Talking Total Addressable Market (TAM)
Watch the video to hear Octopus Ventures investor, Edward Keelan, unpack the knotty subject of Total Addressable Market (TAM). It’s important – but founders and investors often get it wrong. Find out why it matters and the steps you can take as a founder to make sure you’re calculating it correctly.
Tips for understanding and defining your TAM:
- Your TAM (Total Addressable Market) is the total number of customers who might buy your product, multiplied by the price.
- It matters to investors because it offers an indication of the final size of the business: a business can’t grow beyond the TAM.
- It’s important to founders because the total number of customers and the price you can charge says a lot about the business: if the total number of customers is small, the product has to be expensive. If the number of customers is high, the product can be cheap, but the market might be crowded.
- TAM can be calculated from the bottom up, or from the top down. Top down is easier, but it’s easily confused with the TAM for the sector, rather than the specific business. Bottom up gets more granular and offers a far clearer TAM.
- A well-calculated TAM doesn’t just demonstrate market opportunity – it also boosts investor confidence by proving that a founder knows their market.
- Note that TAM changes over time. When smartphones first launched they were expensive and the market was correspondingly small. Now, they’re everywhere. The products are cheaper and the TAM has shifted.