Total addressable market
Total addressable market (TAM), also called total available market, is a term that is typically used to reference the revenue opportunity available for a product or service. TAM helps to prioritize business opportunities by serving as a quick metric of the underlying potential of a given opportunity.[1]
One approach is to estimate how much of the market any company can gain if there were no competitors. A more encompassing variation is to estimate the market size that could theoretically be served with a specific product or service. TAM can be defined as a global total (even if a specific company could not reach some of it) or, more commonly, as a market that one specific company could serve (within realistic expansion scenarios). This focuses strategic marketing and sales efforts and addresses actual customer needs. The inclusion of constraints such as competition and distribution challenges then modifies the strategy to frame it with realistic boundaries, reducing the market down to the serviceable available market (SAM), the percentage of the market that can actually be served (either by that company or all providers) out of the TAM.[1]
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Difference between TAM, SAM and SOM
Total Addressable market (TAM), or Total Available Market, is the total market demand for a product or service,[2] calculated in annual revenue or unit sales if 100% of available market is achieved.
Serviceable Available Market (SAM), is the portion of TAM targeted and served by your products or services.[2]
Serviceable Obtainable Market (SOM), or Share of Market, is the percentage of SAM which is realistically reached.[2]
For example, the total UK consumer expenditure on food in 2014, which is the Total Addressable Market of food market is £198 billion(including catering, alcoholic drinks, non-alcoholic drinks and other foods ).[3] The Serviceable Available Market for alcoholic drinks, which producers of alcoholic drinks target and serve is £49 billion.[3] Since the market for alcoholic drinks is not monopoly, the Share of Market for a company producing alcoholic drinks can never reach 100% of SAM.[4]
Importance of TAM
Total Addressable Market shows the potential scale of the market. Estimating TAM is the first step for entrepreneurs to start up their business. It is important to estimate TAM objectively instead of exaggerating or underestimating this value with subjective attitudes, as it is vital to allocate a suitable market with potential growing capacity. Investors often tend to look for markets with high TAM values, showing confidence in such markets with great potential to increase demand for their products and services. This is a reasonable deduction, while on the other hand, high value of TAM is not necessarily a good sign, as total available market does not mean the high degree of demand obtained. Some other factors such as competition level in the market, accessibility of resources, etc. would also affect the performance of the company. Hence SAM and SOM are also important indicators to measure if the market is worth investing.[5]
Illustrations of real-world news about TAM
- The Morgan Stanley analyst Katy Huberty said in her research report that Apple could reach $3.4 trillion of total addressable market by 2020, from $800 billion today, since it expands into new markets such as cars.[6](Mar 20, 2015)
- Alibaba still has potential to incredibly increase total addressable market up to 40%, stated by Jim O'Donnell, Chief Investment Officer of Forward Management, as he believes Alibaba is expanding not only China's market but also markets outside China.[7](Jan 30, 2015)
- The total addressable market for pulsed RF power semiconductor keeps increasing in spite of degeneration in market for wireless infrastructure, as manufacturers are stepping into the new markets for pulsed RF power semiconductor such as transportation and military.[8](Nov 2014)
- The market size for microwave tubes (valves) is poorly realized by the general public, yet in fact its total addressable market has reached nearly $1 billion, as microwave tubes are commonly used in areas such as military, medical and space communication applications.[9](Jan 2009)
- The total addressable market for comparators (a device used to compare two currents or voltages) reached $173 million in 2003, and would reach $273 million in 2009.[10](Apr 07, 2004)
- The market for contracted manufacturing services keeps growing compared with electronics manufacturing services (EMS) and original design manufacturers (ODM). Its serviceable obtainable market reached $560 million in 2001, and has a potential to obtain 27% of total addressable market of electronics and IT industry by 2006, stated by Kevin Kane, program manager for IDC's Contract Manufacturing Services.[11](Oct 31, 2002)
References
- ↑ 1.0 1.1 Steve Blank and Bob Dorf, The Startup Owner's Manual, K & S Ranch, first edition (March 1, 2012), ISBN 978-0984999309
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