Market Sizing: How to Measure Market Size + Examples

What Is Market Sizing?

Market sizing is the process of estimating the total revenue or potential number of customers for a specific product or service within a defined market. It helps businesses assess demand, forecast revenue, and make strategic decisions.

Why Is Market Sizing Important?

1. Guides Business Strategy – Helps companies determine if a market is worth entering or expanding into.
2. Attracts Investors – Investors want to see growth potential and realistic revenue projections before funding a business.
3. Improves Sales & Marketing Plans – Knowing market size helps target the right customer segments and allocate budgets efficiently.
4. Prevents Costly Mistakes – Launching in an unprofitable or oversaturated market can lead to failure.

👉 Example: A startup developing an AI-powered fitness app would use market sizing to estimate how many potential users exist and how much revenue they could generate.

Key Market Sizing Metrics

1. Total Addressable Market (TAM)

TAM represents the entire potential demand for a product or service if there were no competitors or limitations. It is the largest possible market size a company could capture.

👉 Example: The global fitness app industry was valued at $1.3 billion in 2023, meaning this is the TAM for all fitness apps worldwide.

2. Serviceable Available Market (SAM)

SAM is the portion of the TAM that a company can realistically serve, based on factors like geography, target audience, and business capabilities.

👉 Example: If a fitness app only targets English-speaking users in the U.S., its SAM would be smaller than the global TAM.

3. Serviceable Obtainable Market (SOM)

SOM is the realistic market share a business can capture within its SAM, considering competition, pricing, and marketing budget.

👉 Example: If the U.S. fitness app market is $300 million, but a startup estimates it can acquire 2% of the market, its SOM would be $6 million.

How to Calculate Market Size

1. Top-Down Approach (Industry Research Method)

This method starts with a broad industry size estimate and narrows it down based on specific market filters.

Steps:

1. Find TAM data from industry reports (e.g., IBISWorld, Statista, McKinsey).
2. Refine the market scope using demographics, region, or industry focus to estimate SAM.
3. Estimate SOM based on competition and market entry strategy.

👉 Example: If the global coffee industry is $500 billion, but a company targets premium organic coffee in the U.S. ($50 billion market) and expects 5% market penetration, the SOM would be $2.5 billion.

2. Bottom-Up Approach (Customer-Driven Method)

This method starts with individual customer data and scales it up to estimate market size.

Steps:

1. Estimate the number of potential buyers in the target market.
2. Determine the average revenue per customer (ARPU).
3. Multiply the total customers by ARPU to calculate SOM.

👉 Example: If a SaaS company estimates 50,000 potential customers, with an ARPU of $1,000 per year, its SOM would be $50 million.

3. Value-Theory Approach (Revenue-Based Method)

This method estimates market size based on the value a product creates and how much customers are willing to pay.

Steps:

1. Identify the problem your product solves.
2. Estimate how much customers currently spend on alternatives.
3. Calculate how much of that spending could shift to your product.

👉 Example: If companies spend $10 billion on traditional CRM systems, and a new AI-powered CRM aims to capture 10% of that market, its SOM would be $1 billion.

Common Market Sizing Mistakes to Avoid

1. Relying Only on TAM

Just because an industry is worth billions doesn’t mean your company can capture a significant portion of it. Focus on SAM and SOM for a realistic estimate.

2. Using Outdated or Unreliable Data

Markets change rapidly—using old reports or unverified sources can lead to wrong assumptions. Always use the latest research and cross-check multiple data sources.

3. Ignoring Customer Behavior & Competition

A large market doesn’t guarantee success. Businesses must consider how customers make decisions and how competitors already dominate the space.

4. Overestimating Growth Potential

Many startups assume they will capture 10%+ market share, but realistic estimates should be based on actual marketing budgets, competition, and adoption rates.

5. Not Adjusting for Niche Markets

Some industries are highly specialized (e.g., B2B SaaS, medical devices). If your product serves a niche, your TAM will be much smaller than general industry reports suggest.