As designers, we’re driven by the passion to create work that’s not just visually stunning but also intuitive and impactful. But have you ever wondered why some projects take off and others just seem to fizzle out? It’s not just about the quality of the design—it’s also about understanding who you’re designing for and how big that audience is. That’s where understanding business concepts like Total Addressable Market (TAM) can help you create designs that not only look great but make a real impact.
Let’s break it down and see why designers should know about TAM!
What is TAM?
TAM, or Total Addressable Market, estimates the total revenue opportunity a product or service could generate if it captured 100% of its market. In simpler terms, it’s how big the market could be if everyone who needed your product or service actually used it.
For designers, understanding TAM is like having a map to the size of the audience you’re designing for. It can help you shape your approach and make your designs more aligned with both user needs and business goals.
Why Should Designers Care About TAM?
You might be thinking, “Isn’t TAM more of a business or marketing thing?” Well, yes, but as a designer, knowing about TAM can actually make a huge difference in how you work and the success of your projects. Here’s why:
1. Prioritize Design Features: TAM lets you decide what features to focus on. A large TAM might justify investing time in advanced features and polished designs, whereas a smaller TAM could prompt simpler, more cost-effective solutions.
2. Tailor User Experience: A large TAM means a broader audience, possibly from different countries or cultures. This can help you make decisions like designing for multi-language support or ensuring your interface is universally accessible.
3. Collaborate Like a Pro: When you speak the language of TAM, you’ll be able to communicate better with business stakeholders. You’ll understand why certain decisions are made and can position your designs as more strategically aligned with the company’s goals.
4. Understand Market Fit: Some designs fail because they don’t resonate with enough users. Knowing TAM helps you understand if the audience is big enough to support a product, giving you context to create more targeted, impactful designs.
Why is TAM Relevant for Business?
TAM is a critical concept for businesses because it helps guide their strategy and investments. But how does that trickle down to designers? Here’s why it’s relevant:
1. Informs Business Strategy: Businesses use TAM to assess whether a market is worth pursuing. For designers, understanding this can help you align your designs with the company’s larger strategic direction.
2. Guides Product Development: TAM can indicate how much effort should go into building out certain features. If the market is huge, companies might push for more complex products, and as a designer, you’d know where to focus your creative efforts.
3. Justifies Investment: Companies often use TAM to justify the budgets for product development or marketing. When you know the TAM, you can advocate for larger design budgets or more resources, because you understand the potential return on investment.
4. Supports Marketing and Sales: A large TAM requires broader, more expansive marketing efforts, which means more universal design decisions. On the flip side, a smaller TAM might mean you design for a specific niche audience, with a more personalized feel.
5. Mitigates Risk: TAM helps businesses evaluate risk. If the TAM is small, they might take a more cautious approach. As a designer, understanding this helps you create designs that are efficient and cost-effective, ensuring they hit the mark for the specific audience.
TAM is a critical concept for businesses, and understanding it helps companies make strategic decisions about where to invest their time, resources, and money. But what does this mean for different types of businesses
- For Large Multinational Companies: If you work for a massive company with several billion dollars in annual revenue, a TAM of $10 million might not seem attractive. They are looking for huge growth opportunities that can generate hundreds of millions or even billions in revenue. A $10 million market might not move the needle enough for them, so they are more likely to pass on small-market ideas in search of the next big thing.
- For example, if a company generates $10 billion annually, tapping into a $10 million market represents a tiny fraction of growth, which may not justify the investment required to pursue that opportunity.
- For Startups Seeking Investments: Startups looking to secure millions in venture capital funding are under similar pressure. Investors want massive market potential that could lead to large returns. If the TAM is only $10 million, it may not provide the kind of growth they’re aiming for, especially when VCs are typically looking for the next unicorn—a company valued at over $1 billion. With a small TAM, the startup’s revenue potential is capped, making it less appealing to investors.
- For Self-Funded Startups: On the flip side, if you’re working with a self-funded startup that’s already generating $10 million in revenue, then a niche market with a $10 million TAM could still be highly valuable. Since these companies often have more modest growth goals and aren’t under pressure from investors to grow exponentially, they might find smaller, focused opportunities to be profitable. They can capitalize on niche markets that larger companies or VCs overlook.
This concept is key because it shows that TAM isn’t just about big or small markets—it’s about finding the right fit for your business stage and goals. What works for a global giant might be too big for a small startup, while a niche market that seems small to one company could be the perfect opportunity for another.
Where Should You Use TAM in Your Design Projects?
Now that you know what TAM is and why it’s important, let’s talk about where you can actually use it in your design projects:
1. Research & Discovery Phase: At the start of any project, understanding TAM helps you define the scope of the project and the audience you’re designing for. If the TAM is large, it might prompt you to think more globally or design for a broader set of users.
2. Feature Prioritization: Knowing the TAM helps you focus on the right features. If you’re designing for a large market, it might make sense to prioritize feature-rich designs that can cater to many different types of users. For smaller markets, simplicity and focus are key.
3. UI/UX Design: A large TAM can influence how scalable your designs need to be. If you’re designing for millions of users, your product needs to be flexible and adaptable. If the TAM is smaller, your design might be more focused and specific.
4. Marketing and Branding: TAM gives insight into how broad or niche your branding and design choices should be. A large TAM might require more universal appeal, while a smaller TAM allows you to focus on a more defined audience.
5. Scaling & Post-launch Iterations: After your product launches, knowing the TAM can guide how you improve and scale your design. If the product takes off, you’ll need to think about how your designs can accommodate a growing user base.
6. Designing for Long-term Growth: If the TAM is large, your design needs to be able to evolve with the product as it scales. This might mean creating designs that are modular and can be easily updated as the product grows.
How to Calculate TAM
TAM might sound complicated, but the formula is actually pretty simple:
[TAM = (Total Number of Customers)*(Annual Revenue per Customer)]1. Total Number of Customers: How many potential buyers or users are there in your market?
2. Annual Revenue per Customer: On average, how much money does each customer spend per year on your product or service?
Example of Calculating TAM
Imagine you’re developing an app tailored specifically for freelance graphic designers. You estimate there are about 10 million freelance designers worldwide, and on average, each designer might spend around $100 per year on tools like your app.
Using the formula:
[ 10,000,000*100 = $1,000,000,000]That’s a TAM of $1 billion! Knowing this, you can see there’s a massive opportunity to design features that appeal to a broad audience and plan for potential growth.
Fun Fact!!!
Did you know that Apple holds a whopping 57% of the global smartphone market when it comes to profits? That means more than half of all the profits made in the smartphone industry go to Apple, even though they sell fewer units than some competitors like Samsung. This shows how powerful understanding TAM and market share can be. Apple knows their market and focuses on creating products that their audience is willing to pay a premium for, resulting in higher profits even with fewer sales!
TAM Insights Guide Better Design
Ultimately, TAM is more than just a business number. It’s a valuable tool that can help designers make smarter decisions, prioritize the right features, and collaborate more effectively with the rest of the team. When you understand the potential market size, you can align your designs with both the user experience and the business goals, making your work more impactful.
So, next time you dive into a new design project, take a moment to think about TAM. Not only will it help you create better, more informed designs, but it will also show your team that you’re thinking strategically about the success of the product. Happy designing!
Understanding TAM helps designers create impactful, scalable, and market-driven solutions. At Brim Labs, we blend design with business strategy to craft products that truly succeed. Let’s collaborate to build designs that drive real growth—connect with us today!
