Market Size Calculator

Understanding Market Sizing: TAM, SAM, and SOM

Market sizing is a critical exercise for startups, investors, and established businesses looking to understand the potential of a business opportunity. The TAM-SAM-SOM framework provides a structured approach to evaluate market opportunities from the broadest possible view down to realistic, achievable targets.

Why is market sizing important?

• Investment Decisions: Investors use TAM/SAM/SOM to evaluate if a market is large enough to generate significant returns.
• Strategic Planning: Helps businesses focus resources on the most promising opportunities.
• Goal Setting: Provides realistic targets for growth and market penetration.
• Competitive Analysis: Understanding market size helps identify competitive dynamics and opportunities.

The Three Levels of Market Sizing

Total Addressable Market (TAM)

TAM represents the total revenue opportunity available if you achieved 100% market share globally. It’s the biggest possible pie - the entire demand for a product or service without any constraints.

Example: If you’re building project management software, your TAM might be the total amount spent globally on all project management solutions.

Serviceable Addressable Market (SAM)

SAM is the portion of TAM that your business can realistically serve based on:

• Geographic limitations (regions you can operate in)
• Product/service fit (segments that need your specific solution)
• Regulatory constraints
• Technical capabilities

Example: Your project management software might only serve English-speaking markets initially, and only target companies with 10-500 employees.

Serviceable Obtainable Market (SOM)

SOM represents the portion of SAM that you can realistically capture in the near term (typically 3-5 years) considering:

• Competition
• Your resources and capabilities
• Market penetration rates
• Sales and marketing efficiency

Example: Given 50+ competitors in the project management space, you might realistically capture 5% of your SAM in 5 years.

How to Calculate TAM, SAM, and SOM

TAM Calculation Methods

1. Top-Down Approach: Use industry reports and market research to find total market size.
2. Bottom-Up Approach: Calculate based on total number of potential customers × average revenue per customer.
3. Value Theory Approach: Estimate based on the value your solution provides and what customers would pay.

SAM Calculation

SAM = TAM × % of market that fits your solution × % of market you can geographically serve

SOM Calculation

SOM = SAM × Realistic market share %

Using the Calculator

1. Total Market Size: Enter the TAM based on your market research. This should be the global market value for your category.

2. Solution Fit: What percentage of the total market actually needs your specific solution? Not everyone in the market will be a fit for your particular approach.

3. Geographic Reach: What percentage of the market can you realistically serve? Consider language, regulations, and operational capabilities.

4. Realistic Market Share: Based on competition and your capabilities, what share can you capture in 5 years? Be conservative - even market leaders rarely exceed 20-30% share.

5. Growth Rate (Optional): If the market is growing, enter the annual growth rate (CAGR) to see projections.

Best Practices for Market Sizing

• Be Conservative: It’s better to under-promise and over-deliver. Investors know that SOM estimates are often optimistic.
• Use Multiple Sources: Don’t rely on a single market report. Triangulate data from multiple sources.
• Consider Market Dynamics: Is the market growing or shrinking? Are there emerging technologies that could disrupt it?
• Update Regularly: Market sizes change. Revisit your calculations annually or when major market shifts occur.
• Segment Carefully: The more specific your market definition, the more accurate your sizing will be.

Common Pitfalls to Avoid

• Overestimating SAM: Don’t assume you can serve markets where you have no presence or capabilities.
• Unrealistic SOM: Capturing even 1% of a large market is extremely difficult. Be realistic about competition.
• Ignoring Market Dynamics: Static market sizing ignores growth, disruption, and changing customer needs.
• Too Broad TAM Definition: Defining your market too broadly makes TAM meaningless (e.g., “all software” instead of “CRM software”).

Market Size Benchmarks

For context, here are typical market share achievements:

• Market Leaders: 15-30% share (rare to exceed 30% due to competition/antitrust)
• Strong Players: 5-15% share
• Niche Players: 1-5% share
• New Entrants: < 1% share in first few years

Remember, a small share of a large market can still be a significant business. Focus on building a defensible position in your SOM before expanding your SAM.