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Writer's pictureDimitris Adamidis

Demystifying TAM Calculation: Unveiling the 5 Methods to Size Your Market

Updated: Mar 14


Calculating Total Addressable Market

This article focuses on the top five (5) methods used to calculate TAM. It is an introduction to the larger TAM, SAM, and SOM concepts topic that ultimately should drive your organizational, coordinated GTM planning.


According to a survey conducted by McKinsey & Company, among executives and decision-makers in technology companies, 87% considered Total Addressable Market (TAM) as a critical factor in their strategic decision-making process. It indicates the widespread recognition of TAM as an essential metric for assessing market potential and making informed business decisions.


While TAM is a valuable metric for understanding the potential market size and assessing market opportunities, its exact usage and significance in GTM evaluations may vary based on factors such as industry, company size, and business model.


Before jumping into the most commonly provided reports from IDC, Gartner, Forrester, and Mckinsey, you must understand the typical methods used to compute them. I recommend using existing components for more tuned TAM that matters for your organization. Each method listed below includes a short description with the calculation example. I used a hypothetical number in these calculations.


Top-Down Approach: This method involves estimating the overall market size based on macro-level data and then narrowing it down to specific segments. It typically utilizes industry reports, market research data, and government statistics.

A good example could be cloud computing which could involve analyzing global IT

spending reports from research firms like Gartner or IDC to estimate the cloud market

size. A publicly traded company in this space Amazon Web Services (AWS), would fit

that exercise well.


  1. Identify the Market Segments: Identify the relevant segments within the cloud computing market. For example, it could include Infrastructure as a Service (IaaS), Platform as a Service (PaaS), Software as a Service (SaaS), and other specific solutions.

  2. Gather Macro-level Data: Obtain macro-level data from industry reports, market research firms, and government sources. These sources may provide information on IT spending, cloud adoption rates, and market growth projections.

  3. Use the gathered data to calculate the market size for each segment. It may involve applying growth rates and market share percentages to the total market. For example, suppose the total IT spending in a given year is $1 trillion, the cloud adoption rate is estimated at 40%, and a specific cloud segment has a market share of 10%. In that case, that means Market Size = Total IT Spending * Cloud Adoption Rate * Market Share Percentage; therefore, Market Size = $1 trillion * 0.40 * 0.10 = $40 billion.

  4. Sum Up Segment Sizes: Repeat the market size calculation for each segment and then sum up the individual segment sizes to determine the overall TAM for the cloud computing market. For example, if you calculate the market size for IaaS, PaaS, and SaaS to be $20 billion, $15 billion, and $5 billion, respectively, the total TAM for the cloud computing market would be: Total TAM = $20 billion + $15 billion + $5 billion = $40 billion.


It's worth noting that the accuracy of the TAM estimate depends on the quality of the data sources and the assumptions made during the calculation. However, the top-down approach provides a high-level assessment of the market potential based on available data and market indicators. That means cross references with other experts or similar reports are highly advised.


Bottom-Up Approach: This method estimates market size by aggregating data from individual customers or user segments. It relies on primary research, customer surveys, and data from existing customers.


An excellent example is the e-commerce sector, with Shopify as a good brand reference; the bottom-up approach might involve analyzing transaction data from various online retailers to estimate the market size.

  1. Identify the Target Market: Consider the e-commerce market and focus on small and medium-sized businesses (SMBs) that are potential users of Shopify's platform.

  2. Define the Addressable Market: Estimate the number of SMBs in the e-commerce market that could benefit from using Shopify. Let's assume there are approximately 1 million SMBs in this segment.

  3. Determine the Adoption Rate: Research the market and assess the percentage of SMBs likely to adopt Shopify's platform. Based on market analysis and industry trends, let's assume an adoption rate of 15%.

  4. Calculate the Total Addressable Market (TAM): Multiply the number of SMBs in the addressable market by the adoption rate. In this case, the TAM would be 1 million SMBs * 15% = 150,000 SMBs.

  5. Assess Revenue Potential: Determine the average revenue potential per customer for Shopify. It can be based on subscription fees, transaction fees, and additional examples, like services. For example, let's assume an average annual revenue of $2,000 per customer.

