The Total Addressable Market (TAM) is one of the most misleading business metrics in the IT industry (and possibly in others). It’s just feel-good numbers we say to each other.
There are at least three reasons:
- TAMs are often associated with macro-categories (e.g., automation) that actually are umbrellas for a myriad of problems. For a product to have its TAM associated with one of those macro-categories, it must solve all problems within that category. Complete unrealistic.
Even for a more narrow-defined category, the TAM is never representative of the specific use cases that a product can address. And no IT vendor, even internally, would ever dare to suggest that their product is a subset of the reported TAM.
- Humans don’t buy products based on taxonomies defined by a higher power. We buy products that we believe will solve our problems. And more often than not, we get very creative in solving our problems, using products that were not meant for the task we have in mind.
This second point should be especially important for those IT vendors that count on a bottom-up adoption. In that scenario, people think out-of-the-box to solve problems that established product categories can’t solve or solve poorly. That’s why there’s room for new entrants.
So a TAM should not depend on sanctioned solutions, arranged in predefined taxonomies or macro-categories. TAMs should be defined after jobs to be done, considering a wide array of completely unrelated solutions able to achieve the task and actively used by the end-users.
But of course, this is 10x harder to do for both IT vendors and analysts, requiring a huge amount of field research by interacting with actual customers (vs shaping a taxonomy around similarities across products by reviewing documentation). So nobody even considers the idea.
The first two points have a profound implication. The first point suggests that the TAM associated with any given product is much smaller than what it’s claimed to be. The second point suggests that there is much more competition for the same TAM than any taxonomy could ever capture.
- IT vendors predominantly discuss TAMs internally suggesting that the opportunity is right there to take it, it’s just a matter of scaling sales and marketing. Very misleading. How capable a product is to capture the full extent of the TAM is never in question.
But if a product is poor at solving the problem/s associated with a certain TAM, no amount of marketing and sales could ever fix that. Most of the time, that realisation comes too late. So the blame falls on the Field which is unjustly accused of performing poorly.
There are other metrics that could lead to more realistic numbers. Things like Serviceable Available Market (SAM) and Serviceable obtainable market (SOM) but
- in 22 years in the IT industry, I have yet to meet a vendor that uses them
- they depend on the TAM, which is misleadingly calculated
Notice that, on purpose, my criticism does not focus on how industry professionals approximate and miscalculate TAMs. Not because there are no approximations and miscalculations. There are aplenty. But if we go down that path, then we also need to call out the approximations and miscalculations in sales forecasts and growth trend models. Any person that has ever gone through that sort of tribulation knows that those models are based on a castle of cards made of (partially or completely) made up numbers. And you can find cards-castle-builders in scrappy startups as well as in prestigious public companies, in famed think-tanks as well as in leading industry analyst firms.
How the TAM is a broken concept in its essence is way more important than how it’s imprecise in its expression.
The TAM is just a story we tell ourselves within BUs and in our interactions with investors, analysts, and the press. It’s a feel-good number that has no connection with the reality of how people buy and use products, and it often places the blame for failure in the wrong places.