Total Addressable Market and Why it’s Important

When growing your business and attempting to raise capital, truly understanding your Total Addressable Market or TAM is key. But how do you go about gathering such robust information? Let’s get started!

While you need to know where you stand in your industry, it’s ultimately worth knowing where you stand in the eyes of your customer and potential customers. That’s where research surveys and focus groups come into the picture. These items not only aid you with understanding your customers but also your competition and how much of a direct threat they impose on your share of the market for this analysis.

Before you begin surveying or creating focus groups, it’s ideal to define your buyer personas, which in turn will aid you in targeting the appropriate people to reach out to for surveys and focus groups. You can also run a SWOT Analysis to fully understand your potential buyers, competitors, and even your product offering itself.

Once you have formalized who your buyer is and what their initial needs would be you can begin to calculate the TAM. And essentially there are three ways to calculate TAM as it relates to your business. The first is the Bottom-Up approach.

This calculation for TAM is based on any of your previous sales and pricing data for your business as well as the competition. You can do this by multiplying your ACV by the total number of potential customers. This will provide you with context to showcase the TAM based upon your existing data at scale.

Next up is more ideal if you are pre-revenue with the Top-Down approach which uses industry data you have captured, market reports, and research studies to identify the TAM. This will allow you to have a good understanding, based upon your persona and surveys who to target and allow you to capture the volume of potential customers in accordance with your market. The data here is difficult to find, and at times may be outdated, so being able to find accurate and up-to-date information during this process is key.

The last is the Value Theory which can combine Bottom-Up or Top-Down, but focuses more emphasis on the value your customers get and their ability to remain customers with the intent to not only stay a customer but for them to be advocates and upsell opportunities for new/upgrades products or service offerings as your business grows.

No matter what, make sure you spend time working on your TAM before taking action with investors. Understanding your TAM, while important in raising capital, is also a pillar of Sales, Marketing, and Operational Support for your business. So do yourself a favor, and do the research!

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