Understanding Total Addressable Market (TAM) Using OKRs for Business Growth

Market research is integral to crafting an effective pitch or strategic plan. However, the value of your research hinges significantly on how you approach it. While identifying your industry’s market value is a meaningful starting point, conducting a detailed analysis of your market positioning is crucial. This understanding will enable you to make informed, data-driven business decisions. Establishing your Total Addressable Market (TAM) is essential not just for attracting investors, but also for grasping your business's growth potential and steering strategic decisions towards more profitable outcomes.

What is Total Addressable Market (TAM)?

Your Total Addressable Market (TAM) represents the potential revenue your business can capture within the market. It’s usually depicted in a monetary value or calculated based on the estimated number of potential customers your business could attract. In the context of pitching to investors, a well-supported estimate of your TAM is instrumental in demonstrating the scalability and viability of your business idea, thereby justifying their investment. However, ensuring that your calculations are grounded in realistic data is paramount; the estimates should reflect genuine opportunities rather than mere aspirations.

Approaches to Calculating Total Addressable Market

There are three predominant methods to estimate your Total Addressable Market: top-down, bottom-up, and value-created approaches. Each method has its distinct advantages and steps for effectively calculating your TAM.

1. Top-Down Approach

The top-down approach utilizes existing industry research and market reports to derive an estimate of TAM. This method is especially useful for startups or businesses in their developmental stages with little to no sales data. While it provides a broad view of the market, it has its drawbacks—primarily the reliance on potentially inaccurate self-reported data in surveys and macroeconomic analyses.

For instance, consider a blockchain development company targeting the financial services sector. A report from IDC projected global spending on blockchain solutions to be $2.7 billion USD in 2019, forecasting that 30% of this spending would originate from the financial sector, which narrows the TAM for our blockchain company to $810 million. If we estimate that our company's range of solutions covers 20% of the blockchain technology market, our TAM drops to $162 million.

However, it is crucial to understand that different calculations can yield vastly different results. For example, if we consider a portion of the broader financial services application market—estimated at $79 billion in 2018—we could identify a TAM that reflects innovative potentials where 41% of financial leaders view blockchain technology as transformative. By believing that only 20% of these companies will effectively integrate blockchain, our TAM is further refined to $6.4 billion. This illustrates the importance of a strategic choice in determining which market evaluation aligns best with your business model and long-term goals.

2. Bottom-Up Approach

The bottom-up approach leverages existing sales data to extrapolate future revenue streams. This method is ideal for businesses that already have a track record of sales or have garnered interest from potential clients. Utilizing existing data can not only help in estimating the TAM but also in uncovering new market opportunities.

As an example, if our blockchain company has been operational and takes on projects for about $10,000 each, and estimates having 15,000 potential clients interested in their products, this results in a TAM of $150 million. This approach provides a realistic basis for growth by analyzing tangible data, thus appealing to investors seeking concrete evidence of potential profitability.

3. Value-Created Approach

The value-created approach focuses on quantifying the benefits a product or service brings to customers. Through this calculation, businesses can estimate the revenue potential based on customer savings and additional earnings. If our blockchain company offers a solution that can reduce a financial institution's administrative costs by 20%, with the total administrative expenditures in the financial market approximated at $30 billion, and if the company anticipates capturing 5% of these savings, its TAM would be $300 million. This method is particularly valuable for companies intending to differentiate their offerings based on the value delivered.

Research Methods for TAM Calculations

If you're uncertain about the best method to employ, initiating exploratory research is vital. Depending on the stage of your business, research methods will differ: startups might rely heavily on industry reports and analytics, while established businesses can utilize surveys, focus groups, and their analytics data for informed estimates.

After conducting initial research, one calculation method may appear more precise or directly relevant. Once a method is chosen, it's advisable to target your research efforts accordingly. Primary research can involve further focus groups, while secondary research may require a search for comparative statistics across various industry reports. It is often beneficial to combine both the top-down and bottom-up approaches for a comprehensive analytical viewpoint.

Calculating Serviceable Available Market (SAM) and Serviceable Obtainable Market (SOM)

Once the Total Addressable Market is established, refining your data to calculate the Serviceable Available Market and Serviceable Obtainable Market is advisable. While TAM represents the total potential revenue, SAM narrows this down based on the specifics of your offerings and target audience. SOM factors in competition and predicts revenues based on the percentage of market share you can realistically attain.

For example, if our blockchain development company estimates its TAM at $162 million and identifies that 50% is derived from smaller financial institutions, the resulting SAM might sit at $81 million. Assessing competition, if the company anticipates capturing only 5% of this market, the projected SOM becomes $4 million. This layered analysis equips business leaders with clearer insights to inform strategic decisions.

OKR #4 – Understanding Overall Business Potential

In the framework of Objectives and Key Results (OKR), understanding your overall business potential aids in charting your strategic direction. Focusing your OKRs around establishing your TAM allows your team to hone in on priorities and actionable strategies that drive growth, whether for investors or internal business directives.

Strategic Benefits of TAM Analysis

Even if your company isn’t currently seeking investment, conducting a thorough analysis of your Total Addressable Market can be the impetus behind your strategic planning efforts. Investigating potential market fits enables you to identify saturated markets, discover emerging opportunities, and unveil gaps within your industry. Gaining a robust understanding of the TAM, SAM, and SOM not only identifies constraints but also reveals broader possibilities.

Powered by AntOKR

Ready to enhance your OKR management and streamline your business growth strategies? AntOKR is your go-to tool for OKR management, aiding teams in effectively setting, tracking, and achieving their objectives. Unlock your potential and start your journey today with AntOKR.

Conclusion

Establishing a clear and data-driven understanding of your total addressable market is crucial for driving sustainable business growth. By employing one or a combination of the discussed methods—top-down, bottom-up, or value-created—you can arm yourself with the insights necessary to propel your business forward. Thorough TAM analysis not only captures the essence of market potential but also places your business on the radar of potential investors and partners.

Get started with AntOKR today and turn your strategies into tangible results!