Market Sizing (TAM, SAM, SOM)

Overview

Understanding the size of your market is super important when you’re starting a business. It helps you figure out if your idea is even worth pursuing and how big your business could potentially become. This is where market sizing comes in, specifically looking at TAM, SAM, and SOM. Think of it like this, you’re trying to see how many people or businesses are out there who could possibly buy what you’re selling.

This topic fits perfectly within the “Idea and Market Research” subcategory because before you dive deep into building anything, you need to validate your idea by understanding its market potential. If the market is too small, your business might not be sustainable. If it’s huge but you can’t realistically reach a significant portion of it, that’s also a problem. TAM, SAM, and SOM give you a structured way to break down this huge market into manageable pieces.

For founders, knowing your market size is like having a roadmap for growth. It helps you set realistic goals, attract investors who want to see potential for scale, and make smart decisions about where to focus your efforts. Without this, you might be chasing customers in a market that’s already saturated or doesn’t have enough demand to support your ambitions. It’s a fundamental step for any successful startup journey.

By understanding TAM, SAM, and SOM, you can assess the true opportunity of your business. TAM is the total market demand for your product or service, SAM is the portion of TAM you can reach with your current business model, and SOM is the slice of SAM you can realistically capture. This breakdown helps you stay grounded while still aiming for ambitious growth.

Key Concepts

• The basics of the topic: Market sizing is the process of estimating the revenue opportunity available for a product or service. It involves understanding the total market, the segment you can address, and the portion you can realistically capture.
• How this topic relates to larger category and subcategory? In “Idea and Market Research,” market sizing is a critical early step to validate your business idea. It directly informs whether your idea has enough potential to justify the resources needed for development and launch, fitting squarely into understanding the viability of your business concept before extensive investment.
• How this topic is important to business and founders? For founders, understanding market size is crucial for strategic planning, setting realistic growth targets, making informed product development decisions, and attracting investment. It helps answer the question, “Can this business become big enough to be successful and profitable?”
• Common pitfalls to avoid:
  • Overestimating your market share or the overall market size, leading to unrealistic projections.
  • Confusing TAM with SAM or SOM, which can misrepresent your actual addressable market.
  • Failing to conduct thorough research, relying on assumptions instead of data.
  • Not updating your market size estimates as the market evolves.

Implementation Guide

Step by step process

1. Define Your Market: Clearly identify the product or service you are offering and the core problem it solves. Who are your potential customers, and what are their needs?
2. Calculate TAM (Total Addressable Market): This is the total market demand for your type of product or service. Think about all potential customers globally or within your broadest geographic scope. You can use approaches like top-down analysis (starting with broad market data and narrowing down) or bottom-up analysis (estimating demand from individual customer segments and summing them up). For example, if you’re selling a B2B SaaS tool for small businesses, TAM could be the total global spending by all small businesses on software solutions.
3. Calculate SAM (Serviceable Available Market): This is the portion of TAM that you can actually reach with your current business model and sales channels. Consider geographic limitations, regulatory constraints, or specific customer segments your product is designed for. For instance, if your SaaS tool is only available in English and targets businesses in North America and Europe, your SAM will be smaller than the global TAM.
4. Calculate SOM (Serviceable Obtainable Market): This is the portion of SAM that you can realistically capture in the short to medium term, given your resources, competition, and marketing efforts. It’s your target market share. If your SaaS tool is new, you might aim to capture 1-5% of your SAM in the first 1-3 years.
5. Document Your Assumptions: Clearly list all the assumptions you made during your calculations. This is vital for transparency and for revisiting your estimates later.
6. Refine and Validate: Review your numbers. Do they make sense? Are there any gaps in your logic? Try to validate your assumptions with preliminary customer interviews or surveys.

Measuring success

• Accuracy of your estimates: The closer your calculated SOM is to your actual achievable revenue in the initial period, the more successful your market sizing was.
• Investor confidence: If investors understand your market sizing and find it credible, it’s a sign of success.
• Strategic clarity: The ability to use your market size estimates to make clear, actionable business decisions.
• Achieving SOM targets: Meeting or exceeding your SOM projections demonstrates effective execution based on your market understanding.

Tools and resources needed

• Recommended books, chapters, articles:
  • “The Lean Startup” by Eric Ries (especially chapters on market validation)
  • “Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist” by Brad Feld and Jason Mendelson (sections on market opportunity)
  • Articles on market sizing from reputable sources like Harvard Business Review, Forbes, or TechCrunch.
• Recommended YouTube videos:
  • Look for videos from channels like “Y Combinator,” “TechCrunch,” or business strategy experts that explain TAM, SAM, SOM with practical examples. Search for terms like “TAM SAM SOM explained,” “how to calculate market size.” For example, a search for “TAM SAM SOM explained with examples” on youtube.com can yield helpful tutorials.
• Data research tools:
  • Statista.com: For industry reports, market data, and statistics.
  • Google Trends (trends.google.com): To understand search interest and trending topics related to your market.
  • Industry-specific reports: Many industries have dedicated research firms that publish market reports (often for a fee).
  • Government data sources: Bureau of Labor Statistics (BLS), Census Bureau (in the US) or equivalent in other countries for demographic and economic data.
  • Competitor analysis tools: Tools like SimilarWeb or Ahrefs can provide insights into competitor traffic and market share.
• Blogs:
  • Y Combinator Blog (ycombinator.com/blog): Often features advice on market validation and fundraising.
  • Azeem Azhar’s “Exponential View” newsletter: Provides insights into technology trends and market dynamics.
  • McKinsey & Company Insights (mckinsey.com/insights): Offers in-depth industry analysis.

Checklist

• Clearly defined the product/service and its core value proposition.
• Identified the primary customer segments for the product/service.
• Researched and calculated the Total Addressable Market (TAM) for the product/service.
• Documented the methodology and data sources used for TAM calculation.
• Researched and calculated the Serviceable Available Market (SAM) based on business model and reach.
• Documented the assumptions and limitations for SAM calculation.
• Estimated the Serviceable Obtainable Market (SOM) for the next 1-3 years.
• Documented the assumptions and competitive factors influencing SOM.
• Reviewed all calculations and assumptions for internal consistency and realism.
• Identified at least two potential data sources for market research.
• Explored at least one article or video explaining TAM, SAM, SOM concepts.
• Considered potential pitfalls in market sizing and how to avoid them.
• Prepared a summary of market size estimates for discussion with advisors or potential investors.