Market Sizing (TAM/SAM/SOM)

Overview

Market sizing quantifies the revenue opportunity in a market. The TAM/SAM/SOM framework provides progressively refined estimates from total market to realistically achievable share.

Key Definitions

TAM (Total Addressable Market)

• Total global market demand for a product/service
• Assumes 100% market share (theoretical maximum)
• Useful for understanding ceiling and investor conversations

SAM (Serviceable Addressable Market)

• Portion of TAM targetable with current business model
• Considers geographic, demographic, or segment constraints
• More realistic than TAM

SOM (Serviceable Obtainable Market)

• Realistic market share achievable in near term (1-3 years)
• Considers competition, resources, and go-to-market capability
• Most relevant for planning

Calculation Methodologies

Top-Down Approach

Start with large market data, narrow down:

1. Find industry market size from analyst reports
2. Apply relevant percentage for target segment
3. Adjust for geography if not global
4. Factor growth rates for projections

Example:

• Global SaaS market: $200B (TAM)
• HR SaaS segment: 15% → $30B (TAM refined)
• North America: 40% → $12B (SAM)
• Achievable share 2%: $240M (SOM)

Pros: Fast, uses existing research Cons: May miss nuances, depends on source quality

Bottom-Up Approach

Build from unit economics upward:

1. Identify target customer count
2. Estimate price per customer
3. Calculate total revenue potential

Example:

• Target customers: 50,000 SMBs
• Average contract value: $5,000/year
• Total: $250M (SOM)
• Expand to all SMBs (500,000): $2.5B (SAM)
• Include enterprise: $10B (TAM)

Pros: More defensible, validates assumptions Cons: Slower, requires customer data

Value Theory Approach

Estimate based on value delivered:

1. Calculate customer pain point cost
2. Estimate value of solution
3. Apply capture rate (typically 10-30% of value)

Example:

• Customer loses $100K/year to problem
• Solution captures 20%: $20K willingness to pay
• 100,000 potential customers: $2B market

Trend Indicators

Apply three-valued logic to growth projections:

• INC (Increasing): Market growing >10% annually
• CONST (Constant): Market growth 0-10% annually
• DEC (Decreasing): Market contracting

Document evidence for each indicator:

• INC: "Analyst projects 25% CAGR through 2027"
• CONST: "Mature market with 3% annual growth"
• DEC: "Legacy technology being displaced"

Data Sources

Primary Sources (Most Reliable):

• Industry analyst reports (Gartner, Forrester, IDC)
• Government statistics (Census, BLS)
• Trade association data
• Company financials (public companies)

Secondary Sources:

• Market research firms (Statista, IBISWorld)
• News articles citing research
• Industry publications
• Competitor disclosures

Estimation Sources (Use Carefully):

• LinkedIn job counts × average salary
• Google Trends relative volume
• App store downloads × price
• Website traffic estimates

Output Structure

## Market Sizing Summary

| Metric | Value | Growth | Trend |
|--------|-------|--------|-------|
| TAM | $X.XB | X% CAGR | INC/DEC/CONST |
| SAM | $X.XB | X% CAGR | INC/DEC/CONST |
| SOM | $XXM | - | - |

## Methodology
[Top-down / Bottom-up / Hybrid]

## TAM Calculation
[Step-by-step with sources]

## SAM Derivation
[How SAM was narrowed from TAM]

## SOM Justification
[Realistic share rationale]

## Key Assumptions
1. [Assumption and sensitivity]
2. [Assumption and sensitivity]

## Data Sources
- [Source 1]: [What it provided]
- [Source 2]: [What it provided]

## Confidence Level
[High/Medium/Low with explanation]

Common Pitfalls

• Double-counting: Ensure segments don't overlap
• Currency confusion: Specify USD/EUR and year
• Stale data: Note data age, adjust for growth
• Over-optimism: SOM should be conservative
• Missing context: Include methodology for credibility

Scenario Modeling

For uncertain markets, provide range:

Use transitional scenario graphs to show how market might evolve between scenarios.

Additional Resources

For detailed templates and examples, see:

• references/sizing-methodologies.md - Complete methodology guide
• references/data-sources.md - Source reliability ratings
• examples/market-sizing-report.md - Sample sizing report