  6. Calculate TAM Revenue: Multiply the TAM (number of SMBs) by the average revenue per customer. In this example, the TAM revenue would be 150,000 SMBs * $2,000 = $300 million.


Market Sizing Models: These mathematical models combine multiple data sources, such as customer surveys, market research reports, and financial data, to estimate the TAM. These models often consider market growth rates, customer demographics, and adoption rates.


HubSpot, a publicly traded company, offers marketing automation software and uses market sizing models to estimate the potential market size based on factors like the number of small and medium-sized businesses and their marketing needs.

  1. Identify the Target Market: Determine the specific market segment that HubSpot operates in, such as small and medium-sized businesses (SMBs) needing marketing automation and CRM software.

  2. Gather Market Data: Collect relevant data about the target market, such as the total number of SMBs, the growth rate of the market, and the average spending on marketing software by SMBs.

  3. Define the Market Segments: Break down the target market into segments based on company size, industry, and geographic location. This segmentation helps in estimating market penetration for each segment.

  4. Determine the Penetration Rate: Assess the current market penetration for HubSpot within each segment. For example, let's assume HubSpot has a penetration rate of 15% in the SMB market segment.

  5. Calculate the Addressable Market: Multiply the total number of SMBs by the penetration rate to determine the addressable market. For example, if there are 10 million SMBs and HubSpot has a 15% penetration rate, the addressable market would be 10 million * 15% = 1.5 million SMBs.

  6. Estimate Revenue per Customer: Determine the average revenue generated per customer by HubSpot. It can include subscription fees and additional services; for example, assume an average annual revenue of $5,000 per customer.

  7. Calculate the Market Size: Multiply the addressable market by the average revenue per customer to obtain the estimated market size. In this example, the market size would be 1.5 million SMBs * $5,000 = $7.5 billion.


Comparable Market Analysis: This method involves looking at similar markets or adjacent industries to estimate the TAM. It relies on identifying analogous markets with comparable characteristics and using their market sizes as a benchmark.


A good example would be the electric vehicle (EV) industry; a comparable market analysis might involve looking at the traditional automotive market size and estimating the potential market size for EVs based on factors like market adoption rates and government incentives. We can use Rivian as a good example of this method.

  1. Identify the Comparable Companies: Determine the companies in the automotive industry that are similar to Rivian regarding their business model, target market, and product offering. In this case, we can consider comparable companies like Tesla, NIO, and Lucid Motors.

  2. Gather Market Data: Collect relevant data about comparable companies, such as their revenue, market share, and the total addressable market (TAM) they operate in. The information can be obtained from its financial statements (if available), industry reports, and market research.

  3. Determine the Market Share: Assess the market share of each comparable company within their respective markets. This can be based on revenue or unit sales. For example, let's assume that Rivian has a 5% market share in the electric vehicle segment.

  4. Calculate the Total Addressable Market (TAM): Determine the TAM for the electric vehicle market. It can include the global sales of electric vehicles or a specific market segment, depending on the focus of the analysis. For example, let's assume the TAM for electric vehicles is $100 billion.

  5. Estimate Rivian's Market Size: Multiply the TAM by Rivian's market share to obtain the estimated market size. For example, if the TAM for electric vehicles is $100 billion and Rivian has a 5% market share, the estimated market size for Rivian would be $100 billion * 5% = $5 billion.

By comparing Rivian's market size to comparable companies, you can gain insights into its relative market position and potential growth opportunities. Therefore, it's essential to consider factors like competitive dynamics, product differentiation, and market trends while performing the Comparable Market Analysis to understand Rivian's market potential comprehensively. I must say that this example is simplified and doesn't include a comparison to the traditional combustion cars industry. However, it could.


Partner/Customer Data Collaboration: This method involves collaborating with strategic partners or customers to gather data and insights on market potential. It relies on data-sharing agreements and leveraging the knowledge and expertise of trusted partners.


Let's take Microsoft as an example, a publicly traded company that collaborates with Intel to estimate the potential market size for their joint offering of cloud-based AI services. By leveraging Intel's data on AI adoption and market trends, they were able to estimate the TAM for their solution.

  1. Identify Partner and Customer Data: In this approach, you would collaborate with partners and customers to gather relevant data. For example, Microsoft and Intel could collaborate with their ecosystem of partners and customers to obtain insights into market demand, customer preferences, and usage patterns.

