- The TAM or the total addressable market
is one of the primary reasons
why investors say no to a startup.
It doesn't mean you'll get funded if the TAM is big enough,
but it does mean you will get a no if it's too small.
This is Raw Startup.
With Vivino, we built a massive market,
a 400 billion wine market,
and it is a massive advantage for a startup
to have a big market to work on.
In this video,
I'll tell you exactly what a total addressable market is
and show you how to calculate it for your shelf,
both bottoms-up and top-down.
I'll give you very specific methods for market sizing,
calculating the total addressable market.
With that, let's get going.
Okay, let's first define it.
Total addressable market or TAM,
and sometimes referred to as total available market,
either way, it's the same thing.
This is about how big the total market is
that you're attacking.
How big is the total opportunity?
It's not about what you're expecting to get.
Obviously, very, very few companies get 100% market share.
There are a few other numbers here too,
like SAM and SOM.
I'm gonna focus on TAM,
total addressable market,
that's the most important number.
Now, why is this so important?
Well, imagine you build an incredible product,
the best product in the market.
You beat the competition,
you get almost the entire market.
Well, what if the market is small?
You spent all this time,
invested all these things in this product.
Yes, you've built the best product,
but in a tiny market.
That is not good.
Well, maybe you build a CRM for pipe cleaning manufacturers,
but it turns out even if you build the best product
and get the entire market for CRM for pipe cleaning,
the market is tiny.
Yes, this is an extreme example,
but this happens all the time.
Don't underestimate the importance
of figuring out how big the market actually is.
Don't ever solve a big problem in a small market.
You spend years and years on building this amazing product,
you win the entire market,
but the market is tiny.
It's basically all loss,
so don't ever do that.
Let's make sure the potential is huge,
the TAM is huge.
And yes, investors will ask about it.
It's in every single pitch that ever got funded.
How to calculate it or just find it?
And this is not an exact science.
In most markets,
we really don't know how big the market is,
we're just trying to make good estimates.
There are basically two ways
to find a total addressable market,
the top-down analysis or the bottom-up analysis.
Let's start with the top down analysis.
In that situation,
you have some data about how big the market is
and it must exist,
and then we slice it down
to find exactly how big our total addressable market is,
but you have to have some data from the market.
So how do we find that data?
I would basically use Google for this.
I would just say XX market size.
Wine market size.
Beer market size.
Car market size, et cetera.
If you use wine as an example,
you can go on Google, find the market size
and really find some global data.
Try Google first.
After that,
you can go to Statista,
which is really good too.
They have a lot of market sizes reports available for free.
If at all possible,
try and find multiple sources
to confirm that the data's actually right.
If there's no data at all,
we might have to use the bottoms-up method,
but we'll get to that in a second.
Okay, back to the top-down analysis,
and let's stay with Vivino as an example.
We're building a marketplace to sell wine online.
The question is, what is the total addressable market
for selling wine online?
If the numbers you find are a little bit old,
you can add a little bit in a growing market
and reduce it a little bit if it's a shrinking market.
Remember, this is an estimate,
nobody knows the exact size of the market.
Okay, back to the wine, and let's do some calculations.
The data shows us that the market
is approximately $400 billion.
Massive market,
but that's total sales globally, not just online.
So it's not quite the number we're looking for.
We're looking for online sales of wine,
not what's sold in retail or bars and restaurants.
So let's start slicing
and let's start with restaurants and bars.
Our indicators say that around 20% of all wine sales
are in bars and restaurants, so we need to remove that.
We're now down to 300 billion in retail sales.
Next to find out is how much is online sales?
So not in retail or what we call brick and mortar.
This can be a little bit tricky,
but we look at multiple sources
and it indicates that the online part of wine sales
is around 15%.
This gives us a total addressable market
for selling wine online at $45 billion.
Now the TAM number is not a permanent state.
Numbers can increase or shrink,
whatever happens in the market,
but also sometimes inside the math, things change
that change your total addressable market quite a bit.
For instance, one of the premises here
was that the online sale is 15%.
We believe that 15% could grow.
If that 15% grows to 30%,
the number balloons to $90 billion.
The next question is obviously,
how big a piece of that TAM can you grab?
But that's for you to figure out.
Cool.
Let's go to bottoms-up analysis.
Very often when we try and find a total addressable market,
there just isn't a market before.
We've invented something new so there is no market.
In that case, you might have to do a bottoms-up analysis.
In some case you can do both.
You have some number for a top-down analysis,
but also some numbers for a bottom-up.
Then you can do both and see how they match.
Okay, let's do an example.
We'll do a very niche product called CuePilot.
CuePilot is a very specialized product
used to direct big live shows
like the Eurovision Song Contest.
The product is sold to television producers
all over the world,
but since the original product is from Denmark,
a lot of the market is in the Nordics.
Now we want to find the TAM for this product,
and the way to do that is to do a bottoms-up analysis.
The way we do a bottoms-up analysis in this case
is to find out how many potential buyers are in each market.
And we have an idea
about how much they would spend each per year.
Then we take the potential buyers
and multiply that with how much they would spend per year.
The product has been in the market for a few years,
so an average spend is around $40,000.
So we have one side of the equation, the $40,000.
Next thing is to find out
how many potential customers are up.
They know the Nordic market really well
and know there are around 30 potential customers there.
Next thing is to build a spreadsheet
and go through every single region,
and figure out how many buyers
they think are in each region.
So open a spreadsheet
and start adding countries and regions.
And this is not an exact science,
it's about making a good estimate,
not necessarily making it perfect.
Going through the spreadsheet with CuePilot,
they found that around 719 potential customers for CuePilot.
Next thing is to multiply the potential clients
with the annual spend,
and in this case with CuePilot,
the total addressable market is around $29 million.
Knowing the TAM can also give you an idea
about what kind of company you want to build.
If like in Vivino's case,
you are in a $400 billion market,
and maybe a total addressable market of 45 billion.
Then there is big potential
and you can raise a lot of money.
If on the other hand, you are in a $50 million market,
you don't wanna raise too much money
because the potential just isn't big enough.
After having seen the TAM,
you might also wanna change the product,
so it appeals to more people.
In the example of CuePilot,
we had 719 plants.
What if we make a broader product
that appeals to more people?
We can change the 719 to 10,000.
Then you've increased the TAM 14 times.
On the other side of the equation,
you also change the TAM by increasing the price.
Obviously, the TAM is just the TAM.
You have to do everything else right too.
The TAM is more like an access ticket,
and then you can get in and do everything well, too.
That's what I have on total addressable market.
Make sure you do the exercise on your own startup,
you might just get surprised.
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