Total Addressable Market, or TAM, is a term used to describe the market opportunity for a product or service. There are a few definitions, but I like to think of TAM as the global market for x in a given year, where x is whatever category a product or service is in.
For example, Coca-Cola might be interested in the TAM for global annual soft drink spend, whereas Uber might be concerned with the TAM for global annual transportation spend.
TAM is often used as a measuring stick to answer the question, “how big could this business be?” If the TAM for a market is $100 million, any individual firm in that market is going to have a valuation constrained by the size of their TAM1. In this example, the collective annual revenue of all the firms in that market would be no greater than $100 million, all else equal2.
Unsurprisingly, TAM is a popular way for startups and more mature companies to describe their market size to investors. But plenty of companies miss an opportunity to translate the excitement they’re generating with investors and senior leadership to the folks that are operating the business day-to-day.
I believe everyone should know the TAM of their company3. Understanding how big a company is relative to its TAM can inspire and align teams around the opportunity at hand. Ambitious companies are likely only just scratching the surface of their Total Addressable Market, and this context can motivate teams to pursue initiatives that could result in step-change growth4 rather than incremental improvements that would result in flat or modest growth — or even negative growth!
Absent leadership providing this information readily, going through the thought exercises of which market (or markets) your company operates in, how big its Total Addressable Market is, and measuring how much of its TAM your company has captured are great ways to better understand your business and where opportunities for massive growth may be.
This example assumes these firms only operate in the single $100 million market. In reality, a nascent startup will likely be operating in a primary market, but that’s not likely to be true for Fortune 500 firms. ↩
“All else equal” never holds up in practice, so thinking about how the TAM can change is critical for understanding a market. Some reasons TAM can change include shifting consumer behavior, potentially due to the diffusion of a new technology across a market or new government regulations. ↩
I also believe that everyone in a company should be able to articulate their company’s strategy. Strategy should be something everyone in the company can understand, so it can be a clear north star for decision-making. Tactics matter, too, but should be dictated team-by-team rather than top-down. ↩
Eugene Wei wrote the excellent essay Invisible Asymptotes on how Amazon unlocked new step-change growth opportunities by removing the hidden pain points of their business that prevented customers from using Amazon more frequently. His piece calls out TAM specifically, too, including how he viewed Amazon’s long-term TAM as a “layer cake of different retail markets.” ↩