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Customized financing to consolidate high-interest debt or fund major purchases or expenses.

August 30, 2023

What is Total Addressable Market (TAM)? | BHG Financial

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Whether you’re looking to assess profit potential for a company pre-acquisition, evaluate group buy-in opportunities, or potentially expand your existing business—measuring total addressable market (TAM) can be a useful first step. 
 
TAM identifies revenue potential and demand, and it can help determine a company's growth strategy. In this article, we’ll cover what TAM is and how to calculate it. 
 

What is total addressable market? 

Total addressable market is the result of 1) identifying all potential customers and 2) the possible revenue if your business served every one of those customers—assuming there was no competition. 
 
Your portion of the TAM—also known as the serviceable obtainable market (SOM)—is your market share. Typically, the TAM is split among competitors. In markets where there are many competing businesses, a given company’s market share may be small. Meanwhile, greater market share can lead to scalability and increased profitability. 
 

How to calculate the TAM 

There are various ways to arrive at the TAM. We’ll focus on a top-down approach that identifies a large group of customers and then narrows it down to a smaller target audience. To use this method, you’ll need information from industry reports as well as statistics. 
 
The formula is simple:

TAM = Potential Customers x Average Revenue Per Customer

 

Identifying the number of potential customers may require significant research. This can be challenging—yet it is important to the formula and arriving at the most accurate estimate. 
 
Essentially, you can determine the TAM by following these three steps:

  1. Establish the larger audience that you’ll be looking into before narrowing it down into a more specific segment.  
  2. Find your ideal customers. Determine what percentage of your broad audience would be interested in your product or service. You want to try to identify the most specific audience possible.  
  3. Now multiply the number of potential customers by the average revenue per customer to get to the TAM.  

 

Exploring a use case to illustrate TAM 

Now, let’s examine a scenario where the TAM formula may be applied (Note: the figures used in this section are based on assumptions and are intended to illustrate an example only). 
 
Assume there's a medical spa in a city with a population of 320,000 residents. This medical spa’s clients consist mostly of women between the ages of 35 and 55. 
 
There are 90,000 women between the ages of 35 and 55 in the area. 
 
The average medical spa treatment is $600, and the frequency of service is 2x per year. Therefore, the average revenue per customer is $1,200 per year. 
 
Now let’s apply the formula:

90,000 x $1,200 = $108,000,000

 

Remember that the medical spa must acknowledge their competition. With two other spas in the community, a TAM of $108MM will be shared with these other providers. 
 

Other considerations 
While TAM can help you formulate your business strategy, it should only be one of multiple resources in your toolkit. For the purpose of business expansion, for example, you should also consider these other factors:

  • Profitability—It’s important to take time to determine whether expansion will positively impact your business’ bottom line and whether that impact will be substantial. 

  • The wants and needs of potential clients—Taking a look at your current offerings, you must evaluate how well they’ll serve your target audience.  

  • Your competition—It’s common to have various competing businesses in your market. Be sure to consider how your business can or should differentiate itself from these other companies in order to secure an edge with your client base.

 

BHG Financial can help you expand 

Many professionals require additional funds to support their business acquisition, buy-in, or business expansion efforts. If you’re ready to move forward with your initiatives, BHG Financial can provide you with up to $500,0001,2 and terms of up to 12 years1, giving you a loan with affordable monthly payments. You’ll also have access to concierge service every day of the week. 
 
Get started by using our online Payment Estimator to view your personalized loan estimate in just 30 seconds, without affecting your credit score.  

Learn more about partnering with BHG Financial to grow your business by checking out our Business Acquisition Loans page. Or, if you’re a medical provider considering expansion, read about the ways you can use our Medical Practice Loans
 
 

¹ Terms subject to credit approval upon completion of an application. Loan sizes, interest rates, and loan terms vary based on the applicant's credit profile. Finance amount may vary depending on the applicant's state of residence.

² BHG Financial business loans typically range from $20,000 to $250,000; however, well-qualified borrowers may be eligible for business loans up to $500,000.  

No application fees, commitment, or impact on personal credit to estimate your payment.

For California Residents: BHG Financial loans made or arranged pursuant to a California Financing Law license - Number 603G493.