TAM stands for “total addressable market”. It's the total amount of yearly revenue that you could achieve if you manage to reach 100% of the people who could use your product. Too small, and you won't make any money; too big, and you'll struggle to focus.
TAM shows you the size of the universe—from there you need to determine how much of the market you can actually serve, and which market you want to target first.
Once it's set, you can also build models to measure the “direction of TAM”, i.e. whether your market is growing or shrinking based on trends.
Note: TAM will always be an estimate—you shouldn't treat it as a hard number. It's more of a guideline to help you on the way to segmentation, and to allow you to better understand the market.
Steps to determine TAM
Decide on your beachhead market and the number of users/buyers in that market
Use top-down analysis to help set the market (e.g. secondary research)
Use bottom-up analysis to verify (use your own data to make sure people fit into expected segments)
Note: We'll need to set segmentation criteria before we do this and use it to measure the density of existing users/subscribers
Determine ARR per acquired user using an estimate of what they would be willing to pay.
Note: We probably would not base this on current Zapier prices, since we're probably under-charging
Calculate TAM: revenue per user x # of total possible users (if you capture 100% of the market)
Finding your beachhead market
Out of all the markets you could focus on (there will be a lot of 'em) you should select one to move towards. This way, you can generate revenue effectively and learn your marketing levers along the way.
Use these six criteria to determine your beachhead:
Does the customer have money to spend? If not, it won't come out positive from a cash perspective.
Is the customer accessible? You want to speak directly to them when you're starting out.
Is there a compelling reason for this audience to buy? Are you solving a specific problem? Better than the current leading solution?
Can you deliver the full product they need? Don't sell just a motor to a consumer—you need to work through partners. Don't pick enterprise if you aren't suited for their needs today.
What's the competitive landscape? How strong are their offerings for this audience and what's their perception from customers?
If you win this segment, can you use it to move to other segments? Can you make slight modifications to your sales strat, or will it need to be overhauled?
Is the market in line with the values and passions of the team? Make sure you're going to keep people excited and motivated.
Once you pick a beachhead, you'll likely need to continue segmenting that market into smaller groups. You'll start to develop a market of customers that buy similar products, expect similar value from the products they buy, and spread your product through word of mouth.
TAM is the total addressable market for your product—or the total number of people who could possibly buy it in your space. Calculation
Revenue per end user x # of end users
Revenue per user == LTV for Zapier
You can do TAM in a couple of ways:
Bottom up. This is the best way to calculate TAM because it uses real data from your company. You can use primary market research + a customer profile to determine how many customers exist in the market.
Top down. Inverted-pyramid style where you need to look at secondary market research and see how many people fit into certain segments. You're taking a huge swath of people and whittling down to your end user.
To calculate real-world TAM, you'll want to figure out your audience's density in different kinds of companies. (e.g. how many industrial designers work at Hasbro?)