  2. Gather Data from Partners: Collect data from partners in Microsoft's and Intel's ecosystems. This could include information on sales volumes, customer demographics, geographic distribution, and customer feedback. For instance, Microsoft may collaborate with software developers, system integrators, and solution providers to gather data on the usage of their products and services.

  3. Gather Data from Customers: Engage directly with customers to collect data on their purchasing behavior, product preferences, and market requirements. This can be done through surveys, interviews, focus groups, or by analyzing customer usage data. For example, Microsoft and Intel could conduct market research studies or leverage existing customer data to gain insights into customer needs and preferences.

  4. Analyze the Data: Once collected, identify patterns, trends, and market opportunities. Look for commonalities across partners and customers to uncover market segments, customer profiles, and potential growth areas. For example, by analyzing partner data, Microsoft and Intel can identify the industries or regions where their products are most popular. Microsoft has a customer base of 100,000 companies, and Intel has a customer base of 50,000. When combined into a unified dataset, resulting in a dataset of 150,000 companies. Through analysis, it is determined that four market segments have varying levels of cloud solution adoption potential; therefore, they identify the potential of 30,000 entities in their shared market segment.

  5. Calculate the Market Size: Microsoft and Intel estimate the TAM for their cloud-based solutions based on the joint analysis. Let's assume the average revenue per customer is $10,000. The TAM for their cloud-based solutions in the target market would be calculated as follows: TAM = Total Number of Potential Customers * Average Revenue per Customer = 30,000 * $10,000 = $300 million.

By leveraging partner and customer data collaboration, companies like Microsoft and Intel can gain valuable insights into market demand, customer preferences, and industry trends. This approach allows them to tap into the collective intelligence of their ecosystem and make informed decisions regarding market sizing, product development, and go-to-market strategies.


Conclusions: Regardless of which report or method you'll use, you must ensure that the readout is done collectively between multiple parties of your organization. Doing this in isolation can expose your company to wrong, sometimes catastrophic decisions you cannot undo. Eliminating bias and engaging a massive amount of your organizational resources is a strategic decision, not a tactical one. Making this right is key regardless of whether you are an investor or an executive. Finally, here are a couple of practical suggestions for using the TAM for all GTM professionals and finance teams:

  1. Revenue Forecasting: TAM data provides insights into the market size and potential, which can help revenue operations teams forecast and set realistic revenue targets after connecting that data with SAM and SOM. By understanding the total addressable market, they can estimate the revenue potential for their products or services and align their sales and marketing strategies accordingly. Looking through the segmentation has another value in your planning process.

  2. Pricing Strategy: TAM data can be valuable in determining the pricing strategy for products or services. Finance teams can analyze the market size, competitive landscape, and customer segments within the TAM to assess pricing elasticity and identify optimal price points that maximize revenue while remaining competitive. Revenue Operations can set up different strategies around their discounting policies or sales tactics to handle objections from their prospects and customers.

  3. Market Expansion Opportunities: TAM data can guide revenue operations and finance teams in identifying new market opportunities for business expansion. By analyzing the TAM across different geographies or market segments, they can identify untapped markets with growth potential and develop strategies to enter and capture market share in those areas.

  4. Investment and Resource Allocation: TAM data helps finance teams evaluate investment opportunities and allocate resources effectively. By assessing the TAM's market size, growth rates, and dynamics, they can prioritize product development, marketing, and sales initiatives based on market potential and expected return on investment.

  5. Growth Scenario Creation: By understanding the TAM's market size, growth rates, and trends, RevOps, and finance teams can assess the financial impact of various scenarios, conduct sensitivity analysis, and make informed decisions regarding budgeting, resource allocation, and financial performance targets (e.g., Quota-to-OTE ratio by segment and GTM source to Revenue).

  6. Due Diligence for Mergers and Acquisitions: TAM data is often considered during due diligence processes for mergers and acquisitions. There is more here than that, but that conversation might start here. Finance and leadership teams can assess the market opportunity represented by the TAM to evaluate the strategic fit and inorganic growth potential. In addition, TAM data can inform valuation models, synergy assessments, and investment decisions.




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