THE MEDIA ENCYCLOPEDIA
Total Addressable Market
Total Addressable Market (TAM) represents the total universe of potential customers relative to your product or service offering.
What is Total Addressable Market (TAM)?
Total Addressable Market (TAM) represents the total universe of potential customers relative to your product or service offering. While determining the Total Addressable Market (TAM) for a business is by no means a perfect science, it is a helpful guide for businesses seeking to validate service offerings.
How do you calculate Total Addressable Market (TAM)?
To calculate the Total Addressable Market (TAM) for your business, you can work backwards from the highest known demographic to the lowest known demographic. As an example, to determine the Total Addressable Market (TAM) for a software business that offers accounting services to small businesses. Since the service is not location dependent, the Total Addressable Market (TAM) could be all Small Businesses in the United States (data you can acquire from reliable, publicly-available sources like the Census).
In this very simple assumption of Total Addressable Market (TAM), you can make a deduction based on expected Conversion Rates and Cost Per Acquisition.
As an example, if the Total Addressable Market (TAM) is 1,000,000 Small Businesses in the U.S. and your expected conversion rate is 1%, that means you have reasoned to acquire 10,000 prospective customers.
If your product offering is $24.95/month, your expected Churn is 12 months, your Customer Lifetime Value (LTV) is roughly $300.00. With a desired Return on Ad Spend (ROAS) is 2.0, you can spend up to $150.00 to acquire each of those 10,000 customers, or roughly $1.5 Million.
Of course, not every small business ha $1.5 Million laying around to acquire their entire Total Addressable Market (TAM). However, using these calculations, you can give yourself a decent idea of how many potential customers exist and how much it would cost to acquire them.
As an example, if you have only $15,000 to spend on customer acquisition (like digital advertising, sponsorships, etc.) this means you can spend up to $150.00 to acquire 100 customers, which would generate roughly $30,000 in annual revenues based on the above assumptions.
As the product acquires new customers, and delights them with great service and cost savings, Customer Acquisition Costs (CAC) should go down, Return on Ad Spend (ROAS) shoudl go up, and Churn should go down.
THE MEDIA ENCYCLOPEDIA