The TAM or Market Size is a metric used to measure the commercial potential of a product or service in a given market. This indicator allows to know the total size of the market, including the number of potential customers and the amount of money spent in the sector in question.
What is TAM for?
The TAM is a very useful tool for entrepreneurs and investors who want to evaluate new business opportunities. It helps them determine if a product or service has a market large enough to justify their investment and if there is enough demand to ensure their profitability.
In addition to being a critical metric for business decision making, TAM is also critical for strategic planning and product development. It enables research and development teams to design products and services that are in tune with market needs and desires and have significant business potential.
Benefits of calculating TAM
Among the advantages of having a calculated TAM we can mention the following:
- Identification of market opportunities: The calculation of the TAM allows entrepreneurs and investors to identify market opportunities in sectors that are underexploited or that present an unmet demand. Knowing the size of the total market, as well as the number of potential consumers, can help entrepreneurs determine unmet needs and potential future needs that could generate demand.
- Justification of the investment: The calculation of the TAM is also crucial to justify the investment in a new product or service. Knowing the size of the market and the number of potential customers helps investors make informed decisions about the return on investment and profitability of the project.
- Product and service design: TAM knowledge helps research and development teams design products and services that are in line with market needs and wants. This in turn increases the chances of commercial success, as these products and services meet market demands.
- Attract investors: If an entrepreneur or entrepreneur has a clear estimate of the TAM, it may be easier to attract investors and venture capital, since these are more interested in projects with a high potential demand and a good projected return.
- Growth planning: Understanding TAM is also important for business growth planning. Knowing how much room there is in the market for a new product or service helps business owners plan for growth and expansion, as well as identify new markets and development opportunities.
How TAM is calculated
To calculate the market size, the following steps are followed:
- Identify the target market: The first step in calculating TAM is to identify the target market. This involves defining the target audience that is expected to buy the product or service and determining the total size of the market it is in.
- Conduct market research: Once the target market has been identified, it is important to conduct market research to gather data on the size of the global market, the number of potential consumers, their buying habits, and their needs.
- Calculate the number of potential consumers: Based on the data collected through market research, the total number of potential consumers in the market can be calculated. This calculation may depend on different factors such as age, gender, geographic location, and other demographic criteria.
- Estimate the average spend per consumer: Once the number of potential consumers has been calculated, it is important to estimate the average expenditure that each of them could spend on the product or service in question. This data can be obtained through market research and can be adjusted with price inflation and other economic factors.
- Multiply to obtain the TAM: Finally, to obtain the TAM, the total number of potential consumers must be multiplied by the estimated average expenditure for each of them. This number represents the total size of the market the product or service is targeting and is a key indicator for profitability and business success.