Total Addressable Market (TAM)

Nobody wins the whole market, so TAM is not a plan. It is a sanity check on whether a category is worth entering at all. A market worth a few million pounds supports a very different business from one worth billions, and it should change how much you are willing to invest. Without the check, a business can spend years serving a market too small to ever repay the effort.

Investors also ask for it, and a vague TAM is a quick way to lose their trust.

• Define the market tightly: industry, company size, geography and the problem solved.
• Count the companies or people who fit, using public statistics, industry bodies or a prospecting database.
• Multiply by what your product would realistically charge, not by what the whole problem costs.
• Then narrow the figure to the slice you can reach and win, which is the job of TAM SAM SOM.

TAM answers one question: if every business that could use the product bought it, how much money would that be each year? The basic sum is the number of potential customers multiplied by what each would pay yearly. Say 8,000 companies fit the definition and each would spend about £5,000 a year on a solution like yours. The TAM is £40 million.

There are two ways to get the count. A top-down estimate starts from an industry report and carves it down. A bottom-up estimate counts real companies in a database and multiplies by your own price. Bottom-up is usually the more honest of the two, because every input can be checked.

• Quoting a huge industry figure, such as "the global marketing industry", that has nothing to do with the product.
• Counting customers who could never buy, for example companies too small to afford the price.
• Treating TAM as a revenue target. A share of one per cent of a large market is not a plan.