What kind of grocery shopper are you?
Do you take your time, comb every aisle, look at every option and add to your cart whatever looks good in the moment? Or do you plan a little, consider meals you might like to eat, think of a ballpark budget, prepare a list, and aim to get in and out as quickly as possible?
A survey by an online magazine Kitchn showed that 97% of grocery shoppers use a list. So why is it that so many companies shop for new customers as if they are combing every inch of the grocery store – hoping things will magically jump off the shelf and into their carts?
When it comes to sales and marketing, building a prospecting list of target accounts and contacts may feel like a good place to start, but identifying and analyzing the total addressable market should come first.
Total addressable market (TAM) is the total available opportunity for your product or services. It’s typically measured in terms of revenue, but can also be thought of as the total population of organizations that could become your customers.
Just like you don’t go to the grocery store aiming to buy every food at once, you don’t try to bite off your total addressable market in one fell-swoop. In grocery shopping terms, TAM means considering all of the food you might possibly want to buy on any given trip to the grocery store (your menu, so to speak). But just as important, it eliminates the food and the aisles you don’t need to waste your time looking at.
To break it down, we spoke with Justin Withers, ZoomInfo’s SVP of Strategy & Corporate Development, who gave us insight on how to calculate total market size using the Bottom-Up and Top-Down methods.
What is Total Addressable Market?
The total addressable market, also known as total available market, is a calculation that represents the overall revenue opportunity for a given set of products or services. It is most often used to provide “guardrails” for companies putting together go-to-market (GTM) strategies, or who are planning to present to potential investors.
This addressable market size calculation is especially helpful when it comes to estimating the size of a particular market and painting a picture of the financial opportunity that could be.
Withers emphasizes the importance of creating “fences” or boundaries around your business opportunity, which allow your team to focus on the areas of greatest opportunity and narrow the environment in which your company operates. Without fences, a company will wander about chasing after every potential lead or opportunity (good or bad), wasting time and resources pursuing dead-end “opportunities.”
The best businesses initially focus their addressable market on niche markets and demonstrate success in an area of expertise—before expanding their TAM “fence” to include their next big opportunity.
The ability to define the characteristics that make up your market, and define the market in which you want to challenge, is vital.
Justin shares this example:
“A few years ago, I actually put together a menu of different meals I liked that my wife commonly prepared, and included a few additional genres I like in general, such as Italian and Greek food.
“She loves to cook and does an awesome job at it, but she hates coming up with ideas of what to cook. So I provided her a total addressable market of foods that I’d be interested in eating. She then created a smaller ingredient-oriented grocery list based on a subset of that market, to take to the grocery store.”
Calculating TAM for business means asking questions:
- What are the characteristics of our current and potential customers?
- What industries are we likely to sell into?
- Where are those companies located?
- What size of companies buy our solutions?
- How is the market growing? Are there new entrants? Bigger budgets?
- Where is growth expected?
Justin uses ZoomInfo to create filtered searches that specify industry, company size, and geographical location. He highlights the significance of striking a balance between creating boundaries narrow enough to direct your company towards a distinct objective but not so narrow that market opportunities become too small.
You also need to consider how you weigh the available opportunities. For example, ZoomInfo markets to companies of all sizes and in all industries. However, the size of the opportunity varies greatly by the size of the customer.
So, to prioritize, we carve up our TAM into micro-TAMs based on combinations of industry and employee count, for which we have data on our success rate. By identifying these micro-TAMs, we can see where we win often and win big, but are under-represented (an opportunity) compared to areas with lower deal sizes and higher loss rates (lower priority).
This data-driven approach ensures we focus our finite GTM resources on the biggest and best opportunities first. We can then further layer in interesting data points such as intent, technologies installed, or other attributes to further prioritize where we focus.
Two Different Approaches for Calculating Total Addressable Market
Armed with the specific characteristics and “boundaries” that make up your company’s current market, you can approach your total market calculation.
While there are more ways to calculate it, we’ll focus on the two most common approaches: Top-Down and Bottom-Up.
1. Top-Down Market Size
The Top-Down approach to calculating TAM uses industry research to estimate the size of your addressable market.
