TAM stands for Total Addressable Market, or Total Available Market – the total market demand for the specific product or service you’re offering. Think of it this way: If every single potential client were to sign with your company, that would be the TAM.
TAM can be calculated by multiplying the Total Market (number of potential customers) and your Average Contract Value (ACV). So, for example, if you have 1,000 potential customers, and your AVC is $100.00, the TAM is $100,000. Many companies choose to use third-party consultants to size the market, and you can also use research that has already been conducted on your industry, but it’s best to use a bottom-up approach, by starting with your list of the potential clients in your market.
Knowing your Total Addressable Market is important for five main reasons:
1. It helps you raise capital.
Investors need to know what potential the business has, so all entrepreneurs should have a good idea of their TAM before heading into any investor meeting. Knowing the TAM allows investors to objectively estimate things like market value, penetration, competitors, and timing to determine the overall value of a business.
2. It enables financial projections and forecasting.
The Total Addressable Market is often used as a benchmark for financial models and forecasts. This is important for current stakeholders and investors in your business to know, and it will help you budget and plan appropriately for the short-term and the long-term.
3. It enables better personnel projections.
Total Addressable Market, as well as financial projections and quota, can help you determine headcount growth. Forecasting your personnel needs is important as you develop your bench, consider promotions for current team members, and budget for expenses.
4. It allows you to do territory planning.
Total Addressable Market information can also be used to allocate personnel strategically across verticals (Industry, Geography, Company Size, etc.). For example, if you know that a large proportion of your TAM comes from companies of 100+ employees, you can allocate more sales reps to that vertical.
5. It helps you in holding the business accountable.
Businesses should use their Total Addressable Market to determine growth metrics. How well is the business doing? Is your TAM growing, and is business keeping up with the growth of the market? Ideally, these should be in proportion, or business growth should be increasing at a higher rate than TAM. If it’s not, it’s time to reevaluate your strategies.
Calculating your Total Addressable Market accurately WILL result in better sales success – not just by understanding the potential your product or service has to grow, but by assigning the most resources to the sectors of the market that have the most potential for your business.
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