1. What Is Market Size?
Market size refers to the total potential demand for a product or service within a defined market. It helps businesses determine the revenue opportunity and guides strategy, investment, and marketing efforts.
2. Why Understanding Market Size Matters
Knowing your market size allows you to:
- Evaluate the potential for growth
- Set realistic revenue targets
- Attract investors with clear data
- Choose the right product, pricing, and positioning strategies
- Avoid overestimating demand
3. Types of Market Size
There are three core types of market size that businesses commonly use in analysis:
A. Total Addressable Market (TAM)
This is the entire demand for your product or service if there were no limitations such as geography, competition, or capacity.
- Represents the largest possible opportunity
- Helps in big-picture strategy and investor presentations
- Often used in new or fast-growing industries
Example: If you sell online fitness programs, your TAM could be all global consumers interested in fitness.
B. Serviceable Available Market (SAM)
This is the portion of the TAM that your business can serve, considering your products, geographic reach, and operational limits.
- More realistic than TAM
- Helps determine where to focus marketing and sales
- Useful for resource allocation
Example: Using the fitness business, your SAM might be English-speaking customers in the UK and US only.
C. Serviceable Obtainable Market (SOM)
Also called Share of Market, SOM is the part of the SAM that your business can reasonably capture in the short term, based on resources, competition, and your value proposition.
- Helps in forecasting revenue
- Reflects practical market share goals
- Essential for financial planning
Example: If your online fitness brand can realistically gain 1% of your SAM in the first year, that becomes your SOM.
4. Other Market Size Categories (Less Common)
- Target Market: The specific customer segment you’re aiming to serve
- Niche Market: A narrow subset of the target market with unique needs
- Penetrated Market: The portion of the market you have already captured
- Market Potential: The upper limit of demand at full product adoption
5. How to Calculate Market Size
Use this basic formula for TAM:
Market Size = Number of Customers × Average Revenue per Customer
You can calculate SAM and SOM by narrowing the TAM based on your business scope and realistic market penetration.
Sources include:
- Industry reports (Statista, IBISWorld)
- Government databases (ONS, Companies House)
- Surveys and primary research
- Competitor benchmarks
6. Mistakes to Avoid in Market Sizing
- Overestimating TAM and assuming you can capture it all
- Ignoring market constraints (budget, competition, legal)
- Using outdated or irrelevant data
- Failing to differentiate TAM, SAM, and SOM
- Presenting only optimistic figures without rationale
Frequently Asked Questions
What is the difference between TAM and SAM?
TAM is the total demand, while SAM is what your business can actually serve based on its capabilities.
Can my SOM change over time?
Yes, as your business grows, you can capture a larger share of the market.
How do investors use market size data?
To evaluate growth potential, scalability, and whether the opportunity is worth funding.
Is niche market size important?
Absolutely. In niche markets, small customer bases can still be highly profitable.
Should startups focus on TAM?
TAM is useful for vision, but SAM and SOM are more relevant for early-stage planning.
How accurate does market sizing need to be?
It should be realistic and backed by credible data, but does not need to be perfect.
Conclusion
Understanding the types of market size—TAM, SAM, and SOM—is crucial for every business, from startup to scale-up. These metrics provide a clear view of your business opportunity and support informed decisions in strategy, marketing, and investment. Measure them accurately, revisit often, and let data guide your growth.