How to calculate your total addressable market

Whether you are starting a new business or trying to grow an established one, having a deep understanding of your target market is critical to the success of your product or service. While this is true for any industry, knowing the size and scope of your market is especially important in the fiercely competitive healthcare landscape.

A key first step in understanding your market and gauging the growth of your business is to calculate your total addressable market (TAM). This metric represents the overall revenue achievable for a product or service.

Finding your healthcare business’ TAM offers valuable insights into the size of the opportunity in your territory and can guide your strategic planning into the future. You can use this healthcare commercial intelligence to make more informed decisions about market entry, resource allocation, risk assessment, and much more.

In this guide, we’ll show step-by-step how to calculate your total addressable market. After reading this guide, you should have a better understanding of the actions your team should take as you prepare to release a new product or service.

Four steps to finding your total addressable market

Determining your TAM involves a series of steps to estimate the maximum potential revenue your healthcare business could generate if it captured 100% of the market demand. Those steps are:

  1. Define your target market
  2. Gather data and segment your market
  3. Calculate the TAM
  4. Validate and refine

1. Define your target market

Gathering information about your target market is the first step in finding the potential revenue you can generate in the healthcare space. To get the information you need, you might first need to answer some questions.  

  • Who are the intended users of your healthcare product or service?
  • Where are those companies or patients located?
  • How does your product or service address the wants and needs of the company or their patients?

Our guide on how to sell effectively to healthcare facilities can help you answer these questions and develop a solid framework for a go-to-market strategy your team can build upon. For the purpose of this guide, however, let’s say you’re a healthcare IT company with a game-changing electronic health record (EHR) platform operating in New York.

Based on your company’s unique goals and sales strategy, your sales territories could span the breadth of the state or could be centered around just New York City. Furthermore, as an EHR vendor, you could potentially target hospitals, clinics, private practices, and a range of other healthcare facilities. As you consider the full scope of your growth strategy, you may want to narrow or expand your total addressable market based on what’s realistically achievable for your business.

For the sake of simplicity, let’s assume that your company is targeting hospitals across New York.  

2. Gather data and segment your market

With a better grasp of the area of the market your company will compete in, the next step is to gather healthcare data specific to that market and then create segments as needed for more granular decision making. This means you’ll need to identify the specific healthcare providers and organizations within your territory.

Continuing the example from above, you’ll need to identify the number of active hospitals in the state of New York. You can potentially obtain this data from state health departments, industry reports, online directories, or a provider of healthcare commercial intelligence. There are 258 active hospitals in New York as of October 2023, but you may want to focus on the largest hospitals based on net patient revenue.

You may wish to further segment your target market based on factors like the type and size of the hospital, its specialties, and its geographic locations. For example, you could segment your market by large, medium, and small hospitals, or create a segment capturing all the hospitals within New York City. Segmenting the market can help you get a more accurate picture of your TAM and can also help your marketing and sales teams down the road as they find and engage with the most suitable prospects.

3. Calculate the TAM

Finding your total addressable market is done using a simple formula. Your TAM is equal to your customer base multiplied by the average revenue per customer. This will give you the total revenue that your business could generate if you captured 100% of the market.

The first two steps of this process help you determine your customer base. Because there are 258 active hospitals in New York, the size of your market is 258.

The other half of the formula requires you to find the average revenue per customer, a metric largely determined by your company’s pricing model. If you charge hospitals $50,000 annually for your EHR software, that is your average revenue per customer.

Altogether, this formula looks like the following:

TAM = 258 (customer base) x $50,000 (average revenue per customer

After doing the math, you’ll calculate your total addressable market to be $12.9 million.

Repeat this calculation for each segment you identified in Step 2 to determine the total addressable market for each segment. Then, take the sum of all TAM segments to find the overall TAM for your company. For example, if we expanded our market to clinics and specialized practices, we would need to add them all to get the total TAM.

4. Validate and refine

Validate your total addressable market estimates by comparing them with industry reports, competitor data, and other market research. Refine your estimates as needed based on additional insights.

This process will give you a comprehensive view of the potential market opportunity for your EHR software within the state of New York, allowing you to make informed business decisions and tailor your marketing and sales strategies accordingly. For some quick tips, check out these 7 healthcare marketing campaign optimizations.

What it all means

It’s important to remember that TAM represents the maximum revenue opportunity available to your company if you control 100% of the market share. Of course, capturing the entire market share is improbable, or may be an unrealistic goal for your company to achieve at this stage in its growth.

Understanding your TAM also helps you determine two other important metrics: your serviceable addressable market (SAM) and your serviceable obtainable market (SOM). SOM focuses on the portion of your TAM that your company can realistically target based on market demand, helping your teams focus on the segment that aligns best with your product’s value proposition and benefits. Calculating your SOM helps you find the percentage of market share your company can realistically capture given the competitive landscape. Once you know your SOM, you can adjust your marketing strategies to better differentiate your product or service from the competition.

Determining your total addressable market, serviceable addressable market, and serviceable obtainable market are all crucial metrics to setting realistic growth targets for your business as you bring a new product to market or enter into a new territory. These healthcare insights can help your teams make more informed decisions on pricing, expansion strategies, and how to compete effectively in the healthcare landscape.

For more information on how to find the right audience for your product or service, check out these resources:

If you’re a business selling into the healthcare space and ready to perform a TAM analysis for your specific product or service, start a free trial today.