TAM mental model

If you have ever found yourself wondering … “how the heck am I going to calculate total addressable market (TAM) for this idea.” Then this blog post is for you.

I have a straightforward mental model for calculating TAM that you can use. The TAM mental model is the intersection of three key components: Market Category, Industry Vertical, and company size. These three items provide you with a good basis to triangulate and calculate the TAM for any new idea. This method works particularly well if you are trying to get a seat count for a new SaaS Product.

Market Categories

Market Category divides the overall addressable market into three segments: business-to-business (B2B), business-to-consumer (B2C), and business-to-government (B2G). Typically, your product or service would target one of these segments. B2B, B2C, and B2G are high-level strategic segments that can help narrow your target market. Market categories are an excellent starting point when you want to calculate TAM.

Business to Business (B2B)

The B2B market segment comprises businesses selling products or services to other companies rather than individual consumers. B2B sales cycles vary depending on your target business size. As a rule of thumb, the larger the company you are selling to, the longer and more complex the sales cycle. Enterprise sales often involve longer sales cycles, higher purchase volumes, and a focus on building strong relationships. On the other hand, selling to small businesses can have a shorter sales cycle but require significant resources to manage the number of customers.

Business to Consumer (B2C)

The B2C market segment comprises businesses selling products or services directly to individual consumers. The direct-to-consumer segment often features shorter sales cycles, lower purchase volumes per transaction, and a focus on mass marketing to reach a broad audience. B2C companies prioritize creating compelling brand experiences, personalized marketing approaches, and convenient purchasing options to attract and retain customers.

The B2C market segment also includes businesses selling to channels like wholesalers and retailers, who then sell the products to consumers. This indirect approach often involves establishing partnerships with distributors and retailers, offering them favorable terms and support to ensure adequate product placement and promotion. B2C companies targeting these channels focus on building strong relationships with intermediaries, providing them with marketing materials and incentives to drive sales, and monitoring market trends to adjust their strategies accordingly.

Business to Government (B2G)

There are typically three levels of government. The three levels of government are National (Country), Regional (State, Province), and Municipal (Cities, towns, and villages). The sales cycle for B2G is often very long, complex, and bureaucratic. That said, once you have sold into a government organization, the reward is a long-term contract that can be very difficult for competitors to displace.

Industry Verticals

Market categories provide a high-level segmentation of a market. However, to calculate TAM, you must usually dig considerably deeper than the market category. Industry Vertical is the next layer of detail when I investigate TAM for a market. The North American Industry Classification System (NAICS) is the best reference I can think of for categorizing industry verticals. Government statistical agencies use the NAICS standard in classifying organizations to collect, analyze, and publish statistical data related to the U.S. business economy.

The two-digit NAICS classification also gives marketers an excellent mid-level breakdown of industry verticals. The names of the industry verticals make them easy to understand. However, when calculating TAM, particularly if you want a more granular view of your market niche, I recommend using a six-digit NAICS code(s). That said, organizations like FRED in the U.S. and Statistics Canada collect a good deal of publicly available information on NAICS. The statistical data can help determine the size and number of employees in a particular segment.
Figure 2 – Market Categories & Industry Verticals

Company Size

Size of Organization

The diagram beside illustrates how to categorize organizations by the size of the company. The size of the company is in two dimensions. On the x-axis, the unit of measure is the number of employees. On the Y-Axis, the unit of measure is the layers of hierarchy in the organization. Generally speaking, the more employees an organization has, the more layers of hierarchy it will have. This figure provides some general guidance on defining the size of organizations when calculating TAM.

Team

A Team is the smallest functional unit in an organization. I would also like to refer to a team as a one-room startup. A Team is more than two employees and up to about ten or twelve maximum. Regardless of the size of an organization, a team is the basic building block. A team typically has growth aspirations but is in a very early stage and pre-product market fit.

Startup

A startup is a newly established business typically characterized by introducing a new product, service, or business model. Startups tend to address a specific market need and can disrupt an existing industry: growth potential and uncertainty are characteristics of a typical startup. Startups tend to operate lean and agile, focusing on rapid experimentation, customer feedback, and iteration to refine their offerings and business strategies.

Small Business

A small business typically has less than one hundred employees. The key differentiator between a small business and a startup or scaleup is the intention to grow. Small businesses, for a variety of reasons, tend to want to remain the same size. The key factors defining a small business are less than one hundred employees and no intention of growing.

Scale Up

A scaleup business is a company that has already gone through the initial startup phase, found product market fit, and demonstrated a high growth rate in revenue, number of employees, or both. Typically, scaleups have at least fifty (50) employees and experience an average annual growth rate greater than 20% over three years. They often face challenges in scaling operations, maintaining culture, securing funding for expansion, and managing increased complexity. Scaleups focus on rapidly expanding their market reach, customer base, and product offerings to achieve sustainable growth and market leadership.

Mid-Market

A mid-market organization is larger than a small business or scaleup but smaller than a large enterprise. While there is no strict definition, mid-market companies typically have annual revenues ranging from $10 million to $1 billion and employ between 150 and 1,000 employees. These organizations often have more resources and capabilities than smaller businesses, allowing them to pursue growth opportunities and compete more effectively in their industries. Mid-market companies may face challenges in scaling their operations, managing complexity, and maintaining agility and innovation as they grow.

Enterprise

An enterprise is a large corporation with more than one thousand employees operating in various regions or countries. They typically have a complex organizational structure with multiple divisions, departments, and subsidiaries. Enterprises often have significant resources, including financial, technological, and human capital, and may have a global presence. They also tend to have established processes and systems to manage their operations efficiently.

A large enterprise is similar to an enterprise but refers specifically to a very large organization (10,000+ employees) with extensive resources, a global presence, and a high level of complexity. Large enterprises often have annual revenues exceeding $1 billion and employ thousands. They typically operate in multiple markets and industries and may have a strong influence on the economy and society as a whole. Very large enterprises are often referred to as the Fortune 500.

Budget, Authority, Need, Timing (BANT)

The last step in my approach to calculating TAM is to get a sense of “who” I need to talk to in the prospective companies. I love zeroing in with the BANT (Budget Authority Need Timing) acronym. BANT is critical for determining who will use and approve your product or service within an organization. Usually, only specific departments or teams within an organization will use your product.

For Example, only some employees within a company would use CRM (Customer Relationship Management) software like Salesforce. Other employees working in finance would use accounting software, and an entirely different set of employees doing software development would need access to a seat in GitHub or Jira. Fine-tuning your TAM and getting to a more useful serviceable addressable market or SAM means digging deeper into the organization to get a seat count. To successfully launch a new product or service, TAM is a helpful guideline for investors; however, to sell and market, you will need to dig deeper than just TAM.

I hope you found this post a helpful guide on how to calculate TAM for a new idea.

All the best,
Ian Paul Graham, Startup Coach & Consultant
“I help startup founders do market research and find product market fit.