Estimating the size of your market as a startup is a tough job that can greatly affect your business’s future. However, it often doesn’t get the attention it needs. Estimating market size by figuring out the Total Addressable Market (TAM), the Serviceable Addressable Market (SAM), and the Serviceable Obtainable Market (SOM) is a key strategy that helps entrepreneurs and decision-makers understand the size of an opportunity and their realistic share within it.
In this short playbook, we will talk about how to size markets based upon a total addressable market (TAM), serviceable addressable market (SAM) and a serviceable obtainable market (SOM). We will also discuss how investors interpret and assess these estimates and some dos and don’ts of presenting these estimates.
Understanding these terms is a good place to start:
Total Addressable Market (TAM)
TAM represents the entire revenue opportunity available if your product or service could serve 100% of the relevant market without any limitations. It answers the question: How big is this market in theory? TAM is usually calculated on a global or national scale and assumes no constraints—such as geography, regulation, competition, or operational capacity. Think of TAM as the “universe” of demand for a category of product.
Serviceable Addressable Market (SAM)
SAM narrows the focus from TAM to the portion of the market that your specific business model or product can realistically serve, considering constraints like geographical reach, regulatory limitations, and specialization. In other words, SAM asks: Of the total market, how much can we serve with our current capabilities and product offering? For example, if your business is only operating in North America and your product is only suitable for mid-sized companies, SAM filters the TAM down accordingly.
Serviceable Obtainable Market (SOM)
SOM further narrows the SAM down to the portion you can realistically capture, given your current go-to-market strategy, resources, brand awareness, and competitive landscape. SOM identifies the market share we can secure in the near future. This metric is conservative, realistic, and crucial for initial planning and investor expectations.
It should be noted that TAM, SAM, and SOM are not static—they evolve with your business. As your product matures, your marketing reach grows, and new geographies open up, both your SAM and SOM can expand. But starting with a clear understanding of the difference between these market sizes will help you ground your ambition in strategic realism.
Where Do You Start with Determining Market Size?
Calculating the Total Addressable Market (TAM) can be approached in two main ways: top-down and bottom-up. Each method has its own advantages and is best suited to different stages of business development and data availability. Using the same example of a cloud-based accounting platform for small businesses, we can explore both approaches in detail.
Top-Down TAM Calculation
The top-down approach starts with high-level industry data—usually from market research reports or government statistics—and narrows it down using assumptions and filters that match your business parameters.
Step-by-Step (Top-Down):
- Start with a reputable market research source. Suppose a recent IBISWorld report estimates that the global market for small business accounting software is $120 billion annually.
- Filter by geography (if needed). If you’re launching in North America, and research suggests that North America accounts for about 25% of global small business software spend, you adjust accordingly: $120 billion × 25% = $30 billion TAM in North America.
- Segment by business size or type. If your target is businesses with fewer than 50 employees (which make up roughly 80% of small businesses), you filter again: $30 billion × 80% = $24 billion TAM.
- Further refine (if needed). You can refine by industry vertical, software adoption rate, or digital readiness to arrive at a more tailored TAM estimate, though in a pure top-down TAM, this is often less detailed.
Any estimation of this type is not perfect. On the positive side, a top-down estimate is quick and easy to communicate, especially to investors. Additionally, it can be very useful when external data is rich and credible. However, on the flip side, the estimate can be prone to overestimation if the assumptions made by the entrepreneur are too broad. Also, a top-down estimate, by definition, may not reflect actual customer behavior or real market constraints. So while a top-down estimate may be relatively easy to calculate, it should not be your only estimate of market demand.
Bottom-Up TAM Calculation
The bottom-up approach starts from the ground level—with the price of your product, the number of potential customers, and how much they’re likely to spend. It tends to produce more realistic and actionable insights, especially for early-stage startups.
Step-by-Step (Bottom-Up):
- Determine pricing and expected annual revenue per customer. Your cloud accounting platform is priced at $25/month, or $300/year per customer.
- Estimate the total number of potential customers. Based on census and business data, there are approximately 30 million small businesses in North America with fewer than 50 employees.
- Assume 100% penetration for TAM purposes. Multiply the number of businesses by your annual revenue per customer: 30 million businesses × $300/year = $9 billion TAM. This represents the maximum revenue you could generate if every small business in your serviceable region used your product.
The bottom-up approach is more grounded in the real economics of the product. However, the bottom-up approach can underestimate potential if data is incomplete or too conservative.
