A big area of uncertainty for any entrepreneur is whether or not their business idea makes sense, will be accepted, and of course, will it be profitable. Those were three main concerns for me when I started my business; they are the same for other entrepreneurs today.
Bringing a new product or service can be an exciting but challenging experience. One critical aspect of launching a new product or service is understanding the market and its potential. Understanding the market's size, scope, and potential is essential before investing resources into your product or service. This is where the concept of Total Addressable Market (TAM), Total Attainable Market (TAM), and Total Serviceable Market (TSM) comes in.
In this article, I share three terms I used when evaluating my business; I explain what they mean and four reasons why they are important.
Three Terms All Entrepreneurs Should Be Familiar With?
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Total Addressable Market (TAM)
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Total Attainable Market (TAM)
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Total Serviceable Market (TSM)
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What is Total Addressable Market (TAM)?
Total Addressable Market (TAM) is the total demand for a particular product or service in a specific market. It is the maximum revenue opportunity for a product or service if it captures 100% of the market. It includes all potential customers, regardless of their purchasing behaviour or status. TAM is usually estimated using a top-down approach that examines the entire market and averages how many potential customers are willing to buy the product or service.
What is Total Attainable Market (TAM)?
Total Attainable Market (TAM) is the portion of the Total Addressable Market (TAM) that can be realistically targeted and reached by a business. It considers factors such as geographic, demographic, and psychographic constraints. TAM is typically estimated using a bottom-up approach examining the market segments a business can target.
What is Total Serviceable Market (TSM)?
Total Serviceable Market (TSM) is the portion of the Total Attainable Market (TAM) that a business can realistically serve with its product or service. It considers production capacity, distribution channels, and the ability to provide after-sales support. TSM is typically estimated using a bottom-up approach that examines the company's capabilities and resources.
Four Reasons Why is this important for Entrepreneurs?
Understanding the TAM, TAM, and TSM is crucial for entrepreneurs when starting a new business or launching a new product or service for several reasons:
1. It Helps Validate Ideas:
By estimating the TAM, TAM, and TSM, entrepreneurs can validate their business idea and determine whether the product or service has a viable market. This information can help entrepreneurs refine their business plans and make informed decisions about investing resources into the product or service.
2. It Helps to Focus on the Most Profitable Market Segments:
Entrepreneurs can identify and focus their resources on those segments by estimating the addressable, attainable and serviceable markets. This can help the business optimise its marketing strategy, product development, and distribution efforts.
3. It Helps to Identify Potential Competitors:
Entrepreneurs can also identify potential competitors and understand the market's competitive landscape. This information can help the go-to-market needed strategies to differentiate itself and gain a competitive advantage.
4. It Helps to Determine the Pricing Strategy:
An area that most entrepreneurs need help with is the pricing of their product or service. This approach helps entrepreneurs determine the appropriate pricing strategy for the product or service. This information can help the business set a competitive market price and maximise profitability.
In Closing
Understanding the TAM, TAM, and TSM is critical for entrepreneurs when starting a new business or launching a new product or service. By paying attention to these three terms, entrepreneurs can make informed decisions and increase their chances of success.
One important final point would be to remember that your markets evolve, and buyers and industries change, so don't settle on just doing this exercise once. As your market changes or you have a new product or service to bring to market, look at doing micro versions of this exercise. It will always add clarity to your business and go-to-market strategies.
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