Your business is only as big as your market. For companies launching new products or applying for additional funding, calculating the total addressable market (TAM) is critical to determining their potential success.

TAM is approximately the amount of money a company could generate if it monopolized the market. While that’s not realistic, it is a valuable comparative factor.

However, there needs to be more clarity about the TAM in SEO and how to calculate it. So, that’s what we’re answering in this insightful post that explores key concepts.

Find out more below.

total addressable market

What is the Total Addressable Market?

In a nutshell, TAM is the revenue opportunity available if your company achieves a 100% market share for your product or service. Put another way — it’s also the total market demand for a product or service.

TAM is a critical metric for startups, as it helps generate a value proposition and estimate potential growth. However, TAM is also useful for SEO — forecasting traffic potential based on your keyword sets and allowing you to prioritize optimization activities.

TAM isn’t the same as the total market. The latter assumes no competition or alternate products — even Coke compares itself to water. Instead, your TAM is a fraction of the larger market related to the potential users aligned with your product or service.

How to Calculate Total Addressable Market?

We’re using TAM in the SEO sense — not for making money, but for users to reach. So, for example, if a startup launches a customer payment app, it would start by showing that there are around 1 billion businesses worldwide.

Say 10% of these businesses accept non-cash payments. That figure becomes 100,000,000 potential customers. However, only 5% of these allow digital or smartphone payments, resulting in 5,000,000. Therefore, if using the app generated, on average, $300 per year per business, the TAM would be $1,500,000,000.

For SEO, the calculation is a bit different:

All Keywords in Your Segment x Average Keyword Search Volume = TAM

Let’s look at this example to understand this Total Addressable Market formula. Suppose you’re targeting specific keywords within a segment of Google. For example, if you’re a children’s toy company, your keywords will come from relevant sections, e.g., children’s toys or play equipment.

All of those keywords collectively have an average search volume. Multiplying the two (or adding up the search volume for all your keywords) estimates your TAM.

The formula used by other industry experts is as follows:

Potential Market x Competitive Position = TAM

So, you could multiply all the users of Google —  4.3 billion — by the percentage of users applicable to you. As a Total Addressable Market example, if you’re a Texas business, you’d identify the share of users in Texas and divide it by the whole.

The problem of such an approach is apparent — it needs to be more specific. Plus, calculating your competitive position is substantially more complex than summing the search volume of keywords.

Top-Down Approach

This approach uses industry data, market reports, and research studies to pinpoint the TAM. In this method, you can leverage industry data from sources such as Gartner or Forrester to determine which specific segments within your industry are relevant to your objectives and the extent of their size.

Nonetheless, there are certain constraints associated with this Total Addressable Market calculation. Industry-generated data may need to be regularly updated and could overlook the more specialized facets of your market.

Consequently, consider enlisting the services of a market research consulting firm to undertake bespoke research tailored to your specific requirements.

Bottom-Up Approach

This approach for calculating the TAM is grounded in historical sales and pricing data. To compute your TAM using this method, multiply your average sales price by your current customer count.

This calculation will provide you with your Annual Contract Value (ACV). Subsequently, multiply your ACV by the number of potential customers to determine your Total Addressable markets. Let’s illustrate this with an example.

For instance, if you specialize in selling scuba fins to dive shops in California, you typically sell approximately 60 pairs of fins to these shops at a rate of $35 per pair. By multiplying 60 pairs by $35, you would calculate an ACV of $2,100.

Next, you can multiply this ACV ($2,100) by the total count of dive shops in California (which, say, is 125) to arrive at a TAM value of $262,500.

Value Theory

The value-theory approach in Total Addressable Market calculation centers on assessing the worth that consumers derive from your product or service and their willingness to pay for it in the future.

Returning to our scuba gear example, imagine you manufacture a type of fin that outshines competitors in weight and boasts patented technology, making them exceptionally easy to remove.

In this context, you would establish your value theory by projecting how much dive shops would be willing to invest in carrying your superior product. If the prevailing market price for fins is $35 per pair, dive shops might consider paying a few bucks more for ultra-lightweight fins.

Once you have calculated your TAM, the next step is to assess whether entering the industry is a viable Total Addressable Market proposition.