If we compare the example estimates that we have used throughout, you will see that the estimates differ.
Approach | TAM Estimate | Basis of Estimate |
Top-Down | $24 billion | Industry reports × regional share × filters |
Bottom-Up | $9 billion | Price × estimated number of target customers |
These estimates differ because the top-down approach assumes broader adoption based on industry averages, while the bottom-up approach is rooted in specific unit economics and known customer pools. Neither is inherently right or wrong—the key is to understand the assumptions behind each and to use them in complementary ways.
Both TAM calculation methods serve different purposes. Top-down is persuasive and often used in pitch decks to show big-picture opportunity. Bottom-up is practical and aligns better with operational planning and financial modeling. Ideally, a robust market sizing exercise will use both, showing that your business opportunity is both large in scope and grounded in reality.
How Investors View TAM, SAM, and SOM
Investors take TAM, SAM, and SOM estimates very seriously because these figures help them gauge the potential scale of return on their investment. However, they view these estimates with a healthy degree of skepticism. Many pitches either overstate the opportunity unrealistically or fail to present a structured, credible market sizing altogether. How you present these numbers can absolutely make or break a pitch.
Investors want to know: If this startup succeeds wildly, is the market big enough to sustain a large company or justify a significant exit? For example, venture capitalists often look for multi-billion dollar TAMs because they need companies with unicorn potential to offset other portfolio failures. However, investors appreciate that such an exit comes in stages of development. They want to see that the founders are realistic and understand the actual part of the market they can serve based on geography, customer type, or product differentiation. A clearly defined SAM reassures them that the startup is focusing on a logical entry point.
The SOM is the starting point for the startup. This is where investors judge the startup’s grasp of its own capabilities. They ask: How many customers can this team reasonably acquire in the short-to-medium term with the current product and resources? A well-defended SOM shows thoughtful planning and credible go-to-market strategy. If your SOM projections don’t align with your planned marketing, sales force, partnerships, or channels, investors will question your overall judgment.
Dos: What Impresses Investors
- Use credible sources. Back up market data with reputable research reports, government data, or widely accepted industry studies.
- Demonstrate methodology. Explain exactly how you got to your numbers. A transparent, step-by-step approach builds trust.
- Use both top-down and bottom-up approaches. Combining both shows rigor and helps investors see both the potential (top-down) and the realism (bottom-up).
- Be specific. Narrow your SAM and SOM to well-defined customer segments. Vague definitions (“all small businesses worldwide”) suggest poor market understanding.
- Tie estimates to a clear growth roadmap. Show how you expect to expand from SOM to SAM and eventually aim toward TAM. This shows ambition and thoughtful strategy.
Don’ts: What Can Sink Your Pitch
- Don’t just present a TAM number alone. Saying “The market is worth $500 billion, so we just need 1%” is a classic rookie mistake. Investors hate this lazy math because it ignores the realities of customer acquisition and competitive dynamics.
- Don’t overstate early SOM. Overly aggressive SOM projections signal to investors that the founders don’t understand the difficulty of customer acquisition at scale.
- Don’t use outdated or irrelevant data. Relying on stale reports or data that doesn’t match your exact niche or geography will hurt your credibility.
- Don’t hide your assumptions. Investors expect to see the assumptions behind your estimates. Hiding or glossing over them suggests either lack of rigor or intentional deception.
- Don’t confuse TAM, SAM, and SOM. Many founders mistakenly treat them as interchangeable or present inconsistent numbers. Investors quickly spot this and interpret it as a lack of preparation.
For investors, strong TAM, SAM, and SOM estimates show market potential, execution discipline, and founder credibility. When done well, this part of the pitch doesn’t just inform—it builds confidence that you have a realistic, scalable vision with a solid grasp of your target market. When done poorly, it often signals lack of strategic thinking or even naïveté, causing investors to walk away.
Conclusion
In conclusion, accurately estimating the size of your market is crucial for the success of your startup. By understanding and calculating the Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM), you can gain valuable insights into the potential of your business and make informed decisions. These metrics show the market opportunity, your realistic serviceable portion, and your potential near-term share. Utilizing both top-down and bottom-up approaches ensures a comprehensive and realistic market sizing exercise. Remember, these estimates are not static and should evolve with your business. By presenting well-researched and credible market size estimates, you can build confidence with investors and demonstrate your strategic thinking and market understanding.