July 29, 2019

Metrics 101: Why Total Addressable Market is a Need to Know Number

By Infogroup Staff
Metrics 101: Why Total Addressable Market is a Need to Know Number

When you are looking to begin a new business and gauge the industry’s profit margin or you want to determine an achievable revenue goal for your company, you first - and best step - is to determine your total addressable market (TAM). To calculate your TAM, you will need to review your total addressable market data. Once you understand your TAM, you will be able to review your current goals and strategies to make sure they are realistic and attainable. During your review, if you find your current methods cannot help you attain the level of success you seek, you can use your TAM calculation to create the best campaigns to help you improve your metrics and benchmark numbers.

Total addressable marketing data helps business owners and entrepreneurs determine the total market demand for their offering. Regardless if you are selling equipment or offering various home services, TAM will allow you to see a ballpark estimate of the amount of revenue it is possible to generate in your specific industry.

Although you would like to obtain 100 percent of your total addressable market, it may be impossible unless you are a monopoly. With any amount of competition, you are going to have a hard time convincing every single lead to turn to your business over another. As few as two competitors can make it difficult to own even one-third of the market.

TAM is used to estimate the potential for growth objectively. Combined with serviceable available marketing and marketing share, a company can have a complete understanding of how many customers can actually be reached along with the size of the marketing.

Benefits of Knowing Your TAM

Knowing your TAM before going into a business decision allows you to take the best steps for your startup or existing company. The main benefit of knowing your TAM is that it allows you to see your potential revenue opportunity. Additional benefits of knowing your TAM include:

  • Creates a focused future roadmap for you product and services evolution
  • Understand how well you fit within your marketing
  • Attract and retain investors with accurate information
  • Identify competitors early in the process, which will help you stay ahead in the market

Once your TAM is calculated, you can create a TAM slide to present to investors. Once investors see you have put in the time and effort to calculate your total addressable market, you will be more likely to gain access to the funding you need to get started. Along with pleasing investors, you can rest assured you will be making the best decision for yourself. Peace of mind is a priceless benefit.

How To Calculate TAM

Using big data, you should run a bottom-up analysis of your industry to understand your TAM. To run this analysis, multiply the average revenue earned from each customer annually by the number of customers in the market.

Once you crunch the numbers, you can determine if entering the market is a safe business move. Without TAM, you will not know if you are working toward a business goal that provides you with the highest revenue. By working with the best total addressable market data, you can rest assured you are calculating the best benchmarks and metrics available for your business.

Using the best big data possible, you will be able to determine if your market size makes enough revenue to enter. Based on MIT’s Global Startup Labs program, the ideal range is between $20 - 100 million. If your industry is less than $5 million or more than $1 billion, you may not be able to meet the profit margins you desire. If your industry is less than $5 million, it may be difficult to convince investors you can make a large annual revenue since this can indicate your market is too niche. On the flip-side, if your industry is over $1 billion, your market may be too saturated, so it would be difficult to make a good amount of money within the first few years.

Calculate Your TAM Before Any Business Decision 

TAM is the best way to ensure the thrilling adventure of starting a new business or launching a new product line will be profitable and the best decision for you, your business, and your family. Without consulting your total addressable marketing data, you could be walking into a decision blind. By consulting big data, you can rest assured you will be taking the correct steps to propel your brand in the right direction. After calculating your TAM, you can begin the next steps in flushing out your new venture. Now that you know how to calculate TAM, make time in your calendar to this week to calculate your total addressable market. Don't put this on the back burner. This is an essential step every marketer and salesperson needs to take!