Total Addressable Market (TAM) Size is an important calculation, especially when you're considering attacking a new market for the first time.
Defining your beachhead market and End User Profile provides you with enough specificity to make a first-pass calculation of the Total Addressable Market (TAM) size for the beachhead market. For Wellshare, we knew that initially we wanted to target alternative health and allied health practitioners who wanted to operate their business in the Sydney CBD so we used government statistics and industry reports to understand how many potential people could use our space.
The TAM for your beachhead market is the amount of annual revenue, expressed in dollars per year, your business would earn if you achieved 100 percent market share in that market.
You can calculate the TAM using two methods:
1. Bottom-up analysis
2. Top-down analysis
For Wellshare, we looked through government data and were able to understand how many small business (employing 20 people or less) were operating in the CBD area. This gave us a good guide as to how many potential practitioners might have been looking for a treatment room to rent.
Once we had this number we could multiply it by the average cost of renting a room with us per year to get an estimate of the market size. This is an example of bottom up analysis because we are starting with the smallest possible unit which is the cost of a single room for a single practitioner each year and working our way up.
For our top down analysis, we found industry reports which talked about how much revenue as a whole each industry generated. Then we found ATO benchmarking data which showed what proportion of revenue was spent on rent on average by our target end users. Thus, if there was $1b in revenue generated and on average 10% was spent on rent by these businesses then we could approximate that $100m was the market size for rent.
You are looking for a market that is big enough for you to get to scale, develop IP generate sustainable profitability. However, if the market is too big, you probably won't have the resources to compete with the larger players.