Total Addressable Market: What It Is And Why Is So Crucial For Companies
Valuation Tool
In the business world, especially in the start-up or expansion phase, companies must make decisions based on hard data and reliable projections. One of the most relevant concepts in this context is the Total Addressable Market (TAM), i.e. the total potential market that a product or service could theoretically serve. Knowing TAM helps companies understand the size of the opportunities available, plan marketing strategies, evaluate the scalability of their business model and attract investors.
The TAM (Total Addressable Market) represents the total value of revenue that a company could generate if it managed to reach 100% of the available demand for a given product or service, in a specific market. It is a theoretical estimate, which assumes no competition, unlimited production capacity and total market coverage.
To get a more realistic and strategically useful picture, it is crucial to distinguish between:
TAM (Total Addressable Market): The theoretical total market.
SAM (Serviceable Available Market): The portion of the TAM that the company can actually reach, taking into account the geographical area of operation, the specific target customer and its distribution capabilities, etc.
SOM (Serviceable Obtainable Market): The share of the SAM that the company realistically estimates to win in the short to medium term, considering the competition, resources and current strategy.
This distinction is crucial to move from a theoretical vision to a concrete projection.
TAM is so important because:
Guidance in defining the strategy. Knowing the TAM allows companies to understand how big their business can become. A very large TAM may warrant significant investments, while a small TAM may suggest a more niche approach or the need to diversify the offering.
Attracting investors. Investors, especially in venture capital, are looking very carefully at the TAM. A large potential market is a sign of scalability and future growth. If the TAM is too small, investors may feel that the return on investment is limited.
Prioritization of market segments. TAM helps identify and select the most promising segments. If a company operates in different industries or countries, knowing the TAM of each segment allows you to focus resources where there is the greatest potential.
Financial planning support. A well-calculated TAM supports the creation of projections of turnover, market share, and cash flow, which are critical to a credible business plan.
Competitive comparison. Knowing the TAM of an industry also allows you to assess how much room there is still to grow compared to the competition. If the market is large but poorly covered, there can be significant opportunities to be seized.
There are mainly three methods to calculate the TAM:
Top-Down Approach. It starts with macroeconomic or industry data (often provided by market reports such as Gartner, McKinsey, Statista, etc.) and progressively narrows down to the specific product/service.
Bottom-Up Approach. It starts with internal data (average price, number of customers, adoption rate, etc.) and estimates how many units could be sold on a global or industry scale. Example: If your product costs €50 and there are 20 million potential customers in a certain range, the TAM will be €50 x 20 million = €1 billion.
Value Theory approach You estimate the value your product could create for the customer, and from there you speculate how much customers would be willing to pay. It is the least used but useful method for highly innovative products.
The Total Addressable Market (TAM) is therefore an essential strategic compass for any company. Although it is a theoretical estimate, its accurate analysis allows you to inform informed decisions, measure growth potential, and communicate effectively with stakeholders and investors. However, like any analytical tool, TAM must be used critically and integrated with more concrete evaluations such as SAM and SOM. Ultimately, knowing your TAM means looking beyond, understanding the real potential of your business and making more solid and sustainable decisions over time.
Amazing!