What is TAM?
The total addressable market more commonly known as TAM, is the total possible revenue that could be generated for a product or service. This means that it is 100% of the possible market and sales cannot theoretically be more than it.
If the company has several different types of product and services, the total TAM of the company would be the sum of the TAM of the product and services minus the overlapping TAM of similar products of services.
How to Calculate TAM?
There are two main approaches to calculating TAM i.e.
- Top Down Approach
- Bottom Up Approach
Top Down Approach
Here the market as a whole is taken into consideration, and then the percentage of that market that is relevant to the product or service is considered as TAM.
TAM = Total Market% of Addressable Market Price of Product or Service
For example, there are 5.1 million people in New Zealand, and 9% of them are allergic to dairy products.
In that case the TAM for a dairy alternative milk product using top down approach would be 5.1M 9%$2 = $918K
(the price was an assumption)
Bottom Up Approach
This approach takes more realistic assumptions. This is why investors prefer the bottom up approach over the top down approach.
To find TAM using the bottom up approach you have to multiply the actual average sales price of a customer per year with the total number of customers in the area.
TAM = Average Sale Price Every Year Total Customer in the Area