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The company relies on data from its research or survey and, therefore, the addressable market would be more relevant and accurate rather than when relying on inarguable data. The advantage of using a bottom-up approach is that the company can explain why it selected certain customer segments and left out others.

For example, for a startup company with a free accounting mobile app and annual subscriptions worth $100, it can take a reasonable estimate of the number of businesses in its target market to obtain the TAM. It uses more reliable data on the current pricing and usage of a product.

#2 Bottom Upīottom-up analysis is a more reliable method because it relies on primary market research to calculate the TAM estimates. ( All the figures used are based on assumptions).

If the business is offering the application for free but with subscriptions of $100 per year, the estimated total addressable market is $3 billion (30,000,000 x 100). Research shows that 90% of businesses that do not use a premium accounting application employ an in-house full-time accountant.

The company relies on industry research that shows that there are 1 billion businesses around the world, out of which 30% lack access to premium accounting software (30% x 1 billion customers = 300,000,000 potential customers).

The method uses industry research and reports to get the estimates of the population.Īn example is a start-up technology company that offers an app targeting small businesses that cannot afford premium accounting software.

Top-down analysis can be represented by an inverted pyramid that shows the large population of a known segment at the top and the narrowed down segment at the bottom. The top-down analysis follows a process of elimination that starts by taking a large population of a known size that comprises the target market and using it to narrow down to a specific market segment. There are three methods used to calculate the total addressable market. The assessment helps to determine the actual size of the available market and the prevailing competition for the products offered by the startup. TAM takes into account the products and customer segments that remain untapped by the startup. For example, when a private equity firm intends to acquire a startup company, it can use TAM to estimate the revenue generation potential of a product or service offered by that company. Where there are potential investors and buyers of the business, company executives can use TAM to provide a viable value proposition.Ĭreating a viable value proposition involves estimating the market size, size of the overall investment, competition, growth expected, and the available market size. The concept of total addressable market is important for startups and existing businesses because the estimates of effort and funding required allow them to prioritize specific products, customer segments, and business opportunities. It helps determine the level of effort and funding that a person or company should put into a new business line. The Total Addressable Market (TAM), also referred to as total available market, is the overall revenue opportunity that is available to a product or service if 100% market share was achieved. Updated FebruWhat is the Total Addressable Market (TAM)?

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