Total Addressable Market (TAM)

Picture this: two investment opportunities stand before you. One promises a market potential of $10 million… the other… $100 million. The choice seems clear, right? Obvious, even. But—wait. Are those market potential estimates legit? Can you trust them? Estimating total addressable market, or TAM, is about asking the right questions… and making informed guesses.

Why TAM Matters

Sizing your market isn’t just about numbers. It’s about strategy. It’s about vision. It forces you to confront hard truths: your business’s potential… its limitations… its opportunities. Whether you’re an entrepreneur, an investor, or just… curious—understanding TAM matters. Because if you don’t know the size of your market… how do you know where you’re headed?

Top-Down Market Sizing

Start big. Think broad. Then narrow in. Top-down analysis begins with the largest figures and works its way down.

Imagine launching a business called ‘Uber for Tomatoes’—delivering tomatoes on demand. You begin with food spending. The U.S. Consumer Expenditure Survey says households spend $751 annually on fruits and vegetables. Nationwide, that’s $94.4 billion. But… not everyone lives where ‘Uber for Tomatoes’ operates. Not everyone craves tomatoes.

So… you narrow it down:

• 30% live in cities: $28.3 billion
• 5% are tomato purchases: $1.4 billion
• 20% prefer delivery: $140 million
• 10% growth in consumption: $154 million

Your TAM? Roughly $154 million. A rough cut… but a starting point.

Bottom-Up Market Sizing

Now… flip the perspective. Ground up start with individual transactions.

If each household buys $150 of tomatoes annually… and you can reach 35,000 homes in New York—that’s $5.3 million. Expand to 30 cities, and you reach $159 million.

Notice something? Different method… similar outcome. Coincidence? Nah—that’s validation.

Sizing New Markets

But what if you’re stepping into… the unknown? What if the market doesn’t even exist yet? That’s where it gets tricky—and exciting.

In brand-new markets, you can’t just pull historical data… because there is no historical data. So instead… you get creative. You look at proxies. You imagine.

Take Tesla. When they launched, there was no “electric vehicle market.” So what did they do? They looked at the gas-powered car market and asked: “How many might switch to EVs?”

Or Apple. When they introduced the iPhone—there was no “smartphone” market as we know it today. It wasn’t just a phone. It was a phone… a music player… a handheld computer—all in one. So Apple asked: “Hmm… do Americans have the disposable income to pay a premium for a device that does all that?”

Cross Checking your TAM

Top-down. Bottom-up. Which method’s better? Honestly… both. Use them together.

When numbers from both approaches align—confidence goes up. When they don’t? That’s your cue: recheck your assumptions.

Top-down gives you the big picture—but might miss the details. Bottom-up nails the specifics—but can overestimate scale. Together? They balance each other out.

And don’t forget comparables. If your TAM says $1 billion, but similar businesses—like Instacart or Amazon Fresh—never crack $10 million in revenue… red flag. You’ve probably overestimated.

Final Thoughts

So… the next time you size a market, remember—it’s not just about the numbers. It’s about the story behind those numbers. The strategy. The vision.

Markets shift. Assumptions change. And the landscape… it never stands still.

So stay curious. Ask questions. Challenge your estimates. And above all—stay adaptable. Because TAM isn’t just a figure on a spreadsheet. It’s the foundation of your business’s future.