By: Wesley Legg
Definition: A company’s total addressable market is the total annual revenue opportunity available for a given product or service.
Example: Suppose a company sells exterior residential doors. The total addressable market is the total value of doors sold each year. This could consist of both door replacements and new housing starts. We would multiply the total number of doors sold each year by the average door value.
Why does this matter?
Calculating the total addressable market for a company’s products or services helps the management team determine what share of that market the company is currently capturing and how much is remaining. There is a sweet spot that buyers are generally looking for where the Company is a leader in their market, yet there is still meaningful opportunity for growth.
By calculating this market size, you can determine when you need to launch new products or services to expand into new markets. Alternatively if your market share is quite small, it may be preferable to focus on a subset of the entire addressable market – this could be broken up geographically or by a subset of your offerings. For example, if that door company currently has 0.01% of the national market, it may be helpful to focus on becoming a local or regional leader first before expanding further.
Most buyers want total addressable markets greater than $500mm as this means there’s significant available growth remaining. If your company has revenue of $50mm, the Company has market share of 10% which is sizable.
How do I calculate this for my business?
Here are some approaches
- If you belong to an industry association, they should have this value for your sector
- Find an industry report which provides these values (IBIS World provides high quality reports; however, these reports can be expensive)
- Review the annual reports of public companies that are similar to your business; often these indicate their addressable market
- Reach out to a local MBA program to request they calculate your addressable market as a school project
- Calculate your total address market yourself
If I’m doing it myself – how do I do it?
First know that the goal is to estimate the answer and get generally close, so don’t be afraid to make some assumptions.
For the residential, exterior doors example, we’ll first determine the total number of homes in the US and the average life of an exterior door. Homes -> 140mm; Average Life -> 30 years. We can expect that each year about 4.5mm doors will need to be replaced.
In 2021 there were 1.6mm housing starts in the US.
We can make an assumption that the average home has 2.5 doors.
We’ve now arrived at a rough number of doors will need to be purchased each year: (4.5mm + 1.6mm) x 2.5 = 15.25mm
and the average door costs $200. 15.25mm doors x $200 = Total Annual Revenue of $3bn