Market sizing analysis

Market Sizing Analysis

Comprehensive market sizing methodologies for calculating Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM) for startup opportunities.

Use this skill when

• Working on market sizing analysis tasks or workflows
• Needing guidance, best practices, or checklists for market sizing analysis

Do not use this skill when

• The task is unrelated to market sizing analysis
• You need a different domain or tool outside this scope

Instructions

• Clarify goals, constraints, and required inputs.
• Apply relevant best practices and validate outcomes.
• Provide actionable steps and verification.
• If detailed examples are required, open resources/implementation-playbook.md.

Overview

Market sizing provides the foundation for startup strategy, fundraising, and business planning. Calculate market opportunity using three complementary methodologies: top-down (industry reports), bottom-up (customer segment calculations), and value theory (willingness to pay).

Core Concepts

The Three-Tier Market Framework

TAM (Total Addressable Market)

• Total revenue opportunity if achieving 100% market share
• Defines the universe of potential customers
• Used for long-term vision and market validation
• Example: All email marketing software revenue globally

SAM (Serviceable Available Market)

• Portion of TAM targetable with current product/service
• Accounts for geographic, segment, or capability constraints
• Represents realistic addressable opportunity
• Example: AI-powered email marketing for e-commerce in North America

SOM (Serviceable Obtainable Market)

• Realistic market share achievable in 3-5 years
• Accounts for competition, resources, and market dynamics
• Used for financial projections and fundraising
• Example: 2-5% of SAM based on competitive landscape

When to Use Each Methodology

Top-Down Analysis

• Use when established market research exists
• Best for mature, well-defined markets
• Validates market existence and growth
• Starts with industry reports and narrows down

Bottom-Up Analysis

• Use when targeting specific customer segments
• Best for new or niche markets
• Most credible for investors
• Builds from customer data and pricing

Value Theory

• Use when creating new market categories
• Best for disruptive innovations
• Estimates based on value creation
• Calculates willingness to pay for problem solution

Three-Methodology Framework

Methodology 1: Top-Down Analysis

Start with total market size and narrow to addressable segments.

Process:

1. Identify total market category from research reports
2. Apply geographic filters (target regions)
3. Apply segment filters (target industries/customers)
4. Calculate competitive positioning adjustments

Formula:

TAM = Total Market Category Size
SAM = TAM × Geographic % × Segment %
SOM = SAM × Realistic Capture Rate (2-5%)

When to use: Established markets with available research (e.g., SaaS, fintech, e-commerce)

Strengths: Quick, uses credible data, validates market existence

Limitations: May overestimate for new categories, less granular

Methodology 2: Bottom-Up Analysis

Build market size from customer segment calculations.

Process:

1. Define target customer segments
2. Estimate number of potential customers per segment
3. Determine average revenue per customer
4. Calculate realistic penetration rates

Formula:

TAM = Σ (Segment Size × Annual Revenue per Customer)
SAM = TAM × (Segments You Can Serve / Total Segments)
SOM = SAM × Realistic Penetration Rate (Year 3-5)

When to use: B2B, niche markets, specific customer segments

Strengths: Most credible for investors, granular, defensible

Limitations: Requires detailed customer research, time-intensive

Methodology 3: Value Theory

Calculate based on value created and willingness to pay.

Process:

1. Identify problem being solved
2. Quantify current cost of problem (time, money, inefficiency)
3. Calculate value of solution (savings, gains, efficiency)
4. Estimate willingness to pay (typically 10-30% of value)
5. Multiply by addressable customer base

Formula:

Value per Customer = Problem Cost × % Solved by Solution
Price per Customer = Value × Willingness to Pay % (10-30%)
TAM = Total Potential Customers × Price per Customer
SAM = TAM × % Meeting Buy Criteria
SOM = SAM × Realistic Adoption Rate

When to use: New categories, disruptive innovations, unclear existing markets

Strengths: Shows value creation, works for new markets

Limitations: Requires assumptions, harder to validate

Step-by-Step Process

Step 1: Define the Market

Clearly specify what market is being measured.

Questions to answer:

• What problem is being solved?
• Who are the target customers?
• What's the product/service category?
• What's the geographic scope?
• What's the time horizon?

Example:

• Proble