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I received an email from somebody asking me how to calculate TAM, which is “total addressable market,” (don’t feel bad if you didn’t know the acronym, because I didn’t either; I had to look it up). I’ve always called that simply “potential market.” As far as I’m concerned, these are the same thing. I’m going to call it potential market here, in this post.

Regardless of what term you use, understand that these numbers are stories, possibilities, and hopes, not facts. They’re useful because they give a business plan a sense of scale. People want to know how big this opportunity is and how big it can get.  But market size is relative, markets change quickly, definitions are very fluid, so market numbers are educated guesses at best.

Market Forecast and Potential Market

For a general review of what a market forecast it, and how to do one, I’d recommend this link to an article I wrote called what is a market forecast*.  A market forecast is almost always looking at potential market, not market share,  realized market, or sales; potential market is almost always a large number.

Identifying Your Potential Market – Industry Examples

Normally to calculate potential market you start with a large number and then narrow it down. It’s a lot like taking a pie and slicing pieces off of it.

The potential market for business planning software, for example, would start with all people who have access to computers that can run the software. You’d have to quickly cut out people who are too young or too old, people whose computers don’t have the right operating system, people who can deal with the languages supported by the software. And then you’d want to narrow that down to people who are interested in business and, still cutting off pieces, people who want to do business planning using software.

When I was writing for Business Week out of Mexico City, years ago, the head of an American pharmaceutical company operating in Mexico told me that his marketing team believed that less than half of the population of the country (that was 30 years ago) was really part of the market for aspirin. The rest either couldn’t afford them or would never take a pill for a headache.

So the potential market for shoes is people who wear shoes and have money to buy them, but the potential market for athletic shoes is a subset of that, and the potential market for high heels, or ski boots, or children’s shoes, are also subsets.

Some web marketing companies like to think their potential is the whole world; but it’s really people who have access to the web, who can order with shipping, who can read the website, and have credit cards. Right?

Potential Market versus Market Share (…)

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