For instance, industries with an annual market size ranging from $30 million to $200 million might offer promising opportunities. However, enterprises with market sizes below $5 million annually or exceeding $1 billion annually might present challenges.

In the case of a market under $5 million per year, it could be too niche to attract investor interest. In comparison, industries with market sizes exceeding $1 billion per year may need to be more saturated, making it challenging to gain a foothold. In both scenarios, convincing investors to support your venture might be a formidable task.

How to Use Your TAM

You can use the Total Addressable Market formula for a product, content marketing strategy, or even a single blog article. Simply identify all the keywords relevant to the topic in question and multiply them by the average search volume.

(Note: This method tends to slightly overestimate results, as some searches come from the same user.)

Furthermore, you can estimate your traffic based on your TAM by multiplying it by the CTR per ranking. For example, posts ranked #1 on the search engine results page received 28.5% of all traffic. For positions second and third, the CTR was 15.7% and 11%, respectively. By the tenth post, the CTR was just 2.5%.

Take this Total Addressable Market example. If you rank for around 800 keywords in the US and the average search volume is 5,000. Then your TAM would be 4 million. However, assuming you ranked number #1 for all keywords, you can expect site traffic of 1.14 million.

In addition to estimating your site traffic, TAM data can also forecast leads and transactions:

Lead Forecasting

Lead generation is the ultimate goal of content marketing. You can estimate the potential leads based on your TAM. For example, say your total traffic (derived from TAM) is 115,000. Based on your Total Addressable Market formula and current site traffic, you receive 20 site views per lead — or a 5% conversion rate.

You can then model traffic estimations for 10 to 100% of the potential.

Percentage of Total Site TrafficSite TrafficLeads

Getting an actual number to work with helps identify retention rates. Moreover, you can factor in churn rates or calculate the lifetime value of a customer. The possibilities are endless.

Transaction Forecasting

Total Addressable Market (TAM) transaction forecasting is trickier. But for eCommerce stores, it’s a valuable exercise. Like before, we’re calculating a result based on your site traffic. Except that we’re replacing leads for a transaction. So, you need to know how many transactions you’re receiving as a percentage of site traffic and the average price of a transaction.

Let’s say you have a 6% transaction rate, total organic traffic is 90,000, and the average transaction price is $58.

Percentage of Total Site TrafficSite TrafficTransactionsRevenue

Based on these figures, you can estimate your return on investment (ROI) for your total site traffic — purely relying on your Total Addressable Market calculation for the underlying insights — valuable, right?

What Are Some Limitations Of Using TAM?

TAM is a widely used metric for assessing the adoption and usage of new technologies. However, there are several constraints associated with utilizing TAM as a metric, including:

  • Limited Scope

TAM primarily focuses on individual-level factors influencing the adoption and usage of technology. It does not account for organizational or environmental factors impacting technology adoption.

  • Static Model

TAM is a static model that does not consider changes in attitudes and behaviors over time. It assumes that the variables affecting adoption and usage remain constant, which may not hold in real-world situations.

  • Limited Generalizability

The applicability of the Total Addressable Market formula to other technology categories may be limited because it has predominantly been used to study the adoption of information technology. Its transferability to different contexts may be uncertain.

  • Self-reported Data

TAM relies on self-reported data, which can be influenced by sources of measurement error, such as social desirability bias. Participants may provide responses they believe are socially acceptable rather than their actual attitudes.

  • Lack of External Validity

Research that employs TAM often relies on student populations or convenience samples, potentially restricting the generalizability of results to broader and more diverse people.

In summary, TAM is a valuable tool for analyzing the adoption and usage of new technologies. However, to gain a comprehensive understanding of technology adoption and usage, it is advisable to combine Total Addressable Market (TAM) with other metrics and research methods.

total addressable market

Need Help With TAM?

Now you know how to calculate TAM and what to do with it — how will you use this key metric to change your business strategy and drive sustainable growth? We can help you develop tailored approaches and implement effective solutions to maximize the impact of your TAM analysis.

Clicta Digital has a team of experts who can guide you through all these Total Addressable Market processes. Contact us now for a free case assessment.