Market sizing with TAM, SAM and SOM, from the top down and the bottom up

Almost every business plan, pitch deck and strategy paper has a market size slide. Most of them show one very large number taken from a research report, followed by the line “if we win just 1% of this market”. That line tells a reader very little. A useful market size shows who the customers are, how many of them you can reach, and how you worked it out.

The three levels

• TAM, total addressable market. All the demand for this kind of product, measured in revenue, units or customers, if every possible buyer bought.
• SAM, serviceable available market. The part of TAM your product, channels and geography can actually reach today.
• SOM, serviceable obtainable market. The share of SAM you can realistically win in the next few years, given competitors, budget and team.

TAM sets the ceiling. SAM is where you compete. SOM is what your plan and forecast should rest on.

Start with a precise definition

Before any arithmetic, write one sentence that defines the customer and the product. “Independent hair salons in the UK that take bookings by phone” can be counted. “The beauty industry” cannot. Decide too whether you are counting revenue, units or customers, and use the same unit at all three levels.

Top-down: narrow a big number

Top-down starts with a published total, such as an industry report, a government statistic or a trade body figure, and narrows it with percentages: the share in your country, the share in your segment, the share that would pay for a product like yours.

It is quick, and it puts you in the right order of magnitude. Its weakness is that each percentage is easy to guess and hard to defend, and the starting figure often counts things that are not your market at all.

Bottom-up: count buyers and multiply

Bottom-up starts from customers you can describe and builds upwards: number of buyers, times the share you can reach, times the price, times how often they buy. Each step can be checked against something real, such as a business register, a directory, your own sales calls or a competitor’s public price list.

This is the method a sceptical investor or manager tends to trust, because they can test each line.

A worked example (illustration only)

The figures below are invented to show the method. They are not real market data.

Notice that SOM is tied to something you control, the number of salons your team can sign, rather than to a hopeful percentage.

Compare the two methods

Run both and put them side by side. If the top-down SAM is ten times the bottom-up one, something is off. Perhaps the report counts large chains you cannot sell to, or perhaps your price is too low. The gap is the most useful output of the exercise because it shows which assumption to test next.

Estimating without data

Sometimes there is no report at all. Then you build a chain of reasonable guesses, the approach physicists call a Fermi estimate, after Enrico Fermi. The classic exercise asks how many piano tuners work in Chicago, starting from the city’s population and working through households, pianos, tunings per year and tunings one person can do. Each guess may be rough, but the errors tend to partly cancel, and the reasoning can be improved one step at a time.

Common mistakes

• Presenting TAM as the opportunity. TAM is context. SOM is the plan.
• Mixing units. Customers at one level and revenue at the next makes the chain impossible to follow.
• Counting the whole category. A salon booking tool is not competing for all salon revenue, only for the budget salons spend on software.
• A single precise number. Show SOM as a range, low and high, with the assumption that moves it most.
• Hidden assumptions. Put every percentage and its source on the slide or in a note.

What a good market size slide shows

1. A one-line definition of the customer and product.
2. TAM, SAM and SOM in the same unit.
3. The bottom-up calculation, step by step.
4. One top-down figure as a cross-check, with its source.
5. The single assumption that matters most, and how you will test it.

Done this way, the market size stops being a decoration and becomes something a reader can argue with, which is the point.