Total addressable market (TAM) slides are among the most frequently mis-executed. They are often included as a formality in an attempt to get VCs to check a mental box and continue on hearing about other important things: the product, the team, the progress, the go-to-market, etc.
TAM is the size of the market a company is catering in/planning to cater to have an idea as to the size of the market it would be sharing with its peers.
There are three methods used to calculate the total addressable market. They include:
- Top-Down Approach: This method uses industry research and reports. It contains remarkably little information and relies upon secondary data comprising of facts laid out by other companies stating the size of the market without relevant data to get across those numbers. Another major pitfall here is that it assumes the company’s disruptive model won’t change the TAM meaningfully.
- Bottom-Up Approach: This approach breaks down a business strategy at detailed levels. It takes the form of “here’s how we price and how many units of that price we can sell.” This is a much better option than #1, because it involves tangible, relatable data on current pricing/usage of the product and imagines a larger customer base.
- Value-Theory Approach: This method uses conjecture about the buyers willingness to pay. A value-theory TAM relies on an estimate of the value provided to a set of users by the product, as well as a guess at how much of that value creation can be captured through pricing.
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