Market Sizing

What is a Total Addressable Market (TAM) model?

Scalepath Staff
January 29, 2022

What is a TAM Model

A Total Addressable Market or TAM model is an assessment of a product or service’s revenue potential.

Typically, a TAM model will show the total global opportunity for a product or service (the "TAM"), the portion of the opportunity the company can actually service (the "SAM", or Serviceable Available Market), and the target market share or the portion of the market the company can actually obtain (the "SOM", or Serviceable Obtainable Market).

Understanding the market size is a key input before companies enter new markets or investors decide to fund a business, and can help inform decisions to:

  • Launch a new business
  • Introduce a new product
  • Enter a new country or geographic region
  • Tackle an adjacent vertical
  • Develop a new go-to-market plan
  • Design sales territories
  • And more

The best way to think about TAM is to think of it as the total available market. That is, if every customer in the market were to buy, how much revenue would be available for companies in that market to compete for? Because many technology companies don't face fixed traditional market barriers like geographies or verticals (SaaS products can often be used almost anywhere by anyone), TAM can quickly get large, so many companies choose to just look at the TAM of a specific market, such as their primary geo, or English-speaking countries. This is really calculating the serviceable market more than the total market, but that's fine and may be easier than starting with the global TAM.

Creating a reliable TAM model that can be presented to investors or used to make strategic decisions starts with a market sizing study, which breaks down the revenue potential within a market by customer segments, verticals, and geographic areas. It should include sections of the market you can reasonable service (SAM or Serviceable Available Market) and obtain (SOM or Serviceable Obtainable Market). Scalepath has a free TAM, SAM, SOM template available to help with structure.

A TAM model should be more than a static number. The process of determining your TAM is arguably more important than the final number itself. It should answer questions like: How many potential customers are in this market? What would each customer pay for the product or service? What is the product’s future growth potential?

There are two approaches to calculating TAM: top-down and bottom-up.

Top-Down Market Sizing

A top-down TAM model is typically backward-looking as it looks at total current or projected spend in an industry, then breaks down to the portion you are able to service and obtain. This is typically available for purchase from a third-party research firm or a figure you may see in a trade publication. You can do a top-down analysis by taking the overall spending in a market, calculating your estimated share of the market, and voila: you have a simple top-down model. 

Top-Down TAM = Total Spend In Market x Estimated Market Share

You’ve heard these examples before: “The market for Gizmos is $2 billion. If we capture 1% of that, we’ll have $20 million!” 

Top-down analysis is helpful as an indication of the overall market size and growth rate and can be a good “sanity check” on a bottom’s up model, especially for well-established markets that don't change significantly with new market entrants. However, a top-down analysis doesn’t provide the granularity needed to make strategic decisions, deeply understand the market, or explore new products and services. For that, you’ll need to do a bottom-up TAM.

Bottom-Up Market Sizing

A bottom-up TAM analysis takes a more realistic look at a market by calculating estimated sales of a product or service, rather than the umbrella product category spend. 

This approach takes into account:

  • The number of potential customers for your product
  • How frequently customers buy the product
  • How much customers pay for the product
  • Estimates of how much of the market your product or service can capture

The result is a more accurate assessment of a product’s potential and leads to a detailed plan of attack. A bottom-up TAM model can be constructed by taking what you know (customers with a need, spending patterns, deal sizes) and applying it to additional market segments to get a representation of the true market size.

Bottom-Up TAM = Potential Customers x Price of Product

Generating a strong bottom-up TAM model will be one of the primary tools in your strategic toolkit. If you’re ready to build your own TAM, check out this article on building a total addressable market model for a B2B company.

How to use a TAM model

A well-researched and documented TAM is critical to showing executives and investors your knowledge of a market. The process of calculating your TAM itself is often more important than arriving at a final number, and can provide deep knowledge about the make-up of your market and where best to focus your efforts.

To build your own bottom-up TAM model, download a free TAM Excel template or sign up to get access to the Scalepath app here.

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