Sales forecasting and other business analytics solutions are more advanced than ever before, yet Korn Ferry reports that less than a quarter of companies achieve greater than 75% forecast accuracy. If the insights are more sophisticated, why are forecasts still missing the mark?
Part of the challenge is that companies tend to rely too heavily on their own historical data or intuitive, experience-based predictions without looking outward at external market factors.
Total available market (TAM) is a metric that does just that. It informs companies about potential revenue opportunities in their target markets and sets the parameters around which sales goals and forecasts are made.
In the sections that follow, we’ll define TAM in greater detail, discuss why it’s important, and walk through three reliable methods for calculating it.
- Total available market (TAM) is a key metric in RevOps and GTM strategies that measures the total revenue opportunity that exists in a given market.
- Two related metrics — serviceable available market (SAM) and serviceable obtainable market (SOM) — help companies narrow down their TAM to set realistic goals.
- TAM can be measured using three methods: top-down, bottom-up, and value theory.
What is total available market?
Total available market (TAM) — often also referred to as total addressable market — is a metric that represents the entire revenue opportunity available to a company, product, or service.
It looks at the market holistically, accounting for factors like current demand and the competitive landscapes to inform initiatives like startup launches, product or service launches, and other go-to-market (GTM) strategies.
The result of calculating TAM is a smart estimate of how many buyers (and dollars they have to spend) are currently available to capture as sales.
Why do companies want to know their TAM?
Every kind of company should know their total available market, and for a variety of reasons.
Forward-thinking companies with Revenue Operations (RevOps) strategies work to maintain a clear sense of total available market in order to make accurate projections for the future.
Startups calculate it as part of their due diligence process and to demonstrate growth potential to investors and future customers.
Companies of all sizes and industries leverage TAM as a key part of planning their go-to-market strategies to tailor marketing and sales efforts to the right customer segments.
Total available market is valuable in many different ways, and it sets an important benchmark against which companies can evaluate revenue performance. Without knowing TAM, organizations are at risk of executing full-scale strategies or launching initiatives without a clear understanding of their actual revenue opportunity or existing market demand.
TAM, SAM, SOM — What’s the Difference?
It’s important to understand how total available market is different from two terms often discussed in relation to it — serviceable available market, and serviceable obtainable market. All three represent subsets of the market and can be used together to plan go-to-market strategies and develop sales forecasts.
Total available market, as we know, encompasses total existing demand — the revenue that could be earned with 100% market share.
Serviceable available market (SAM) is the portion of TAM that could be served by a company’s products or services (i.e. target market based on specific offerings and business models.
Serviceable obtainable market (SOM) is the portion of the market that’s realistically attainable.
Looking at the market from these three levels allows companies to set “reach” goals (the most optimistic scenario) as well as more conservative goals based on what’s most likely achievable.
3 Methods for Calculating Total Available Market
There are three primary ways to calculate total available market: top-down approach, bottom-up approach, and value theory.
All three are valid ways to measure TAM, and the best one to use depends on the specific company and situation. In many cases, companies will use multiple approaches to understand TAM from a few different perspectives.
The top-down approach starts with a macro view, looking at the market holistically using market research and reliable industry data. It considers the market first with no parameters — all of the demand that exists anywhere in the world, from any customer segments and in any industry.
Once a solid understanding of the entire market exists, companies then narrow down their TAM based on factors like geography, business model alignment, and best-fit customer segments.
The top-down approach is often thought to be the most optimistic of the three methods. It focuses more on opportunity than potential limitations, making it a good starting point for new startups and potential product launches.
The bottom-up approach begins with a narrower focus, using first-party data and financial actuals to determine the total number of potential customers in a given industry or market segment to determine revenue potential.
Then, it calculates potential revenue by multiplying the number of potential customers by the amount of potential revenue per account.
For example: an SaaS startup targeting small- and mid-sized companies may take a bottom-up approach by determining the total number of target companies that exist in the market (for example, every small- and mid-sized company that could benefit from their solution but doesn’t already have a similar solution implemented).
If there are 750 potential customers that fit these parameters, and an average annual subscription costs $5000, then total available market would be calculated as: 750 customers X $5000 = $3.75 million.
From there, many companies narrow down TAM using additional criteria, such as company budget or geographic location.
The bottom-up method is a better fit for companies aiming to develop accurate and realistic sales forecasts for a given time period.
Value theory is an approach used in cases where a novel and new-to-the-world offering is being launched — one for which no direct competition already exists. It estimates TAM by determining how much a potential customer would be willing to pay for the new solution based on the value it provides.
Value theory typically requires original market research — actually interviewing potential customers and testing assumptions to determine how much value they see in the potential new company or solution.
This approach is often used by startups as part of their product/service development process and to demonstrate potential value to investors.
Use TAM to Level Up Your Revenue Strategy
Total available market sets a reliable baseline on which you can build a revenue strategy that’s informed, realistic, and geared toward growth. The right sales planning software can help you do this with confidence.
Xactly’s Intelligent Revenue Platform supports salespeople with precise plans, better incentives, and data-informed insights to accurately measure TAM and so much more. Learn how Xactly can transform your company by checking out our solutions or scheduling your free demo today!