Lots of founders mess up calculating their Total Addressable Market (TAM). Here’s how to do it correctly…

Calculating TAM Correctly

You need to do what’s called a bottoms-up TAM. Take the number of potential customers and multiply that by what you charge for your product.

The figure you get is your bottoms-up TAM.

Let’s take an example: you’re making software for accountants.

Grok 3 tells me there are 1.4 million accountants in America. Your product costs $1,000 a month.

This gives you a bottoms-up TAM of $16.8 billion.

That’s a TAM that would get me excited! A SaaS company with even $100 million a year in revenue is worth a lot, likely over $1 billion. With $16.8 billion in potential revenue up for grabs, we have a chance to do very well.

How Founders Get It Wrong

Now, let’s look at how founders screw up the TAM calculation.

Too often, founders do a top down TAM, or what I call a lazy TAM. They just pluck a number from a report and use it as their market size, even when the number has no relevance to their startup.

For example, IBISworld says the accounting industry is a $140 billion industry. So, that same accounting SaaS startup could stick that $140 billion figure in its deck like it means something.

It doesn’t.

That market size includes salaries for accountants and all sorts of other costs. That figure doesn’t mean anything as far as how much money you can make selling your accounting software.

Wrap-Up

When you pluck a meaningless number from a report, you lose credibility.

When you calculate your TAM correctly, you show investors that you know what you’re doing. You understand your market.

And you’re that much closer to getting a check.

Have a great weekend, everyone!

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