market-sizing-analysis

Market Sizing Analysis

Comprehensive market sizing methodologies for calculating Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM) for startup opportunities.

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Instructions

Overview

Market sizing provides the foundation for startup strategy, fundraising, and business planning. Calculate market opportunity using three complementary methodologies: top-down (industry reports), bottom-up (customer segment calculations), and value theory (willingness to pay).

Core Concepts

The Three-Tier Market Framework

TAM (Total Addressable Market)

SAM (Serviceable Available Market)

SOM (Serviceable Obtainable Market)

When to Use Each Methodology

Top-Down Analysis

Bottom-Up Analysis

Value Theory

Three-Methodology Framework

Methodology 1: Top-Down Analysis

Start with total market size and narrow to addressable segments.

Process:

Formula:

TAM = Total Market Category Size
SAM = TAM × Geographic % × Segment %
SOM = SAM × Realistic Capture Rate (2-5%)

When to use: Established markets with available research (e.g., SaaS, fintech, e-commerce)

Strengths: Quick, uses credible data, validates market existence

Limitations: May overestimate for new categories, less granular

Methodology 2: Bottom-Up Analysis

Build market size from customer segment calculations.

Process:

Formula:

TAM = Σ (Segment Size × Annual Revenue per Customer)
SAM = TAM × (Segments You Can Serve / Total Segments)
SOM = SAM × Realistic Penetration Rate (Year 3-5)

When to use: B2B, niche markets, specific customer segments

Strengths: Most credible for investors, granular, defensible

Limitations: Requires detailed customer research, time-intensive

Methodology 3: Value Theory

Calculate based on value created and willingness to pay.

Process:

Formula:

Value per Customer = Problem Cost × % Solved by Solution
Price per Customer = Value × Willingness to Pay % (10-30%)
TAM = Total Potential Customers × Price per Customer
SAM = TAM × % Meeting Buy Criteria
SOM = SAM × Realistic Adoption Rate

When to use: New categories, disruptive innovations, unclear existing markets

Strengths: Shows value creation, works for new markets

Limitations: Requires assumptions, harder to validate

Step-by-Step Process

Step 1: Define the Market

Clearly specify what market is being measured.

Questions to answer:

Example:

Step 2: Gather Data Sources

Identify credible data for calculations.

Top-Down Sources:

Bottom-Up Sources:

Value Theory Sources:

Step 3: Calculate TAM

Apply chosen methodology to determine total market.

For Top-Down:

For Bottom-Up:

For Value Theory:

Step 4: Calculate SAM

Narrow TAM to serviceable addressable market.

Apply Filters:

Formula:

SAM = TAM × (% matching all filters)

Example:

Step 5: Calculate SOM

Determine realistic obtainable market share.

Consider:

Conservative Approach:

SOM (Year 3) = SAM × 2%
SOM (Year 5) = SAM × 5%

Example:

Step 6: Validate and Triangulate

Cross-check using multiple methods.

Validation Techniques:

Red Flags:

Industry-Specific Considerations

SaaS Markets

Key Metrics:

TAM Calculation:

TAM = Total Target Companies × Average ACV × (1 + Expansion Rate)

Marketplace Markets

Key Metrics:

TAM Calculation:

TAM = Total Category GMV × Expected Take Rate

Consumer Markets

Key Metrics:

TAM Calculation:

TAM = Total Users × ARPU × Purchase Frequency per Year

B2B Services

Key Metrics:

TAM Calculation:

TAM = Total Target Companies × Average Deal Size × Deals per Year

Presenting Market Sizing

For Investors

Structure:

Key Points:

For Strategy

Structure:

Key Points:

Common Mistakes to Avoid

Mistake 1: Confusing TAM with SAM

Mistake 2: Overly Aggressive SOM

Mistake 3: Using Only Top-Down

Mistake 4: Cherry-Picking Data

Mistake 5: Ignoring Market Dynamics

Additional Resources

Reference Files

For detailed methodologies and frameworks:

Example Files

Working examples with complete calculations:

Use these examples as templates for your own market sizing analysis. Each includes real numbers, data sources, and assumptions documented clearly.

Quick Start

To perform market sizing analysis:

For detailed step-by-step guidance on each methodology, reference the files in references/ directory. For complete worked examples, see examples/ directory.