What is Total Addressable Market (TAM)?
The Total Addressable Market (TAM) is the overall revenue opportunity available if a product or service achieves 100% market share in its category. It represents the upper limit of the market demand for a particular offering.
Calculating TAM is essential for businesses, especially startups, to understand the market's potential size and scope.
Example:
Let's take a startup in India developing a telemedicine app focused on providing online consultations.
The TAM for this startup would be the total potential revenue from online medical consultations across India. If every individual who seeks medical consultation opts for an online session through this app, the cumulative revenue from these consultations would constitute the TAM.
Calculation methods:
There are three common methods to calculate TAM:
☞ Top-Down Approach: This approach uses broad market data, such as the total expenditure on healthcare in India, and narrows it down to the specific segment of telemedicine.
For instance, TAM = (Total healthcare expenditure in India) x (Percentage share of telemedicine).
☞ Bottom-Up Approach: It begins with a micro-level unit, like the average fee for one online consultation, and scales up based on the total number of potential users in India.
The formula might be TAM = (Average fee per consultation) x (Total number of potential telemedicine users in India).
☞ Value Theory: This method assesses the unique value or savings the telemedicine service brings to the market, such as reduced travel costs and time for patients.
TAM provides a quantifiable market potential, assisting in business strategy and appealing to investors by showcasing the scale of opportunity and possible ROI.