How to calculate TAM, SAM, and SOM
Market sizing is one of the most important exercises for any startup. It tells investors whether the opportunity is big enough to build a venture-scale business. Getting it right takes research and honest assumptions.
Top-down approach
Start with an industry-wide number (from analyst reports, government data, or research firms) and narrow it down. For example, if the global CRM market is €50B, and you serve SMBs in Europe (20% of the market), your SAM is €10B. If you can capture 5% in year one, your SOM is €500M.
Bottom-up approach
Start with the number of potential customers and what each would pay you per year. This approach is grounded in your actual business model and unit economics, which makes it more credible to investors. Cross-reference with top-down numbers for maximum confidence.
Tips for your market slide
- Always present both top-down and bottom-up numbers. They should roughly agree.
- Cite your sources. Investors will question unsourced numbers.
- Be specific about your SAM. Show you understand your actual target customer.
- SOM should be realistic for year 1-3. A 50% market share claim will lose credibility.