Definition
Total addressable market (TAM) is the total yearly revenue available for a product if every possible customer bought it. It is usually worked out as the number of potential customers multiplied by what each would pay in a year. It sets the ceiling on a market, not a target to hit.
Why it matters when you sell B2B
Investors ask for it, and it shapes big choices: which market to enter, how many people to hire, whether a product is worth building at all.
For a seller it matters less than the smaller numbers inside it. A huge TAM with no way to reach the buyers is worth less than a small one you can name company by company. That is why TAM sits next to serviceable addressable market, the part you can actually serve.
A worked example
Say you sell scheduling software to veterinary clinics in the US.
TAM, worked out bottom upExample
TAM = potential customers × yearly price
- Veterinary clinics in the US20,000
- Average yearly price$2,400
TAM = 20,000 × $2,400 = $48 million a year
That $48 million assumes every clinic buys from you, which none will do all at once. It is the ceiling. The next step is to cut it down to the clinics you can actually serve.
Counting customers bottom up, from a real list of companies that match your ideal customer profile, is more honest than taking a percentage of an industry report.
Common mistakes
- 1Working top down only. "1% of a $10 billion industry" is a guess dressed as a number. Count real customers where you can.
- 2Counting companies that cannot buy. Companies too small, in the wrong region or on an incompatible system belong outside, or in a separate number.
- 3Mixing one-off and yearly revenue. State whether the number is per year. A one-off price and a yearly subscription are not the same market.
- 4Treating TAM as a sales target. No company wins its whole TAM. Plans should be built on the serviceable part.
- 5Not showing the working. A TAM without its count and its price cannot be checked, so it will not be trusted.
Sanity check a TAM
- Write down where the customer count comes from.
- Check the price is what customers actually pay, not your list price.
- Recount bottom up for one region from a real list of companies.
- Compare it with the top down number.
- If the two differ by more than double, find out why before you use either.