Market sizing is just another boring business exercise where you pull a massive TAM number out of thin air to impress investors, right? WELL… That assumption isn’t just wrong; it’s potentially sabotaging your entire business strategy. Hang tight, because I’m about to show you how proper market opportunity sizing can be the difference between building the next unicorn or joining the 90% of startups that fail spectacularly. Here’s how to size your market like a pro in 5 practical steps.
Understanding Market Opportunity Sizing: Beyond the Fancy Numbers
Let me put on my imaginary glasses for this bit…
Market sizing isn’t just about coming up with impressive numbers to slap onto your pitch deck. It’s about understanding the actual commercial opportunity available to your business with brutal honesty.
The thing is, too many entrepreneurs approach market sizing like they’re trying to inflate a balloon for a children’s party – the bigger, the better! But investors and strategic partners can see through that nonsense faster than a toddler spotting broccoli hidden under mashed potatoes.
What we’re going to do instead is crack on with a proper, no-nonsense approach to sizing your market opportunity.
1. The Holy Trinity: TAM, SAM, and SOM Explained
Now, let’s talk about the three crucial metrics that form the foundation of any legitimate market sizing exercise:
Total Addressable Market (TAM)
This is the entire universe of potential revenue if every single person who could possibly use your product actually bought it. It’s massive. It’s exciting. And it’s absolutely useless by itself.
For example, if you’re launching a new plant-based protein drink, your TAM might include every human being who consumes protein supplements. That’s billions of people and potentially trillions in revenue.
Anyone else see where this is going? That number means nothing for your actual business planning.
Serviceable Addressable Market (SAM)
This is where things get interesting. Your SAM represents the segment of the TAM that your product or service is actually designed to serve.
For our protein drink example, your SAM might include only fitness enthusiasts in countries where you can realistically distribute your product, who are interested in plant-based options.
Suddenly, we’ve gone from “everyone on the planet” to a much more specific group. That’s progress!
Serviceable Obtainable Market (SOM)
Here’s the kicker – your SOM is the portion of your SAM that you can realistically capture. This takes into account competition, your distribution capabilities, your pricing strategy, and a dozen other real-world factors.
For our protein drink, maybe you can realistically capture 2-5% of your SAM in the first few years.
This is the number that actually matters. This is the number that should guide your resource allocation, your funding requirements, and your growth strategy.
Hang on a second… next one’s a doozy.
2. Top-Down vs. Bottom-Up: The Battle of Approaches
When it comes to calculating these market sizes, you’ve got two main weapons in your arsenal:
The Top-Down Approach
The top-down approach starts with the big picture – industry reports, market research, and competitor analysis – and then narrows down to your specific slice.
It’s like trying to find your house by starting with a satellite view of Earth and zooming in. Quick, convenient, but sometimes you end up a few streets off.
In January 2025, we tested this approach with a fintech startup targeting small businesses. They started with the global small business banking market ($500 billion), narrowed it to their specific regions ($120 billion), then to their specific customer segment ($30 billion).
Looks impressive, right? Well, it’s also the method most prone to the “magical thinking” that makes investors roll their eyes so hard they can see their own brains.
The Bottom-Up Approach
The bottom-up approach is much more labor-intensive but infinitely more valuable. You start with:
- Number of potential customers
- Price per customer
- Adoption rates
- Conversion rates
- Sales cycles
And build your market size from the ground up.
It’s like building a house brick by brick instead of just drawing a pretty picture of one.
For our fintech example, they would identify how many small businesses match their criteria, what percentage they could reach, what proportion would likely convert, and at what price point.
The result? A much smaller but infinitely more credible market size estimate.
Here’s where it gets absolutely insane – when we compared the top-down and bottom-up approaches for the same business, there was often a 5-10x difference in the numbers. That’s not a rounding error; that’s living in completely different realities!
What I’m going to recommend is using both approaches and reconciling the differences. If your top-down and bottom-up numbers are wildly different, something’s wrong with your assumptions.
Am I overthinking? Definitely. But that’s part of the fun!
3. Tools and Frameworks That Actually Work
Now let’s get into the nitty-gritty of how to actually perform this analysis without wanting to throw your laptop out the window.
SWOT and Porter’s Five Forces
These classic frameworks still have their place in market sizing because they force you to consider competitive dynamics that directly impact your SOM.
The word “competition” means radically different things to different people. For some entrepreneurs, it means direct rivals offering nearly identical products. For others, it includes any business competing for the same customer dollars.
Let me put on my imaginary glasses again…
Porter’s Five Forces helps you systematically evaluate:
- Threat of new entrants
- Bargaining power of suppliers
- Bargaining power of buyers
- Threat of substitutes
- Competitive rivalry
Each of these forces affects how much of the market you can realistically capture.