Popularly, secondary market research from companies such as Forrester, Gartner, or other consulting groups are often used to determine how many end users meet your market criteria, and how big that industry is.
However, research that has already been conducted does not often meet the exact specification for your addressable market, and estimations are often made to carve out or add on segment estimations.
Leveraging research that has already been conducted is the easiest and fastest approach and is fine for high-level estimates, but it is generally not very actionable and carries a lot of uncertainty.
To get a more tailored view, third-party consultants are often hired to size a market. They may conduct email or phone surveys, analyze other research and make more educated assumptions, but the cost will be much higher.
At the end of the day, unless the findings are actionable, you may still just have a revenue number and/or a number of companies. Often, the way to operationalize that insight is still missing.
Top-Down is represented by an inverted pyramid, where the narrowest part of the pyramid represents the company’s end-user profile. Top-Down is presented in the form of, “According to secondary market research, this [industry] is a $X billion market” and leads into how your company manages a percentage of that market.
This approach is a generic way to calculate TAM and lacks specific examples of value or market change.
2. Bottom-Up Market Size
The more accurate approach is the Bottom-Up technique. This solution uses your own company data to build reliable market boundaries and sales goals. Withers prefers this approach, because it gives a more accurate estimation of revenue sums and market growth. In this case, you’re using food that’s already in your own refrigerator, so to speak.
To calculate your market size using a Bottom-Up approach, multiply the total number of accounts in your industry by the annual contract value (ACV) of your company service or product.
Basic Bottom-Up TAM calculation:
TAM = (Total # of Accounts) x (Annual Contract Value [ACV])
For example, suppose my beverage company sold lemonade at an average of $30 a case to vendors; they bought 50 cases per year, on average (ACV of $1,500); and there are 1,000 vendors on the West Coast in total.
I can calculate TAM for my lemonade: 1,000 vendors multiplied by $1500 equals a total market of $1,500,000.
Many people accept the Bottoms-Up method as being the most accurate. Nevertheless, Withers demonstrates how to create even more value from this equation by doing this same calculation for accounts grouped by size.
He suggests totaling TAM by multiplying ACV by the number of accounts in small & medium-sized businesses (SMB), mid-markets (MM), and large enterprises (EE):
Advanced Bottom-Up TAM calculation:
TAM = SUM of (ACV x SMB #) + (ACV x MM #) + (ACV x EE #), etc.
By accounting for the variability in the size of accounts, the Bottom-Up equation provides a more accurate estimation of market size, as well as insights into sub-segments that might be more lucrative to pursue.
If we continue with my delicious lemonade example, I would examine the different business accounts within my own vendor list: Out of the 1,000 vendors that I sell to, I can identify that 659 are small & medium size businesses (SMB), 166 mid-market (MM), and 175 are large enterprises (EE). My ACV for enterprise, midrange, and SMB might be $5,000, $2,000 and $500 respectively.
Therefore, I would calculate the sum of (659 SMB x $500) plus (166 MM x $2,000) plus (175 x $5,000) to equal a total addressable market of $1.7M.
This version of the Bottom-Up approach paints a more vivid picture of my lemonade market—and the assumptions can be tweaked to model pricing adjustments, and factor in assumptions about how much of each market segment might be captured in a year. A more detailed, accurate picture of TAM translates to higher revenue, because it reveals opportunities that a more general estimation can’t identify.
The Bottom-Up approach relies on having good data in your systems—but also a realistic estimation of the number of accounts available that meet your addressable market criteria.
The total addressable market is not just a number for estimating market opportunity. It’s a set of guideposts that can be used to operationalize list-building through further segmentation, modeling, and targeting.
Whether you are releasing a new product, looking for funding, or creating new sales goals, take the time to understand your TAM—not just the revenue number or the calculation of accounts, but a deeper understanding of those accounts. The result of a well-defined total market size calculation is inevitably greater sales success.
You’ll also see better customer retention and higher renewal rates, because your sales team is targeting only those accounts that are a great fit. This resonates throughout the sales cycle.
Total addressable market a starting point for your account-based go-to-market strategy.