Total Addressable Market (TAM)

Total Addressable Market (TAM), also known as Total Available Market, is a term used to reference the total market demand for a product or service. It’s the maximum amount of revenue a business could generate if it achieved 100% market share in its industry.

TAM is most commonly used for business planning, fundraising, and pitch decks, as it provides a realistic understanding of the growth potential within the market. It helps investors understand the scale of the opportunity and the potential return on investment.

To calculate TAM, businesses usually take one of three approaches:

1. Top-Down: Start with industry research and reports and narrow it down to the TAM.
2. Bottom-Up: Calculate based on data from early sales or a pilot program and extrapolate to the larger market.
3. Value Theory: Estimate the value your product or service provides to customers and price it accordingly.

While TAM is a useful figure, it’s important to remember that it is an ideal maximum. No company ever achieves 100% market share, so it’s also important to consider other metrics like Serviceable Available Market (SAM) and Serviceable Obtainable Market (SOM), which offer more realistic targets for a business.