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?

• Progression should be logical
• SAM typically 10-40% of TAM
• SOM Year 1 typically 0.1-1% of SAM

4. Is Year 1 SOM achievable with your resources?

• Convert to customer count per month
• Is that acquisition rate realistic?
• Do you have budget/capacity?

5. Is the market big enough to justify effort?

• Minimum thresholds matter
• Compare to your goals (bootstrap vs VC)

Complete validation checklist: See assets/market-validation-checklist.md for comprehensive 100+ point validation framework.

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Common Mistakes to Avoid

1. Confusing TAM with SAM - Be explicit which number you're discussing
2. Top-down only sizing - Always validate with bottom-up
3. Ignoring competition - Available market is smaller than total market
4. Assuming linear growth - Use S-curves, not straight lines
5. No customer names - If you can't name 10 customers, market may not exist
6. One-and-done sizing - Update assumptions quarterly as you learn

Detailed guide: See references/market-sizing-best-practices.md for:

• How to avoid each mistake
• Industry-specific considerations
• Competitive landscape analysis
• Assumption management frameworks
• Sensitivity analysis approaches
• Case studies (Superhuman, Quibi, Figma, Slack)

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Recommended Workflow

Step 1: Bottom-Up Calculation (Primary)

Use this as your primary estimate:

1. Define universe of potential customers (be specific)
2. Count them using reliable data sources
3. Estimate realistic adoption/penetration percentage
4. Determine average annual revenue per customer
5. Calculate: TAM = Customers × Adoption % × Price

Tool: Use assets/market-sizing-calculator.md for step-by-step worksheet with formulas.

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Step 2: Top-Down Validation (Secondary)

Validate your bottom-up with industry data:

1. Find comparable market size from research firms
2. Estimate what percentage is your segment
3. Compare to bottom-up calculation
4. If within 2-3x: Good confidence
5. If >5x difference: Investigate assumptions

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Step 3: Value Theory Check

Test pricing reasonableness:

1. Quantify value delivered to customers
2. Calculate dollar value of benefits
3. Determine capture rate (10-30% typical)
4. Validate pricing is within reasonable range

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Step 4: Apply SAM Filters

Narrow TAM to realistic serviceable market:

Starting TAM: $__________

Geographic filter: × ____% = $__________
Segment filter: × ____% = $__________
Product fit filter: × ____% = $__________
Distribution filter: × ____% = $__________

Final SAM: $__________

Template: Use assets/tam-sam-som-template.md for complete calculation template.

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Step 5: Calculate Realistic SOM

Project achievable market capture:

Conservative Approach:

• Year 1: 0.1-0.3% of SAM
• Year 2: 0.5-1% of SAM
• Year 3: 1-3% of SAM

Consider:

• Competitive intensity (high = lower %)
• Switching costs (high = lower %)
• Your differentiation (strong = higher %)
• Distribution advantage (strong = higher %)

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Step 6: Validate Thoroughly

Run through comprehensive validation:

1. Complete all reality checks
2. Verify unit economics work (LTV:CAC ratio)
3. Check competitive landscape math
4. Model three scenarios (pessimistic, base, optimistic)
5. Conduct sensitivity analysis on key assumptions

Validation tool: Use assets/market-validation-checklist.md for systematic validation.

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Step 7: Document Assumptions

Critical for updating as you learn:

## Key Assumptions

1. Customer count: [number]
   - Source: [where this came from]
   - Confidence: [High/Medium/Low]
   - Impact if wrong: [+/- X% on TAM]

2. Pricing: $[amount]/year
   - Basis: [competitive analysis, value-based, etc.]
   - Confidence: [High/Medium/Low]
   - Impact if wrong: [direct 1:1 impact]

3. Adoption rate: [%]
   - Basis: [customer interviews, analogies, etc.]
   - Confidence: [High/Medium/Low]
   - Impact if wrong: [+/- X% on TAM]

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Templates and Tools

Calculation Tools

Complete TAM/SAM/SOM Template:

• assets/tam-sam-som-template.md
• Full calculation framework with all filters
• Includes validation checklist
• Assumption documentation section
• Sensitivity analysis worksheet

Step-by-Step Calculator:

• assets/market-sizing-calculator.md
• All three methods with formulas
• Worked examples
• Comparison framework
• Confidence scoring

Validation Checklist:

• assets/market-validation-checklist.md
• 100+ validation points
• Reality checks and red flags
• Customer count validation
• Pricing validation
• Competitive validation

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Reference Guides

Comprehensive Methodologies

Complete Methods Guide:

• references/market-sizing-methodologies.md
• Detailed bottom-up, top-down, and value theory processes
• Industry-specific approaches (B2B SaaS, Consumer, Enterprise, Marketplace, Dev Tools)
• Method comparison and triangulation
• Data source recommendations

Best Practices Guide:

• references/market-sizing-best-practices.md
• Common mistakes and how to avoid them
• Validation frameworks
• Competitive landscape analysis
• Assumption management
• Sensitivity analysis
• Case studies: Superhuman, Quibi, Figma, Slack
• Advanced considerations (timing, geographic expansion, platform effects)

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Summary

Market sizing is educated guessing - the goal is reasonable estimates with documented assumptions, not precision.

The Three-Step Approach:

1. Calculate: Use all three methods (bottom-up, top-down, value theory)
2. Validate: Reality-check with customers, competition, and economics
3. Document: Track assumptions and update quarterly

Key Principles:

• Always start with bottom-up (most reliable)
• Use top-down only for validation
• Can you name 10 customers? (Critical test)
• Update assumptions as you learn
• Model three scenarios (pessimistic, base, optimistic)

Decision Framework:

• If SAM < $10M: Too small for most ventures
• If Year 1 SOM < $50K: Question if worth effort
• If methods disagree >5x: Assumptions need work
• If no competitors exist: Either no market OR huge opportunity (validate carefully)

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Related Skills

• product-positioning - Position against competitive landscape
• product-market-fit - Validate market demand exists
• competitive-analysis-templates - Analyze market attractiveness and competitive dynamics