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. The market consists of all prospective customers for a given product, service, or idea. Customers can be purchasers who intend to resell the product or end users who intend to use or consume the product.
Estimating TAM
TAM helps to prioritize business opportunities by serving as a quick metric of the underlying potential of a given opportunity. Few organizations track market share even though it is an important metric. Though absolute sales might grow in an expanding market, a firm's share of the market can decrease which would bode ill for future sales when the market starts to drop. Where such market share is tracked, there may be a number of aspects that will be followed:
- Overall market share
- Share of a target segment
- Relative share in relation to the market leaders
- Annual fluctuation rate of market share
- An estimation of how much of the market you can gain if there were no competitors
- An estimation of the market size that could theoretically be served with a specific product or service
Example of Competitor Profiling
The folio plot visualizes the relative market share of a portfolio of products versus the growth of their market. The circles differ in size by their sales volume.
TAM can be defined as a global total (even if a specific company could not reach some of it) or, more commonly, as a market that one specific company could serve (within realistic expansion scenarios). This focuses strategic marketing and sales efforts and addresses actual customer needs. Including competition and distribution issues then frames the strategy within realistic boundaries and allows a company to gauge served market share (SAM), the percentage of the market that is already being served, either by that company or all providers. The North American Industry Classification (NAICS) categorizes businesses and collects data within specific economic activities, thus assisting in measuring the SAM.
The market can be categorized into separate groups called segments. Any discrete variable is a segmentation. For instance, customers might be segmented by gender ("male" or "female") or attitudes ("progressive" or "conservative"). Numeric variables may be used to create segments, such as age ("over 30" or "under 30") or income ("The 99%" or "The 1%").
Market Segmentation
Segments can be obtained by any number of approaches. Minimally, an existing discrete variable may be chosen as a segmentation, also called "a priori" segmentation. At the other extreme, a research project may be commissioned to collect data on many attributes that would then be used to conduct statistical analysis to derive a segmentation, also called "post-hoc" segmentation.
Qualitative knowledge of the market based on experience may also be used to identify divisions that are likely to be useful. When a producer appeals to a market or market segment, the producer must take into account the distinction between the end user or consumer and the purchaser or decision maker. This is especially true in B2B models. The market may be individuals or organizations that are able to purchase the organization's product. Each entity in the delivery chain will have different needs, so a complete market needs analysis must include all potential segments and all entities within each segment.