Market sizing: TAM, SAM and SOM

TAM stands for total addressable market. It is the yearly revenue a product could earn if every possible customer bought it. SAM, the serviceable addressable market, is the part of that total the company can reach with its current product, price, language and location. SOM, the serviceable obtainable market, is the share of SAM the company can realistically win in the next few years given its team, money and competition.

Think of a company selling accounting software to small shops in India. TAM might be every business in the world that needs bookkeeping. SAM would be small Indian shops that are willing to pay for software and speak a supported language. SOM would be the fraction of those shops the company can sign up in three to five years.

Venture investors expect a few winners to return the whole fund, so they look for markets large enough to produce a very big company. If a market is small, even a perfect product cannot grow past a limit. A founder who shows a thoughtful market size shows that they understand their customers and their own limits.

Market size is not the only test. A huge market with fierce competition and thin margins can be worse than a small market with few rivals and loyal customers. Investors also ask how fast the market is growing and whether the company can reach new customers cheaply.

Top-down starts from a large published number and narrows it. You take the size of an industry, then multiply by the share that fits your product. For example, take the total number of small businesses in India, then the share that use any digital tools, then the share that might pay for your type of tool.

This method is quick, but it is also easy to abuse. The classic weak claim is: this market is ₹10 lakh crore, and if we win just 1 percent, we make ₹10,000 crore. That reasoning says nothing about how the company will reach even the first hundred customers. Investors tend to distrust top-down numbers that stand alone.

Bottom-up starts from real customers and what each pays. Count the number of potential customers you can name, multiply by the yearly price, then adjust for how many will actually buy. This is slower but far more believable, because each number can be tested.

A simple formula is: number of customers multiplied by average yearly revenue per customer. Use evidence for both parts. The count can come from government statistics, trade association lists or your own sales calls. The price can come from what early customers already pay or what they pay for the current alternative. Most investors prefer a bottom-up estimate, and many founders show both and compare them.

India needs extra care because the population is large but spending power is uneven. Segment customers by income, city tier and payment habits instead of counting everyone. A product for urban professionals has a very different reachable market than a product for rural households, even if both are huge on paper.

Be clear about what the number means. Transaction value, such as the total of payments passing through an app, is not revenue. The company usually keeps only a small percentage of each transaction. Quote revenue pools when you talk about TAM, and keep gross figures separate. Our guide on GMV versus revenue covers this difference.

Also remember that new markets can be created. If the product makes something possible that was too costly before, existing spending data will understate the size. In that case, explain your assumptions openly and test them with real customers.

Once you have a number, try to break it. Change each assumption by a third in both directions and see how the result moves. If a small change in the price or the customer count swings the answer wildly, you know which assumption deserves more research. Then talk to ten real customers and ask what they pay today, what they would pay and what would stop them buying.

Cross-check with a second method. If your bottom-up count gives ₹360 crore and a top-down view gives ₹4,000 crore, the gap is a clue: either many customers are out of reach, or the top-down number includes things your product does not do. Write down why the two differ. A founder who can explain the gap earns more trust than one who shows a single large figure.

Finally, show how the market grows. Say what has to be true for customers to double: more internet access, a new rule, falling prices or a change in habits. Growth drivers that depend on facts you can watch, such as smartphone adoption or the spread of digital payments, are far more convincing than a general claim that the market is expanding.

A good market size comes with its assumptions written down, so another person can change a number and see what happens. If a figure falls apart when one assumption moves, the estimate was weaker than it looked. Nothing here is investment advice; treat any single estimate as a rough guide.

• Using a global figure when the product only works in India, or only in a few cities.
• Counting every person who could use the product, not those who would pay for it.
• Mixing transaction value with revenue.
• Assuming a fixed percentage share without a plan to reach customers.
• Using old reports without checking the year and the source.
• Ignoring free alternatives and the option of customers doing nothing.