Data Sources Worth Their Weight in Gold
Not all data sources are created equal. Here are the ones I’ve found to be insanely helpful:
- Statista – Expensive but comprehensive
- IBISWorld – Detailed industry reports
- Crunchbase – For understanding competitor funding and trajectories
- Industry-specific reports from consultancies like McKinsey, Bain, or BCG
- Government data – Often free but requires serious mining
And here’s a cheeky little trick – university libraries often have subscriptions to premium research services that would cost you thousands otherwise. If you’re an alumnus or know a friendly professor, you might just save yourself a massive research budget.
4. The Investor Perspective: Why They Care About SOM More Than TAM
Here’s something that might come as a shock – investors are not impressed by your massive TAM. In fact, leading with a trillion-dollar TAM in your pitch is the fastest way to signal that you might not understand your business.
What investors want to see is:
- A realistic SOM based on bottom-up calculations
- Clear assumptions that can be validated
- Understanding of adoption curves and sales cycles
- Recognition of competitive forces
- Awareness of market entry barriers
One investor I spoke with in March 2025 summed it up perfectly: “I don’t care if the TAM is $1 trillion if the founder can’t convince me they can capture even $10 million of it.”
Am I spiraling? Absolutely. But that’s what coffee’s for!
5. Common Pitfalls That Will Tank Your Credibility
Let’s talk about the market sizing sins that make investors and strategic partners reach for the “delete” button:
The “1% Fallacy”
“If we just capture 1% of this massive market, we’ll be huge!”
This is the battle cry of the unprepared entrepreneur. It shows a complete lack of understanding of how markets actually work and what it takes to capture market share.
Markets don’t give you 1% just for showing up. You have to fight for every 0.1%.
Ignoring Adoption Curves
The word “disruption” triggers wildly different reactions depending on who you’re talking to. For some, it’s an exciting buzzword that promises rapid change. For others (particularly established industry players), it’s a threat to be neutralized.
Either way, disruption takes time. Even revolutionary products don’t achieve overnight mass adoption. Your market sizing needs to reflect realistic adoption curves.
Overlooking Competition
“We have no competition” is a phrase that should be banned from all business discussions. You always have competition, even if it’s just the status quo or doing nothing.
Your market sizing must account for competitive responses and the portion of the market that competitors will continue to control.
Confusing Theoretical with Practical
Just because theoretically everyone could use your product doesn’t mean everyone will. Your market sizing should reflect practical limitations like:
- Distribution capabilities
- Geographic constraints
- Language barriers
- Cultural factors
- Pricing accessibility
Putting It All Together: A Framework That Works
Right, let’s crack on with a practical framework you can use immediately:
- Define your specific customer segment with painful precision
- Calculate your TAM using industry data (top-down)
- Narrow to your SAM by applying geographic, demographic, and psychographic filters
- Build your SOM bottom-up using:
- Customer count × Price point
- Adjusted for adoption rates
- Adjusted for conversion rates
- Adjusted for competitive factors
- Reconcile top-down and bottom-up approaches and explain any significant differences
- Validate with small-scale tests whenever possible
Let me put this in real terms with a quick case study.
In July 2025, a SaaS startup targeting the legal industry came to me with their market sizing. They claimed a $50 billion TAM based on the global legal software market.
When we rebuilt their analysis using the framework above, we discovered their realistic SOM for the first three years was closer to $30 million – less than 0.1% of their claimed TAM.
Was this disappointing? Initially, yes. But this realistic sizing allowed them to:
- Properly scope their funding needs
- Set achievable growth targets
- Focus on the right customer segments
- Deploy resources efficiently
And here’s the massive payoff – they hit their targets because they were based in reality. Investors were impressed by their thorough understanding of their market opportunity, and they secured funding at a better valuation than competitors with flashier but less credible numbers.
The Bottom Line: Credibility Wins Every Time
The goal of market sizing isn’t to produce the biggest number possible. It’s to demonstrate a deep, nuanced understanding of your market opportunity that builds credibility with investors, partners, and your own team.
A well-executed market sizing exercise should be the foundation of your business strategy, not just a slide in your pitch deck.
Anyone else feeling personally attacked right now? Good. That means you’re taking this seriously.
If you want more insights on building credible business strategies that actually work, make sure to subscribe to my newsletter. Every week, I share tactical frameworks and tools that help entrepreneurs build businesses based on reality, not fantasy.
What market are you trying to size, and what challenges are you facing? Drop me a comment below, and let’s figure it out together.
