Market sizing is the exercise of estimating the number of people who could feasibly be customers for your product or service, and determining the potential revenue that opportunity represents. Both for-profit and non-profit ventures need to understand the size of the opportunity they address.

Market sizing is essential for startups because it provides critical data and insights that inform many aspects of your business strategy - from attracting investors, to making informed decisions about product development, pricing, and marketing. It helps startups navigate the competitive landscape and increase their chances of long-term success.

TAM/SAM/SOM

Market size is often expressed using three interrelated metrics

1. TAM (Total Addressable Market or Total Available Market) “What’s the maximum potential demand or total revenue opportunity available if your product or service achieved 100% market penetration?”
2. SAM (Serviceable Available Market or Service Addressable Market) “What is the realistic portion of the TAM that you can practically serve based on your current business model, capabilities, and strategic focus?”
3. SOM (Serviceable Obtainable Market or Share of Market) “What market can you reach in the next 2–5 years if things go reasonably well?”

NOTE, SOM is inherently time-bound and you can express it in a time frame that’s meaningful for you. TAM is a theoretical maximum, not time-limited, and SAM is your strategic focus, but still not capacity-limited.

Calculating Market Size

There are two primary ways to estimate the size of your market: top-down and bottom-up.

In top-down, you start with a large, credible macro number (often from industry reports or government data) and narrow it down using filters and assumptions until you reach your target market. This often relies on targeting acquisition of a given percentage of an already-sized market.

Instead of relying on broad industry reports or general statistics, the bottom-up method builds your market size calculation directly from specific, observable data points that are relevant to your venture’s operational reality and business model. First, you figure out how many potential customers there are - and then you multiply this by the amount the average customer would spend in a year.

The bottom-up approach is preferred by investors and we strongly recommend you use this technique. The top-down approach is usually disconnected from strategic reality. Saying “this market is huge - if we only get 1% of all the potential customers, we’ll be a billionaires!” ignores who your customers are and how you’ll reach them.

Examples (Using Bottom-up Approach)

B2B SaaS Product

Imagine a company offering booking management software for small healthcare clinics.