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
## 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