How to find your Total Addressable Market (TAM)
Today, I want to talk to you about how to find out your total addressable market or TAM for short. There are few ways to go about doing this. I recently had to do this, so I thought it would be a great time to put together a quick tutorial or how-to on how you can find your TAM.
Top-Down or Bottoms-Up, The Two Approaches to Calculating Your TAM
So the first place I would start if I were you, there’s a great blog post I’ve found on discoverorg.com, titled “How to Calculate Total Addressable Market Size and Perform TAM Analysis”. As you start scrolling through this article, there are some great examples in here on how to get a really good understanding of calculating the total addressable market, what it means, and then two of the most common purchase, which is going to be your bottoms-up approach or your top-down approach.
So the difference between the two approaches to find your Total Addressable Market are:
- The top-down approach is where you don’t currently have customers, you don’t currently have a solid understanding of your numbers. So you’re just getting started. You’re kind of assessing the economy as a whole or various business industries.
- Whereas the bottoms-up approach generally means you’ve got some information regarding your customer’s lifetime value. So you’ve got a little bit of data in your business that you can kind of base your total addressable market size from.
Example of using a Bottoms-Up Approach to Find Your TAM
In this example, I’m going to show you how to do it from the bottoms-up approach. Because in this example, we’re going to use a company that I’m currently doing the total addressable market for. So I’ve got a little bit of data on them, and I know exactly what industries we’re going to go after.
So I’ll show you how to curate that information to find out your total addressable market. So to get started, one of the things I’ve done is created a Google spreadsheet. This is just where I’m going to plug in some quick numbers here, along with doing some really simple calculations. And then you can pull up IBISWorld.com. You can pull that up in a new tab. This is where we’re going to do some industry research, and you can also do this on census.gov depending on what information you’re looking for and whether or not one of these two sources has the information you need. So there are a couple of different sources there for you.
If you’re doing the census.gov website, you can simply just go to census.gov and in the search bar, just start typing in a specific industry. So let’s just say, we’re going to go with graphic design and you’re going to look for the NAICS code. So in this case, it’s 541430. And you can click on that specific industry and pull up some information there. So I see a little bit of information based on the indexes, the counts, et cetera.
I pulled my numbers from IBISWorld, just because it was a lot easier to pull all that information in one place. And as you’ll see in my spreadsheet here, we’re going after in this example, creative services. So I had to actually pull together a few different industries so that I can do a calculation on them. So in this example, advertising agencies, digital agencies, graphic designers, et cetera. So if you go to IBISWorld and you go in the search box, you can type advertising and you’ll see some suggested search results come up for you. So let’s just say advertising agencies in the US. I’ll click on that, and then one of the first results that I see here, so I’ve got that code that I just referenced.
Even with the free tier that they have available, this is going to show us what the total industry revenue is based on the years. 2019 had a $54 billion industry revenue. There were 71,000 businesses in the US that did advertising as well as some other statistics here.
Add Your TAM Numbers to Your Spreadsheet To Easily Create Calculations and Formulas.
So what I started to do was in my Google spreadsheet, I just created a few columns. So column A was “category”, whereas column B was the “total number of companies in the US”.
So using that first example, the number of advertising agencies, you can see where I plugged in straight from IBISWorld the total number of businesses in the US. And then just for reference and credibility, I also linked to the page that I’ve gathered this information from. So I did this and I repeated that for each industry that I was going after. Again, because we’re going after the creative services industry as a whole, there are some sub-sectors that I wanted to gather information from, which explains why I’ve got a few different rows here.
So then what I did was at the bottom of the row, I did a simple calculation where I just simply added all of these numbers together. So what’s the total number of employees in this specific industry. And then down below, again, taking the bottoms-up approach to finding out our total addressable market. I figured out what is the average lifetime value of a customer per year. So in this example, I just plugged in $3,000. Now, what you can do is a simple calculation to multiply your total addressable market size by the average lifetime value of a customer per year, which brings us to the total of in this case, an almost $4 billion total addressable market. So, that’s a really quick way on how you can find out your total addressable market. There’s several other things I can go into it, but at a basic understanding, this is a great place to start.
And in addition to that, we’re saying that this is a $4 billion total addressable market. That doesn’t necessarily mean that we’re going to come out and we’re going to get $4 billion. Cause we’re not going to capture 100% of the market share. In reality, I think a good rule of thumb is about four or 5% if you’re just starting out.
You have to think about in an example, Salesforce, for example, who’s been around for a long time, I think they just announced that they captured roughly 18% of their total addressable market. So, that would in this instance mean they captured 18% of this TAM, if we’re using this example, of this $4 billion industry.
So a good rule of thumb is, as far as you’re concerned and your business, you should estimate 2% – 6% tops just to make it more realistic.
I hope you found this information helpful. If there’s anything I forgot to add in this video, or if I completely butchered it, feel free to drop a comment below so that we can help share the knowledge.