Total Addressable Market (TAM)

TAM is used to estimate the maximum size of an opportunity, especially by start-ups, investors and companies planning new products. It answers the question: how big could this business become if everyone who might buy the product did so?

TAM can be estimated from the top down, using industry reports and market data, or from the bottom up, multiplying the number of potential customers by the average revenue per customer. For example, if there are 2 million small businesses in a country that could use a particular accounting software, and each would pay 500 a year, the TAM is 1 billion a year.

TAM is often discussed alongside two narrower measures. The serviceable addressable market is the portion of TAM that the company's product and business model can realistically serve. The serviceable obtainable market is the share the company can realistically capture in the near term.

Investors like large TAMs because they suggest room for significant growth. However, TAM estimates are frequently inflated in pitches. A credible TAM is based on realistic assumptions about who would actually buy the product and how much they would pay.