Total addressable market (TAM)

Total addressable market (TAM) is the maximum total revenue opportunity available for a product or service if you captured 100% of demand in the market you define, within a specific period (usually annual revenue).

In plain terms: the biggest the market could possibly be for you, before you apply real-world limits like competitors, geography, channels, budget constraints, or your ability to execute.

What TAM answers (and what it does not)

TAM answers:

• How big is the overall opportunity, in money or units?
• Is this market large enough to support the outcome you want (growth, funding, profitability)?
• Is this a niche, a category, or a platform-scale play

TAM does not answer:

• How much you will realistically win this year
• How fast you can reach the market
• Whether your go-to-market motion will work

Why total addressable market matters

TAM is a decision input for strategy, not a vanity number.

Common decisions TAM supports

• Market selection: Which segments and categories are worth pursuing?
• Positioning: Are you competing in an existing category or creating a new one?
• Business model fit: Does pricing and packaging match how the market buys?
• Resource allocation: Where do you place sales, marketing, and product bets?
• Investor narrative: Can the market support the growth expectations being set?

What “good TAM work” looks like

• You define the market precisely (buyer, problem, category boundaries)
• You show the assumptions (pricing, volume, adoption, time period)
• You pair TAM with SAM and SOM (realistic next layers)

How TAM is calculated

There are three standard ways to estimate TAM. Strong market sizing often triangulates using two.

1) Top-down TAM

You start from broad industry numbers and narrow down with filters.

Formula pattern

• Industry size × relevant segment share × geography share × channel or use-case share

Strength

• Fast and useful for early orientation

Risk

• Can become hand-wavy if the filters are not grounded

2) Bottom-up TAM (recommended for B2B)

You build from real buyer counts and realistic pricing.

Formula

• TAM (revenue) = number of potential customers × average annual contract value (ACV)

Example (B2B SaaS)

• 18,000 target companies in your defined market
• Average ACV €12,000
• TAM = 18,000 × 12,000 = €216,000,000 per year

Strength

• Most actionable for sales strategy and forecasting logic

Risk

• Requires good data on buyer counts and pricing realism

3) Value-theory TAM

You size based on the economic value you create.

Formula pattern

• Number of buyers × value created per buyer × price capture rate

Strength

• Useful when the category is new or pricing is value-based

Risk

• Easy to overstate value without proof

TAM vs. related terms people confuse

TAM vs SAM vs SOM

These three are a stack.

• TAM (Total Addressable Market): 100% of the market you define
• SAM (Serviceable Available Market): the part of TAM you can reach with your current product and constraints (geography, compliance, language, integrations, channels)
• SOM (Serviceable Obtainable Market): the share you can realistically win in a defined time window, given competition and capacity

A practical way to think about it:

• TAM = theoretical ceiling
• SAM = addressable with your offering
• SOM = winnable near-term

TAM vs market size

“Market size” is a broader phrase. It might mean TAM, SAM, or SOM depending on context. If someone says “market size,” you should ask: Which layer and which constraints?

TAM vs ICP

ICP (Ideal Customer Profile) is a targeting tool. It defines who you should sell to first.

TAM defines how big the overall opportunity is (even beyond your ICP).

TAM vs revenue forecast

A forecast is about your expected outcomes. TAM is about maximum possible demand. Confusing these leads to inflated plans.

TAM vs sales methodology, sales process, sales playbook

These are not market-sizing concepts, but they often show up in the same planning conversations.

• Sales methodology: the principles you use to sell (how you qualify, discover, and influence decisions)
• Sales process: the stages a deal moves through in your pipeline
• Sales playbook: the packaged guidance (talk tracks, assets, sequences, plays)

TAM tells you whether the opportunity is big enough.

Methodology/process/playbook tells you how you try to win it.

What goes into a high-quality TAM definition

Define the market boundary in one sentence

A strong TAM statement names:

• Buyer type
• Problem category
• Offering category
• Geography
• Time period
• Revenue basis (units or money)

Example

“TAM is the annual spend of mid-market manufacturing firms in the EU on quality management software.”

Decide your unit of measurement

• Revenue TAM: best for pricing, fundraising, and strategy
• Unit TAM: best for product adoption modeling (seats, devices, locations)
• Consumption TAM: best for usage-based models (API calls, gigabytes, transactions)

Treat price as an assumption, not a fact

In B2B, pricing varies by segment and packaging. A credible TAM shows:

• price range
• average ACV assumption
• why that assumption fits that buyer

Worked example: bottom-up TAM for a B2B product

Imagine you sell a collaboration platform for sales teams.

1. Define buyer and market

• Companies with 50–500 employees
• Selling complex B2B deals with 3+ stakeholders
• Operating in Nordics + DACH

1. Estimate the number of buyers

• 22,000 companies match those criteria

1. Estimate paid adoption

• You sell per team. Average 6 paid users per customer.

1. Set pricing

• €90 per user per month
• Annual revenue per customer = 6 × 90 × 12 = €6,480

1. Compute TAM

• TAM = 22,000 × 6,480 = €142,560,000 per year

This is a TAM estimate because it still assumes “if every qualified company bought.”

Common mistakes and how to avoid them

1) Defining TAM as “everyone”

If your TAM includes buyers who will never purchase your category, it is not TAM, it is fantasy. Define the market by problem + buyer, not “all businesses.”

2) Mixing TAM and SOM

If you apply your own capacity limits (sales headcount, win rate), you are moving toward SOM. That is fine, but label it correctly.

3) Using an average price that only fits one segment

Enterprise pricing applied to SMB counts will inflate TAM. Segment your TAM by pricing tier when possible.

4) Ignoring switching costs and category maturity

A market can be huge on paper but slow to convert. That is not a TAM problem, it is a go-to-market reality. Keep the concepts separate.

Quick checklist for “Is this TAM credible?”

• Does it clearly define the market boundaries?
• Are inputs explicit: buyer count, pricing, time period?
• Is the estimate reproducible by another person?
• Does it match known benchmarks or comparable categories?
• Does it include SAM and SOM as follow-on layers?

Key takeaways

• TAM is the maximum potential market opportunity under the market definition you choose.
• Use TAM to guide strategy and prioritization, not to predict next quarter.
• Pair TAM with SAM and SOM to connect big-picture potential to realistic execution.
• Keep TAM separate from sales execution concepts like sales methodology, sales process, and playbooks.