What are TAM, SAM and SOM, and what is bottom-up market sizing?

What it is, in plain words

Picture a coffee cart. Everyone in the city who drinks coffee is the biggest circle. The people who walk past your corner each morning are a smaller circle inside it. The cups you can actually make and sell before the rush ends are smaller still.

Market sizing uses the same three circles:

• TAM (total addressable market): everyone who could ever buy this kind of product, anywhere.
• SAM (serviceable available market): the part your product, language, price and sales channels can actually reach.
• SOM (serviceable obtainable market): the part you can realistically win in the next few years, given your team and competitors.

There are two ways to fill in the numbers.

Top-down starts from an industry total in a published report and takes slices: “the market is worth billions, we serve this region, we will win a small percent.” It is quick, and it is the version most market slides use.

Bottom-up starts from customers you can count: “there are this many businesses of this type in the countries we sell to, according to this named source; each pays us this much per year.” Customers times price. SAM and SOM are then built from who you can reach and win, not from a percentage.

A concrete example

Take a made-up booking tool for independent dental clinics, sold in one country.

• Top-down: “The dental software market is large; we will take a small share.” The number is big, and nobody, including the founder, can say who those customers are.
• Bottom-up: count the independent clinics in that country from a public registry or industry association list (name the source and the year). Multiply by the annual subscription price. That is the SAM. For the SOM, use the clinics your sales approach can reach in the next few years, for example the regions where you sell in person, times the share you can plausibly convert given what you have converted so far.

The bottom-up result is usually much smaller. It is also something you can defend line by line, and update when the price or the region changes.

Why it matters when you hire someone

Reading market slides is part of my day job as a startup investor, and the most common problem is not a small market. It is a number nobody can explain. That problem usually comes from how the sizing was ordered.

If you do not ask for bottom-up, you often get top-down. It is faster to quote a report total than to count customers. A brief that just says “market research for my deck” invites the fast version.

A number you cannot rebuild is a number you cannot update. If the market size lives only in a PDF, it is out of date the day your price changes or you add a country. Ask for the spreadsheet with the calculation, not only the report.

Sources decide whether the number survives questions. A figure from a paywalled report you cannot open, or a link that does not contain the number, falls apart at the first follow-up question. The market research acceptance list starts with opening sources at random for this reason.

Scope moves the price. More countries, more segments and primary research such as surveys or interviews all cost more. Define one customer in one place first.

What to ask the researcher

Before ordering, write your customer in one sentence and your annual price, and put both into the market research brief. If the price or the countries grow in a custom offer, check the scope with the custom offer guide.