Potential market, Total Addressable Market (TAM) - is a set of consumers who have a significant interest in a particular product or service that is a subject of a given market offer. It inform how big is the largest possible market in reference to available revenue opportunity. Potential market's size helps to understand possible level of investment in the market and shows business opportunities. If the size of potential market is small then simultaneously total population showing interest in the product is small fraction what means that the investment has little chance of success because people won't buy it. If the potential market is large, then fraction of the total population showing interest in the product is big, so investing in development or modification of the product, marketing, promotions etc. can be made. Knowing the size of potential market it is possible to estimate of what steps the company should take and how much it should invest. Potential market based on a set of assumption inform about upper bound to actual sales. Potential market the first and key point to consider entering a new markets.
Estimating Market Potential
The total market potential is calculated by multiplying the number of possible buyers by the by the average selling price of one unit of the product by the quantity purchased by the average buyer. However, the more information is entered into this formula, the better the market potential can be assessed.
Formula: PM = B x S x C
- PM = market potential
- B = number of possible buyers
- S = average selling price
- C = average annual consumption
For example, if for a particular product there are 10 million potential buyers in the market and the average buyer purchase ten units each year at a price of two dollars per unit, the total market potential for that product for the year is 200 million. Total market potential can be expressed in dollars or units.
TAM as a subset of a market
The following acronyms: TAM, SAM and SOM represent different subsets of the market, where each successive will reflect on a part of the previous one. These terms are often referred to during the market evaluation.
- TAM (Total Available Market, Total Addressable Market) - is the entire market demand for a product or service. Applies to the entire market - assuming that company would have 100 percent shares in market. Thanks to this, you will estimate the size of the total market. Simly, it's a collection that contains subsets SAM and SOM and provides an introduction to further analysis.
- SAM ( Serviceable Available/Addressable Market) also reachable market - is a part of the TAM and showed what part of this market may be available to a company, be served by it, taking into account the geographical factor.
- SOM (Serviceable Obtainable Market, Share Of Market) - is the portion of SAM which can be reached with high possibility. The most important analysis, because it gives a realistic insight into how many customers is possible to actually get.
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- Tiwari R., Herstatt C. (2012). Assessing India's lead market potential for cost-effective innovations, Journal of Indian Business Research, vol 4
- Wolfe, K.L (2006) Estimating market potential check-list, "The University of Georgia"
Author: Anna Stankowska