What is TAM?
Total Addressable Market, popularly termed as TAM, is the total market demand for your product or service. TAM pretty much tells you how big the whole pie is.
Look at it this way - if every single person who potentially needs your product eventually ended up making a purchase, then how large would your market be?
TAM gives you a clear picture of the maximum size of the opportunity you’ve got to generate revenue.
Why is calculating TAM critical for ecommerce business owners?
Well, to get the ball rolling, most ecommerce businesses get TAM or Total Addressable Market wrong! When trying to get an ecommerce business off the ground, business owners often get hung up on fleshing out a go-to-market strategy. You need to dig deeper and go way beyond that.
Being able to correctly measure your total addressable market and identify the right market strategy for your online venture is a crucial first step that ecommerce merchants cannot afford to miss out on. Here's why:
1. Get to know your market share: Let's put it this way - you don't want to take the hassle of building an ecommerce store when the size of the market for your products or services is too small to fetch a decent revenue. Figuring out your TAM will help you establish just how much market share you can realistically capture.
2. Be sure of the costs & market demand: This metric also throws light on elements such as costs and demand in the market. With TAM, you will gauge how much you need to shell out to reach your market and how much you would have to produce to penetrate that market.
3. Market penetration strategy: Once you've figured out your TAM, it is also essential to consider the internet and mobile penetration in your market to understand how many people could access your ecommerce store. Typically, businesses set out to capture at least 1 % of their TAM in the first two to three years of setting up their operations.
So how do you calculate TAM?
Let’s get down to the specifics and look at three commonly used approaches to calculate TAM.
The top-down approach is all about using data from leading industry analysts like Gartner or Forrester, market reports, or even government statistics. You start by considering the total number of people globally and then narrow that down by preferred demographics and geographies to arrive at your target market. Now, this approach comes with a few limitations. The pool of data you’re working with is based on many assumptions and is rarely 100% up-to-date.
The bottom-up approach involves working with data such as the current pricing and the usage of the product. You start by considering a much smaller sample size of customers, and then by extrapolating it, you project it over an entire market segment or industry. Contrary to top-down, TAM based on the bottom-up approach is considered more relevant as businesses rely upon in-house data and primary market research rather than statistical guesses.
Value Theory Approach
With the value theory approach, you first estimate how much a potential buyer would be willing to pay for your product or service based on the additional value that it provides. This is then multiplied by the total number of people who would eventually shift from existing alternatives to adopt your product. This approach relies heavily upon how much value you can provide and just how much value creation can be reflected in the pricing.
How can you gain an edge in the Ecommerce marketplace with TAM?
Setting up your ecommerce business is quite an adventure, and it gets all the more exciting when you start projecting your year-on-year growth.
Whatever be your vision, it needs to be grounded in reality, and that is only possible when you let TAM pave the way for your online business’s success.
TAM comes into play when you need to gauge the impact of a new market entrant or bring about a price change to an existing product.
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