Market Sizing
TAM/SAM/SOM framework for estimating addressable market and validating opportunity size.
Definitions
| Metric | Definition | Question It Answers |
|---|---|---|
| TAM | Total Addressable Market — everyone who could possibly buy | "What's the theoretical ceiling?" |
| SAM | Serviceable Addressable Market — segment you can actually reach | "What can we realistically target?" |
| SOM | Serviceable Obtainable Market — realistic share in 3 years | "What will we actually capture?" |
+-------------------------------------------------------+ | TAM | | +---------------------------------------------------+ | | | SAM | | | | +-----------------------------------------------+| | | | | SOM || | | | +-----------------------------------------------+| | | +---------------------------------------------------+ | +-------------------------------------------------------+
When to Use Top-Down vs. Bottom-Up
| Method | Use When | Risk |
|---|---|---|
| Top-Down | Industry reports exist; investor pitch; quick estimate | Overestimates SOM |
| Bottom-Up | Sales capacity known; pricing validated; more credible | More work; requires assumptions |
| Both (recommended) | High-stakes decisions; fundraising; board decks | Cross-validate to build confidence |
Always cross-validate both methods and reconcile within 20%. If they diverge by more than that, revisit your assumptions.
Quick Formulas
Top-Down TAM = (# potential customers) × (annual value per customer) SAM = TAM × (% your solution can address) SOM = SAM × (realistic market share % in 3 years) Bottom-Up SOM = (# customers you can acquire) × (average deal size) SAM = SOM / (your expected market share %) TAM = SAM / (your segment as % of total market)
Example: AI Code Review Tool
markdown## Market Sizing: AI Code Review Tool ### Top-Down TAM - Global developers: 28M - Using code review tools: 60% → 16.8M - Average annual spend: $300/developer - TAM = $5.04B SAM - Enterprise only (>500 employees): 8M developers - Willing to pay premium: 40% → 3.2M - SAM = $960M SOM - Sales capacity supports ~$15M ARR (Year 3) - Realistic market share: 2% - Unconstrained SOM = $960M × 2% = $19.2M - Constrained SOM = min($19.2M, $15M) = $15M ### Bottom-Up - Target accounts Year 1: 50 enterprise deals - Average ACV: $100K - Year 1 ARR: $5M - Year 3 (3× growth): $15M ARR → SOM = $15M ### Reconciled SOM: $15M (confirmed by both methods)
SOM Constraint Model
Do not report an unconstrained SOM. Always apply real-world limits:
SOM constraints: Sales capacity: supports $15M ARR max Competitive pressure: 5 strong incumbents → −20% market share Go-to-market reach: 70% of SAM reachable with current channels Conservative SOM = min( SAM × target_share%, sales_capacity_ceiling, SAM × gtm_reach% × target_share% )
Confidence Levels
| Confidence | Evidence Required |
|---|---|
| HIGH | Multiple corroborating sources, data < 2 years old |
| MEDIUM | Single authoritative source, 1-2 years old |
| LOW | Extrapolated, heavy assumptions, data > 2 years old |
Always label each number with its confidence level in deliverables.
Common Mistakes
| Mistake | Correction |
|---|---|
| TAM = "everyone on earth" | Define a specific, bounded customer segment |
| SOM = 10% of a billion-dollar market | Apply actual sales capacity and GTM constraints |
| Single method only | Cross-validate top-down and bottom-up |
| Old data | Use sources < 2 years old; flag if older |
| Ignoring competition | SOM must account for incumbents' share |
References
- TAM/SAM/SOM Rules — Calculation methods, SOM constraint model, cross-referencing
- TAM/SAM/SOM Guide — Detailed guide with data source recommendations
Related Skills
ork:competitive-analysis— Understand competitive dynamics that constrain SOMork:business-case— Build financial justification once opportunity is sizedork:product-frameworks— Full product strategy toolkit
Version: 1.0.0
