Why would you need to look at the TAMS for a product? Perhaps the better question is why you would not. This is a measure that can be either part of an estimation to start with, but should be fleshed out into a specific number before you are moving forward with a specific product. This galls into the “Product Market Fit” category and is also part of the persona creation that you need to be doing for any and all products you are investing in.
So really quick, this is how is TAMS calculated.
A few ways, but they are not all created equally.
Bottom Up Analysis
Lets say you sell a product for Marketing Manager to evaluate their staff and you have been charging $10/user/mo. You could then address that number to the total number of people in the entire Marketing Management field in the US. Statistics you can get from the government. i.e.. 250,000-ish https://www.bls.gov/oes/current/oes112021.htm
Simple multiplication gives you a US TAMS of 2.5MM/Mo. Not bad you think. However this is the most optimistic analysis. When you look at it in all reality, you have to start placing constraints on those numbers. What size companies are we able to sell to? How many marketing managers are in those size companies? What territories are we ready to sell in for compliance reasons? Assumptions bring in various levels of uncertainty and ambiguity that you need to be on the alert for.
Tying in product features to how you can grow a new vertical or expand into a new niche acknowledges the reality of complexity and at least helps you sound grounded in some reality, even with pretend numbers.
Value Assessed analysis
This looks at how much added value you can present to a customer. Particularly valuable to address totally new products. Let’s say our marketing evaluation tool adds meaningful feedback that we have done a few case studies on what that impact to our customers turns out to be. Let’s say that for each marketing manager that uses our software, we increase the revenue, units of sale, other meaningful metric, generated by that division increase by 10%. We can then use that to present a value proposition and segment those numbers it portion we earn with a specific price. Let’s say we add 10K/mo of some meaningful metric for each unit sold. We can see that if we are priced at $10/user/mo, this is an awesome value added to the customer. Maybe we should instead look at what percent of the value we could capture as a price. Perhaps we establish a 10% target then and we would see our product is now a $1,000/user/mo product. You have to be very realistic however with this approach and it is much better suited to new products or cross sold products. This value proposition is clear and can be very useful way to illustrate a yet to be addressed price point.
Top Down analysis
Don’t do this for what you may present to others, only as a very early estimator of market breadth. This is when you simply pickup a Gartner analysis and make a statement such as ” the total size of marketing managers in the US is 250,000 and growing at a rate of 10% annually.” Again, this is a good starting point, but you need to dig deeper. Bottom Up of Value Assessed are the ways to go.
Why look into TAMS?
The first indicator you are about to have a problem is when you are bound to have issues with getting the needed traction for a product. Let’s say you have a team of 6-8 engineers, a designer. You are looking at an annual payroll that is not trivial. That is before we add in the overhead of production machines, Management time, Finance costs and way before you look at what kind of equity this venture could generate. It is critical you have in mind these factors before you start any serious analysis into making a product for a market. These costs need to have a horizon for being paid, and in 9 out of 10 cases the product should be generating this.
Can your TAMS, and the segment of that you hope to capture, begin to cover these costs? That is a critical question. TAMS is also part of how much SAM and SOM you could expect to capture for a product, but that is for another post.