Glossary

Total Addressable Market

Definition

Total Addressable Market (TAM) is the total revenue opportunity available for a product or service if it were to capture 100% of its market. It represents the maximum potential market size for a business and serves as a key metric for understanding the scale and growth potential of an industry or niche.

For startups, TAM is critical for evaluating market opportunities, attracting investors, and developing business strategies to capture a significant share of the market.

How is Total Addressable Market calculated?

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- Top-Down Approach: Derives TAM from industry reports and research to estimate the overall market size. - Bottom-Up Approach: Builds TAM from internal data, such as product pricing and potential customer base, and scales it to reflect the broader market. - Value Theory: Estimates TAM based on the value delivered to customers and applies it across the target market. For example, if a SaaS startup charges €500 per year and there are 100,000 potential customers, the TAM would be: €500 × 100,000 = €50 million

Why is TAM important for startups?

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TAM helps startups understand the market’s size and potential, guiding their growth strategy and positioning. It also demonstrates scalability and market attractiveness to investors. A large TAM indicates significant growth potential, while a smaller TAM highlights the need for niche-focused strategies.

How do investors use TAM in decision-making?

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Investors analyze TAM to assess the potential scalability and profitability of a startup. A large and growing TAM suggests significant opportunities for expansion, while a clear path to capturing a meaningful share of TAM indicates a well-defined business strategy.

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