worth investing.[5]

Illustrations of real-world news about TAM
  • The Morgan Stanley analyst Katy Huberty said in her 2015 research report that Apple could reach $3.4 trillion of total addressable market by 2020, from $800 billion today, since it expands into new markets such as cars.[6]
  • Alibaba still has potential to incredibly increase total addressable market up to 40%, stated by Jim O'Donnell, Chief Investment Officer of Forward Management, as he believes Alibaba is expanding not only China's market but also markets outside China.[7]
  • The total addressable market for pulsed RF power semiconductor keeps increasing despite degeneration in the market for wireless infrastructure, as manufacturers are stepping into the new markets for pulsed RF power semiconductors such as transportation and military.[8]
  • The general public poorly realizes the market size for microwave tubes (valves). Yet, its total addressable market has reached nearly $1 billion, as microwave tubes are commonly used in areas such as military, medical and space communication applications.[9]
  • The total addressable market for comparators (a device used to compare two currents or voltages) reached $173 million in 2003. It would get $273 million in 2009.[10]
  • The market for contracted manufacturing services keeps growing compared with electronics manufacturing services (EMS) and original design manufacturers (ODM). Its serviceable obtainable market reached $560 million in 2001 and has a potential to obtain 27% of the total addressable market of electronics and IT industry by 2006, stated by Kevin Kane, program manager for IDC's Contract Manufacturing Services.[11]

See also

References
  1. Steve Blank and Bob Dorf, The Startup Owner's Manual, K & S Ranch, first edition (March 1, 2012), ISBN 978-0984999309
  2. "TAM SAM SOM - what it means and why it matters". The Business Plan Shop. 2013-12-12. Retrieved 2015-10-25.
  3. "Food statistics pocketbook 2015 - Publications - GOV.UK". www.gov.uk. Retrieved 2015-10-28.
  4. "Understanding Market Size, or Demystifying TAM, SAM and SOM". www.caycon.com. Retrieved 2015-10-28.
  5. Aulet, Bill (2013). Disciplined entrepreneurship : 24 steps to a successful startup. Hoboken: N.J. : J. Wiley & Sons. p. 45. ISBN 9781118692288.
  6. Patrick, Seitz (March 20, 2015). "Apple could quadruple its total addressable market by 2020". Investor's Business Daily. Investor's Business Daily, Inc. ISSN 1061-2890. ProQuest 1659821677.
  7. Ritesh, Anan (January 30, 2015). "Jim O'Donnell: The Total Addressable Market Alibaba Still Has To Penetrate Is Huge". Business And Economics--Banking And Finance. Accretive Capital LLC d/b/a Benzinga. ProQuest 1649186435.
  8. Cliff, Drubin (November 2014). "Pulsed RF Power Semiconductor Device Markets to Exceed $300M by 2019". Microwave Journal, International Ed. Horizon House Publications, Inc.: 64. ISSN 0192-6225. ProQuest 1626834515.
  9. "Total Available Market for Microwave Tubes Approaching $1 B". Engineering--Electrical Engineering. Horizon House Publications, Inc.: 49–50 January 2009. ISSN 0192-6225. ProQuest 204972805.
  10. "Research and Markets: Total available market for comparators reached $173 million in 2003". M2 Presswire. Coventry, United Kingdom: Normans Media Ltd. April 7, 2004. ProQuest 443755401.
  11. "Contract Manufacturing To Capture 27% Of The Electronics and IT Total Available Market by 2006, According to IDC". PR Newswire. PR Newswire Association LLC. October 31, 2002. ProQuest 443712081.
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