"How big is the market?" is typically the first question any investor asks — and the first question most entrepreneurs get wrong.
Market sizing isn't about finding the biggest possible number to put on a slide. It's about understanding the genuine revenue opportunity for your specific business in your specific circumstances. That understanding comes from three nested metrics: TAM, SAM, and SOM.
Get these numbers right, and you demonstrate commercial awareness that builds investor confidence. Get them wrong — or worse, skip them entirely — and your feasibility study lacks the foundation that every other analysis depends on.
The Three Layers of Market Size
Think of TAM, SAM, and SOM as three concentric circles, each getting smaller and more specific:
TAM (Total Addressable Market) — The entire revenue opportunity if you captured 100% market share globally (or in your total target geography). This is the theoretical ceiling. SAM (Serviceable Addressable Market) — The portion of TAM that your business model, product type, and geographic reach can actually serve. This is the realistic playing field. SOM (Serviceable Obtainable Market) — The portion of SAM that you can realistically capture in the near term (typically 1-3 years), given your resources, competition, and market position. This is your actionable target.A Simple Analogy
Imagine you're opening a pizza restaurant in Perth, Western Australia.
- TAM: The total revenue of every pizza restaurant in Australia. Let's say $5.2 billion annually.
- SAM: The total revenue of pizza restaurants in the Perth metropolitan area. Perhaps $380 million.
- SOM: The revenue your single restaurant can realistically capture in years 1-3, given your location, capacity, and competitive position. Maybe $800,000–$1.2 million.
Each layer tells you something different. TAM tells the investor that pizza is a massive market. SAM tells them Perth has strong local demand. SOM tells them what your specific restaurant can actually achieve.
How to Calculate TAM
There are two approaches to calculating TAM, and each has its place.
Top-Down Approach
The top-down approach starts with a large, published market figure and narrows it down. You take an industry report number and apply it to your geography.
Formula:TAM = Industry Revenue × Geographic Share
Example — Boutique Hotel in Miami Beach:- Global boutique hotel market: $115 billion (from industry report)
- US share of global market: approximately 35% = $40 billion
- Florida share of US boutique hotel market: approximately 12% = $4.8 billion
- Miami-Dade County share: approximately 25% of Florida = $1.2 billion
Bottom-Up Approach
The bottom-up approach starts with your specific economics and scales up. You calculate revenue per customer, multiply by total potential customers.
Formula:TAM = Number of Potential Customers × Average Annual Revenue per Customer
Example — SaaS Project Management Tool:- Total businesses with 10-50 employees globally: 30 million (from government statistics)
- Percentage that use project management tools: 65% = 19.5 million
- Average annual spend on project management software: $2,400 per business
- TAM = 19.5 million × $2,400 = $46.8 billion
Which Approach to Use?
Use both and see if they converge. If your top-down and bottom-up calculations produce similar results, you have a credible TAM estimate. If they diverge significantly, investigate why — one of your assumptions is probably off.
For feasibility studies, the bottom-up approach is generally preferred because each assumption can be verified and challenged independently.
How to Calculate SAM
SAM narrows TAM to the portion of the market your business can actually reach. The constraints that define SAM include:
Geographic Reach: If you're a local business, your SAM is limited to your service area. A restaurant in Sydney doesn't serve customers in Melbourne. Product/Service Fit: Your SAM only includes customers who need what you specifically offer. A luxury hotel's SAM excludes budget travellers; a vegan restaurant's SAM excludes confirmed meat-eaters. Business Model Constraints: Your distribution channels, pricing tier, and service model define who you can reach. An online-only business has a different SAM than a brick-and-mortar store. Formula:SAM = TAM × Percentage Addressable by Your Business Model
Example — Boutique Hotel in Miami Beach (continuing from above):- TAM (Miami-Dade boutique hotel market): $1.2 billion
- Our target: upscale boutique (not budget or mid-range), so ~40% of boutique market
- Miami Beach specifically (not all of Miami-Dade): ~35% of upscale boutique market
- SAM = $1.2B × 40% × 35% = $168 million
- TAM: $46.8 billion
- English-speaking markets only (initial launch): ~45%
- Small business segment (10-50 employees) with our pricing ($20-50/user/month): ~30%
- SAM = $46.8B × 45% × 30% = $6.3 billion
How to Calculate SOM
SOM is the most practically important number — it represents what you can actually achieve. This is where your feasibility study's revenue projections should be grounded.
