Don't Fake Your TAM

How to accurately calculate your total addressable market (TAM)

Author

Rameel Sheikh
May 01, 2024

Your TAM might be BS

Insight from Mostly Metrics

When you pitch to investors, one of the first things they'll ask about is your TAM (Total Addressable Market). It's a stat showing the total potential revenue you could generate if you captured every possible customer.

But many folks get so caught up in the size of their TAM that they forget about the actual experience of delivering their product to customers.

To find your true TAM, you need to investigate the nitty-gritty of pricing and quantity. The pricing part is easy—it's what you charge for your product. But figuring out the quantity? That's where it gets tricky.

If you're selling a simple per-seat product, you can look at the total number of potential users in your target market.

But if you've got a more complex pricing model, like charging based on usage or storage, it's a lot harder to pin down that quantity.

One way to tackle this is to estimate the typical spend for different types of customers. Then, you can multiply that spend by the total number of companies in each category to get a rough idea of your TAM.

It's not perfect, but it's a start.

Here are three things to keep in mind:

  1. Insertion Point: Where does your product fit into your customers' day-to-day workflow? If you can make yourself indispensable by integrating deeply into their processes, you've got a much better shot at expanding into other areas later on.

  2. Competition: Sure, a giant TAM is great—but it also means you'll be facing off against some serious competition. Use the Herfindahl-Hirschman Index (HHI) to assess how fragmented your market is. The higher the score, the closer you are to being the only game in town.

  3. Market Maturity: Is your market getting started, or is it already mature? Make sure you're positioning yourself in a market that can actually support your growth ambitions.

At the end of the day, positioning your product within your TAM is all about finding that sweet spot where you can deliver the most value to your customers in the shortest amount of time.

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