Market Sizing Methodology (TAM/SAM/SOM)
Purpose
This recipe produces a complete market sizing analysis with TAM, SAM, and SOM calculated via three independent methodologies (top-down, bottom-up, value-theory), cross-validated against each other. The output includes confidence intervals, growth projections, and investor-ready formatting.
Prerequisites
- Idea Classification Report from Idea Classification Framework
- Feasibility check passed from Feasibility Quick Check
- Target customer definition — industry, size, geography, role
- Pricing hypothesis — approximate price point or range
Constraints
- TAM is a strategic planning input, not a vanity metric. Inflated TAMs destroy credibility. [src1]
- Bottom-up always required. Top-down alone is insufficient. [src3]
- SOM must be calculated from actual go-to-market capacity. [src6]
- Market data older than 2 years is unreliable for high-growth sectors. [src5]
- Cross-validation mandatory: if top-down and bottom-up differ >3x, fix assumptions. [src2]
Tool Selection Decision
| Path | Tools | Cost | Speed | Output Quality |
|---|---|---|---|---|
| A: Free Data | Census, BLS, SEC, Google | $0 | 3-4 hours | Medium |
| B: Freemium | Statista Basic + free tools | $39-79 | 2-3 hours | Medium-high |
| C: Professional | IBISWorld + reports | $200-500 | 2-3 hours | High |
| D: Full Stack | Gartner + Pitchbook | $1,000+ | 4-8 hours | Very high |
Execution Flow
Step 1: Define Market Boundaries
Duration: 20 minutes. Define product category, customer segment, geography, price range, time horizon, and inclusion/exclusion criteria.
Step 2: Top-Down TAM
Duration: 30 minutes. Start with industry total from research reports, apply segment percentage and geographic filters.
Step 3: Bottom-Up TAM
Duration: 45 minutes. Count potential customers from Census/BLS data, multiply by average revenue per customer.
Step 4: Value-Theory TAM
Duration: 20 minutes. Calculate value created for customers, apply 10-30% willingness-to-pay ratio.
Step 5: Calculate SAM and SOM
Duration: 20 minutes. SAM = TAM filtered by accessibility. SOM = SAM filtered by go-to-market capacity.
Step 6: Cross-Validate and Report
Duration: 15 minutes. Compare all three TAM methodologies, generate investor-ready report.
Quality Benchmarks
| Metric | Minimum | Good | Excellent |
|---|---|---|---|
| Methodologies used | 2 | 3 | 3 + sensitivity |
| Top-down/bottom-up ratio | Within 5x | Within 3x | Within 2x |
| Source recency | 2023+ | 2024+ | 2025-2026 |
| SOM grounded in operations | Yes | With conversion rates | With comparable benchmarks |
Error Handling
| Error | Cause | Recovery |
|---|---|---|
| No industry reports found | Market too new | Lead with bottom-up; use adjacent market reports |
| Top-down/bottom-up differ >5x | Different definitions | Align definitions, check segment exclusions |
| TAM seems too small | Niche market | Valid — may need different funding strategy |
| TAM too large (>$100B) | Definition too broad | Narrow customer segment and geography |
Cost Breakdown
| Component | Free | Paid | At Scale |
|---|---|---|---|
| Government data | $0 | $0 | $0 |
| Market reports | $0 (summaries) | $39-79/mo | $500-2000 |
| Company count data | $0 | $79/mo | $200+/mo |
Anti-Patterns
Wrong: Starting with "the global market is $500B"
Top-down only from broadest number destroys investor credibility. [src6]
Correct: Lead with bottom-up, use top-down as ceiling
Count actual customers, multiply by your price. Use industry reports to validate the ceiling.
When This Matters
Use after feasibility screening and before financial models or fundraising. Market sizing is the quantitative backbone of every investor pitch.