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Total Addressable Market (TAM)

What is TAM?

Calculating the Total Addressable Market (TAM) is a key step in understanding the potential size of a market and the opportunities it presents for your business. TAM is a metric that estimates the maximum revenue a company can generate by selling its product or service to every potential customer within a specific market. In this article, we'll show how to calculate TAM, discuss its importance, and suggest strategies for improvement.

How to calculate TAM

Here's the TAM formula:

Total Addressable Market (TAM) = Number of Potential Customers × Average Revenue Per Customer

TAM calculation example

Let's consider a real-world example of a company that sells electric scooters in a city. We'll use the following data to calculate the TAM:

  • Number of potential customers: 10,000
  • Average price of an electric scooter: $400

Calculate the Total Addressable Market (TAM) using the formula:

Total Addressable Market (TAM) = Number of Potential Customers × Average Revenue Per Customer

TAM = 10,000 × $400

TAM = $4,000,000

In this example, the Total Addressable Market for electric scooters in the city is $4,000,000. This means that the total potential revenue that can be generated from this market is $4,000,000.

Why is the TAM important to understand?

Understanding Total Addressable Market (TAM) is essential for businesses for several reasons:

  1. Market potential assessment: TAM helps businesses gauge the overall potential of a market, enabling them to identify opportunities and make informed decisions about entering or expanding within that market.
  2. Resource allocation: By understanding the TAM, businesses can prioritize their resources and efforts on markets with higher potential, ensuring a more efficient use of time and capital.
  3. Investor communication: Presenting a well-researched TAM to investors can demonstrate a company's understanding of its market and growth potential, increasing investor confidence and potentially attracting more funding.

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