How to Create a Total Addressable Market Slide: A Guide for Investors
The total addressable market (TAM) can be a game-changer for business owners and decision-makers. After all, it estimates the required effort and funding to prioritize particular products, buyer personas, and growth opportunities.
A venture capitalist inspects TAM futures because it determines a brand’s upside potential. For instance, a $100 million TAM cannot build a billion-dollar business.
This article will discuss everything you need to create a TAM slide for investors, including its definition, computation, and practical tips. Read on to enhance your pitch deck today.
What Is TAM?
Also known as total available market, TAM is the overall revenue opportunity of a product or service should it achieve 100% market share. It helps the top management identify the effort and funding level that a new business line requires.
This concept is crucial for startup executives because they can use it to make a viable offer to potential investors and buyers. It considers the products and niches that remain untapped by the business.
Three Ways to Compute TAM
There are three ways to compute your TAM: top-down, bottom-up, and value theory. Keep in mind that this process is as much an art as it is a science. Various methods exist, but there are no set rules for determining TAM. The only thing to remember is that your calculation should be credible and defensible.
Let’s discuss each one in more detail.
A top-down TAM begins with a holistic approach to a market as a whole, and then narrows it down to the portion applicable to the company. Many founders start with this strategy because of its intuitive nature.
For example, if you ran an insurance lead nurturing software company, your approach to calculating top-down TAM may look like this:
1. Identify the total market size.
2. Determine the portion spent on your niche — in this case, insurance software.
3. Further narrow the market to your category, like lead nurturing software.
4. (Optional) You can segment the audience further into geographic clusters.
It may seem ideal to stop after step two, but investors appreciate figures, especially when it comes to their potential return on investment (ROI). Detailed analysis helps them align their numbers with your needs.
Bottom-up TAM, on the other hand, uses existing data from previous selling efforts. We recommend this technique over the top-down approach because it’s a better indicator of the true market size. To calculate bottom-up TAM, you’ll need to do the following:
1. Identify your target market, like an agency with less than 50 insurance agents.
2. Determine how many prospects match this audience.
3. Multiply potential clients with what you charge a customer on average.
There’s no one-size-fits-all way to compute your TAM. For this reason, it’s best to take your time to decide which units go into your calculation. The ideal solution is the one that creates the most accurate representation of your TAM.
The value theory starts by asking potential customers how much they would pay for a product or service based on its value. Afterward, you multiply your product’s value by the total number of people or organizations that match your planned pricing.
Tips for Creating the Perfect TAM Slide
Here are a few practical tips for elevating the TAM slide on your pitch deck:
Personalize your deck. As with job interviews, you shouldn’t make generic files to suit various interviews and talks. Instead, we recommend creating one for every potential investor.
Create high-level summary slides. Develop one or two preliminary slides that will introduce your TAM. This allows you space to highlight any good news that you want to share.
Prioritize story over statistics. We understand how tempting it is to bombard potential investors with figures, but it’s best to share metrics with a powerful narrative. Business owners should find a way to make their stories resonate with their audience.
Update your pitch. In most cases, businesses pitch to several potential investors before they can secure funding. Make sure to keep each pitch deck updated, complete with the latest information, critical metrics, and recent company milestones.
When it comes to computing your TAM, there's no right or wrong way to do it. To choose the best strategy for your business, you need to choose the one that complements your pitch.
However, in most cases, we recommend using the bottom-up approach. It provides readers with precise, easy-to-understand metrics.
Do you have any questions about elevating your pitch? Our experts can help. At (company), we know what it takes to impress venture capitalists. Get in touch with us through (email) or (number) to begin your company’s journey to sustainable growth today.