What is a Total Addressable Market (TAM)?
The Total Addressable Market (TAM) is one of the most important metrics to understand about your industry/market. It defines your potential for growth and should act as a handrail for your business plans. It is a simple calculation of an estimate total number of ideal customers and average revenue per customer (ARPC). Multiply these two to get your TAM.
Importance of the TAM for small businesses
When you build out your business plan it should include your TAM and how you plan on capturing a share of it. There are two universal facts to every TAM: 1) it is quite simple to calculate and 2) is always wrong. However, it should give you a general estimate.
Quick overview of the benefits of knowing your TAM:
- Viability of business idea by understanding expected revenue given a certain capture rate of total TAM
- Identifying the best core market to gear towards and understanding your core customer better
- Planning for expansions into new markets
- Pricing strategies and scenario analysis
- Outlining the competitive environment