Market size (TAM): what it is and how to define it

Within marketing there are many metrics that are essential to know the performance of a company, and it is also key to do an initial market study before starting any project in order to know its viability. It is precisely in this part where the TAM (Total Addressable Market) is usually applied, which would be translated as Market Size.

We explain what exactly TAM is and how it can help a company.

Market size or Total Addressable Market: what is it

The TAM (Total Addressable Market) or Market Size is a concept or metric that refers to the size of the target market. In other words, it is the total volume of annual income that could be generated within the market you want to access as a brand. This is data that indicates the viability of a company within a specific market and the possibilities it has to generate profits.

In order to obtain this data, it is important to know the number of people who have a need that would be covered by the product or service offered by the brand, since the TAM is the amount of income that could be obtained if all those people made the purchase.

However, and even if the TAM obtained is positive, not all companies manage to achieve that sales and profit figure because the competition or the marketing plan followed, among other elements, influence these numbers. However, it can give clues about whether or not a business may be viable within a specific market.

How to define your market size

To know the market size, the total accessible market must be determined., which is one that can be reached as a brand or, in other words, one that can be covered with the resources one has. After The target market must be calculated within that total, a fact that may vary depending on geography or other factors. It must also be determine the potential for penetration into that target market. That is, the market volume that can be achieved in the short and medium term.

For example, a new brand specialized in the sale of cardboard boxes determines that there are 100 companies in the country that offer the same product within the area in which it wants to have a presence. After investigation, distributors claim that the success rate is 80%.

Using this as an example, we would do the following calculation:

100 companies x 80% = 80

If we then assume that each of these companies sells €10,000 worth of cardboard boxes, we can calculate the potential revenue as follows:

80 x €10,000 = €800,000

This means that the company could earn €800,000 if it kept 80% of the sales, which is the total. However, it must be taken into account that, unless the brand ends up being the only one offering that product in that area, it is very difficult to keep that total, since competitors and marketing strategy, among other factors, will influence On it.

This information, then, can help a company determine if it is really worth investing time and money in a project and to know if the market is large enough to obtain income despite the competition.