/market-sizing-frameworks

name: market-sizing-frameworks
description: "TAM/SAM/SOM calculations and market sizing methodologies. Use when assessing market opportunity, estimating revenue potential, or validating if a market is worth pursuing. Trigger on: 'size my market', 'TAM SAM SOM', 'how big is my market', 'market opportunity', 'is this market worth it'."

Market Sizing Frameworks

Frameworks and methodologies for estimating market size and validating market opportunity.

Overview

Market sizing answers the critical question: "Is this opportunity large enough to pursue?" It provides the foundation for strategic decisions, resource allocation, and investment prioritization.

**Core Principle:** Market sizing is educated guessing with documented assumptions. The goal is reasonable estimates and order-of-magnitude accuracy (is it $1M, $10M, or $100M?), not false precision.

**Key Insight:** Always use multiple methods (bottom-up, top-down, value theory) to triangulate and validate estimates. If methods disagree by more than 2-3x, your assumptions need scrutiny.

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When to Use This Skill

**Auto-loaded by agents**:

• `market-analyst` - For TAM/SAM/SOM calculation and market validation

**Use when you need to**:

• Assess if a market opportunity is worth pursuing
• Calculate TAM, SAM, and SOM for business planning
• Validate market assumptions before building
• Support fundraising or strategic planning
• Evaluate competitive landscape impact on opportunity
• Determine realistic revenue projections

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The Three-Tier Framework

TAM (Total Addressable Market)

**Definition:** Total revenue opportunity if you achieved 100% market share globally.

**Purpose:** Understand the absolute ceiling of opportunity.

**Typical Range:**

• Side project: $1M+ TAM minimum
• Full-time business: $10M+ TAM minimum
• VC-backed startup: $100M+ TAM minimum

**Calculation:** See three methods below.

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SAM (Serviceable Addressable Market)

**Definition:** Portion of TAM you can realistically serve given your business model, geography, and product capabilities.

**Purpose:** Your realistic target market after applying real-world constraints.

**Filters to Apply:**

1. **Geographic reach:** Where can you operate? 2. **Customer segment:** Which types of customers fit your solution? 3. **Product capabilities:** Who can your product actually serve? 4. **Distribution channels:** Who can you reach?

**Typical Range:** SAM is usually 10-40% of TAM for focused products.

**Formula:**

SAM = TAM × Geographic % × Segment % × Product Fit % × Distribution %

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SOM (Serviceable Obtainable Market)

**Definition:** Portion of SAM you can realistically capture in the near term (1-3 years).

**Purpose:** Your achievable revenue target given resources, competition, and time constraints.

**Realistic Benchmarks:**

• Year 1: 0.1-0.5% of SAM (new products)
• Year 3: 1-5% of SAM (if successful)
• Year 5: 5-15% of SAM (market leader position)

**Formula:**

SOM = SAM × Realistic Market Share %

**Reality Check:** Convert SOM to customer count. Is that number achievable per month/week?

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Three Market Sizing Methods

Always use all three methods for robust validation. If they disagree significantly, investigate your assumptions.

Method 1: Bottom-Up (Most Reliable)

**Approach:** Count actual customers and multiply by revenue per customer.

**Formula:**

TAM = Total Potential Customers × Average Revenue per Customer

**Process:**

1. Define who is a potential customer (be specific!) 2. Count them using reliable data sources 3. Apply realistic adoption/penetration filters 4. Estimate average annual revenue per customer 5. Multiply to get TAM

**Strengths:**

• Most grounded in reality
• Easy to validate assumptions
• Can name actual customers

**When to Use:** Always start here as your primary method.

**Complete methodology:** See `references/market-sizing-methodologies.md` for detailed step-by-step process with examples.

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Method 2: Top-Down (For Validation)

**Approach:** Start with total market size and estimate your segment percentage.

**Formula:**

TAM = Total Market Size × Your Segment %

**Process:**

1. Find comparable market size data (Gartner, IDC, etc.) 2. Identify what percentage is your specific segment 3. Apply multiple filters to narrow down 4. Compare to bottom-up calculation

**Strengths:**

• Quick sanity check
• Uses industry research
• Good for validation

**Weaknesses:**

• Often produces inflated numbers
• Hard to validate percentages
• Can feel like guesswork

**When to Use:** As secondary validation, never as primary method.

**Complete methodology:** See `references/market-sizing-methodologies.md` for examples and industry applications.

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Method 3: Value Theory

**Approach:** Calculate value created for customers, then estimate capture rate.

**Formula:**

TAM = (Value Created per Customer × Potential Customers) × Capture Rate %

**Process:**

1. Quantify value delivered (time saved, cost reduced, revenue increased) 2. Calculate dollar value of that benefit 3. Determine what percentage you can capture in pricing (typically 10-30%) 4. Multiply by potential customer base

**Strengths:**

• Tests pricing assumptions
• Grounds estimates in customer value
• Helps justify pricing strategy

**When to Use:** To validate pricing is reasonable relative to value created.

**Complete methodology:** See `references/market-sizing-methodologies.md` for value calculation frameworks.

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Validation Framework

The Reality Check Questions

Before trusting your market sizing, validate with these critical tests:

**1. Can you name 10 specific potential customers?**

• If no: Market may be too narrow or unclear
• If yes: Proceed with confidence

**2. Are there existing competitors making money?**

• If yes: Market is validated (good!)
• If no: Either no market exists OR huge greenfield (risky)

**3. Does TAM > SAM > SOM make sense?**

• Pro