SOM is calculated by estimating the market share you can realistically capture, based on:
Competitive Intensity: How many competitors are there? What market share do they hold? What's the realistic share for a new entrant? Marketing Reach and Budget: How many potential customers can you actually reach with your available marketing budget and channels? Capacity Constraints: How much can you physically produce or serve? A 50-seat restaurant has a capacity ceiling regardless of demand. Growth Trajectory: New businesses don't capture their full potential from day one. SOM should reflect a realistic growth curve. Formula:SOM = SAM × Realistic Market Share Capture
Example — Boutique Hotel in Miami Beach:- SAM: $168 million
- There are approximately 45 upscale boutique hotels in Miami Beach
- As a new 120-room property, realistic year-1 market share: ~2%
- Growing to ~3.5% by year 3 as reputation builds
- SOM Year 1 = $168M × 2% = $3.36 million
- SOM Year 3 = $168M × 3.5% = $5.88 million
- SAM: $6.3 billion
- Market is fragmented with hundreds of competitors
- Realistic year-1 share for a bootstrapped startup: 0.001%
- SOM Year 1 = $6.3B × 0.001% = $63,000 (about 26 paying customers)
- SOM Year 3 (with product-market fit and marketing): 0.01% = $630,000
Notice how SOM brings the numbers down to reality. A $46.8 billion TAM sounds exciting. A $63,000 SOM for year one tells you the truth about where you're starting — and that's what your feasibility study needs.
Where to Find Market Data
The quality of your market sizing depends entirely on the quality of your data sources. Here's where to look:
Government Statistics:- Australian Bureau of Statistics (ABS) for Australian markets
- US Census Bureau and Bureau of Labor Statistics
- UK Office for National Statistics
- World Bank for international markets
- IBISWorld (industry-specific market reports)
- Statista (aggregated statistics across industries)
- Grand View Research, Mordor Intelligence, Allied Market Research (paid market reports)
- Industry association publications
- Competitor websites, annual reports, and press releases
- Job postings (indicate growth areas and team size)
- Review sites (customer volume indicators)
- Social media following (rough demand indicators)
- Tourism statistics (for hospitality businesses)
- Building permits (for construction/real estate)
- Business registration data
- Import/export data (for product businesses)
- Surveys and interviews with potential customers
- Expert interviews with industry insiders
- Local foot traffic data (for location-dependent businesses)
The challenge with manual market research is that it takes weeks to gather, verify, and synthesise this data. AI tools with search grounding can dramatically accelerate this process by pulling from current, verifiable sources in real-time.
Common Market Sizing Mistakes
1. The "If We Get Just 1% of the Market" Trap
This is the most classic mistake in market sizing. Entrepreneurs cite a massive TAM and then say "we only need to capture 1% to be a $50 million business." The problem is that "just 1%" of a large market is incredibly hard to achieve and this framing doesn't demonstrate any understanding of how you'll actually acquire customers.
Instead, build your SOM from the bottom up: how many customers can you realistically reach, convert, and serve?
2. Inflating TAM with Irrelevant Segments
Including market segments your business doesn't serve inflates TAM and makes SAM/SOM calculations meaningless. A premium dog food brand shouldn't include the entire pet food market (including cat food, budget brands, and livestock feed) in its TAM.
3. Ignoring Market Trends
A market that's shrinking at 5% per year is fundamentally different from one growing at 15% per year, even if today's size is identical. Your feasibility study should note the direction and rate of change, not just a static number.
4. Using Only Top-Down Data
Investors see through top-down-only market sizing immediately. It suggests you haven't done the work of understanding your actual customer economics. Always include bottom-up validation.
5. Not Citing Sources
Every market size claim in your feasibility study should be traceable to a verifiable source. Unsourced numbers are assumed to be made up — because they often are.
6. Confusing Revenue with Transaction Volume
Make sure your market sizing uses the right unit. The "coffee market" can be measured in cups sold, kilograms of beans, or dollars of revenue. Your TAM should be in revenue terms that map to your business model.
TAM/SAM/SOM in Your Feasibility Study
In a feasibility study, market sizing serves a specific purpose: it provides the foundation for your revenue projections. Here's how the three metrics connect to the rest of your financial analysis:
- TAM establishes that a meaningful market exists
- SAM defines the boundaries of your opportunity
- SOM drives your revenue projections
- Revenue projections feed into your P&L and cash flow forecasts
- Cash flow forecasts are used to calculate NPV, IRR, and payback period
- Sensitivity analysis tests what happens if your SOM is 10%, 20%, or 30% lower than projected
This chain of logic is what makes a feasibility study credible. Every number traces back to verifiable market data, and every projection has a clear basis in that data.
The Bottom Line
TAM, SAM, and SOM aren't just numbers for a slide deck — they're the foundation of every financial projection in your feasibility study. Get them right, and everything that follows (revenue forecasts, NPV, IRR, payback) is grounded in reality. Get them wrong, and your entire analysis is built on sand.
The key is rigour: use verifiable data sources, build bottom-up as well as top-down, be honest about your SOM, and cite everything.
SimpleFeasibility calculates TAM, SAM, and SOM automatically using Google Search-grounded data, with every source cited so you can verify independently. The analysis feeds directly into multi-year financial projections with NPV, IRR, and payback calculations — creating a complete, data-backed feasibility study in minutes. Calculate Your Market Size Now →Related Articles: