How Do You Calculate Market Size
Understand the size of your market opportunity. Calculate TAM, SAM, and SOM for business planning.
How the How Do You Calculate Market Size works
Define your target market, gather customer counts and pricing data, then calculate total addressable market (TAM), serviceable available market (SAM), and realistic market share (SOM).
Investors ask “how big is the market?” because even great execution in a tiny market produces limited returns. Learn to calculate market size credibly.
How it works
Tutorial
When investors ask “How big is the market?” they’re determining if your opportunity is worth pursuing. A company capturing 50% of a $20 million market is far less valuable than one capturing 5% of a $5 billion market. Market sizing helps you understand if your ambition matches reality and separates fundable opportunities from small businesses.
Most founders confuse Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM). Professional market sizing uses systematic approaches: top-down (industry data), bottom-up (customer counts), and value theory (problem value). Learning these methods prevents pitch deck mistakes like claiming a “$500 billion market” when your realistic opportunity is $50 million.
The Basic Approaches
| Approach | Formula | Best For |
|---|---|---|
| Top-Down | Industry Size × Your Segment % | Established markets with data |
| Bottom-Up | Target Customers × Price per Customer | Validating estimates |
| Value Theory | Customers × Problem Cost × Capture % | New markets |
Step-by-Step Example
Scenario:Practice management software for small-to-medium dental practices in the United States
Step 1: Calculate TAM (Top-Down)
| Component | Data Source | Value |
|---|---|---|
| Total US Dental Practices | Industry statistics | 201,000 practices |
| Practice Management Software Market | Industry reports | $2.1B annual |
| Average Spend per Practice | $2.1B / 201,000 | $10,448/year |
| TAM (Total Market) | All dental practices | $2.1 Billion |
Step 2: Calculate SAM (Bottom-Up)
| Segment Filter | Calculation | Result |
|---|---|---|
| Total Practices | Starting point | 201,000 |
| Practice Size: 1-5 dentists | 70% of practices | 140,700 |
| Use Cloud Software | 65% adoption | 91,455 |
| Budget Fit: $3K-15K/year | 80% in range | 73,164 |
| Your Price | $299/month | $3,588/year |
| SAM (Serviceable Market) | 73,164 × $3,588 | $262.5 Million |
Step 3: Calculate SOM (Realistic Target)
| Factor | Assumption | Calculation |
|---|---|---|
| Serviceable Market | 73,164 practices | $262.5M |
| Year 5 Market Share | 3% realistic goal | 2,195 customers |
| Customer Growth Rate | ~10 customers/month average | Achievable |
| Annual Customer Loss | 15% churn rate | Industry standard |
| Year 5 Revenue (SOM) | 2,195 × $3,588 | $7.9 Million |
| Market Share | $7.9M / $262.5M | 3.0% |
What This Means
Your realistic market opportunity is $262.5 million (SAM), not the $2.1 billion total dental software market (TAM). The TAM includes large practices, hospitals, and specialty clinics that will never buy your product. Your SAM focuses on small-to-medium practices with cloud adoption and appropriate budgets. The 5-year target of $7.9 million revenue (3% market share) is an achievable goal that could support a $40-80 million company valuation.
Present all three numbers to show sophistication: “We’re entering a $2.1 billion market (TAM), specifically targeting the $262 million small-practice segment (SAM), with a realistic 5-year goal of $7.9 million revenue representing 3% market share (SOM).” This demonstrates you understand the difference between total opportunity and achievable results. Market share above 10% raises skepticism without extraordinary proof.
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