Get Real About Calculating Your TAM

Last week, we introduced Rule One, Prioritizing the Right Idea over your Passion Project, and we gave you a snapshot of the Maverick Must Dos for putting this rule into action. (See below for a reminder!).

Today, we will dive deep into that very first Maverick Must Do – Getting Real on How Big the Total Addressable Market (TAM) of your business idea actually is.

If you have no idea where to start, it seems overwhelming, or you just hate math, don’t worry, we’ve got you. Below is your step-by-step gameplan for figuring out this all-important number. 

Remember, one hard thing a day, right? Now, let’s get going.

Start with your idea. It could be a new product or service. Or it could just be a better version of an existing one – plenty of people have made millions leapfrogging a business competitor that got fat and happy. Whether you are incubating something truly revolutionary, or you have a little product or delivery tweak that the market desperately needs, first make sure you’ve clearly defined your idea.

Next, sharpen your pencil and crunch the numbers. Unfortunately for some of us, this Maverick Must Do starts with the math – here is how to figure it out.

1. Estimate the total revenue of the entire market. This number is notoriously unreliable and different depending on your data source, but it’s a start. Keep in mind, sometimes, you need to look at multiple submarkets to derive your total market.

2. Determine the number of potential customers in the industry AND the average revenue per customer in the industry. Now, multiply them together.  

Your TAM is somewhere between these two numbers you just calculated. If the number is below $100 million, start again. That won’t be a big enough TAM to merit your blood, sweat and tears. And, Investors won’t like it, either. Conversely, if your TAM is $30 billion or more, you need to further narrow and define your market. If you do a search for the sweet spot of TAMs, you will get a range large enough to drive a truck through, but generally speaking, a TAM of at least $1 billion is a good initial target.

Finally, find the data points that support the math. In the olden days as Victoria’s daughter calls them, AKA a few years ago, banks employed cadres of newly minted MBA students to tackle the TAM research. They analyzed industry reports, consumed big consulting firm research, paid for research studies from firms like Gartner and even poured over census data. (Don’t laugh. There are some amazing consumer spending insights from a survey that 60% of America fills out.) Ultimately, the researchers would generate a multi-page slide deck devoted to extrapolating a single TAM number from all their internet deep state findings.

Fast forward to today, and now you can hit the EZ button on your favorite AI platform to deliver a lot of very interesting and sometimes even on-point research in seconds. To find good answers, input as detailed a query as you can come up with. Remember, try a few different platforms. It goes without saying that you should trust, but verify, all your AI outputs.

What’s Next?

After all this work, take a moment to pat yourself on the back. You have a solid TAM you can work with. But this is just the very tip of the iceberg. TAM is not a static number. It changes all the time depending on financial markets, consumer preferences and even weather patterns.

Next week, you will be channeling your inner economist, sociologist and oracle to identify the most important global trends impacting your business, and whether they will be headwinds or tailwinds. See you soon!