A strategy to calculate the market size: TAM, SAM, and SOM

Make no mistake, size does matter. Although it is not something that should obsess us if a minimum is necessary.

Of course, I am talking about the size of the market, a key variable to understand the potential of a project. But calculating it is not easy: it is difficult to find data and there are several ways to do it … which is the best?

A few years ago I was analyzing the size of the market for my new project, and I had the question of what figure to use to assess how big the opportunity was (the famous market size)… and of course, the doubts appear: What do I consider as my market? The world of entrepreneurship in general? What am I going to provide?

Fortunately, there are three approaches are used there to value the market: TAM, SAM and SOM … and I found the way to approach it so interesting that, I thought it would be interesting to share it with you following my policy of sharing everything I learn :-)

These figures are especially important when we are going to look for investment for our project since it will be one of the first questions investors will ask you … given that it allows them to get an idea of ​​the overall potential of the project, and of the possible total route it may have.

HOW TO MEASURE THE MARKET SIZE WITH TAM, SAM, AND SOM?

1. TAM — Total Addressable Market (Total or addressable market) It
   aims to model how big is the universe we are targeting and serves to analyze how big the business opportunity is, or in other words, its total potential if the model later of business pivots. To calculate it in more or less known markets we can use the sum of the turnover of all its main competitors globally, or go to existing studies where the volume of the market is indicated. If this information does not exist often the best we can use are guesstimations (or estimates constructed from bottom to top .. thanks Mario !) with which to reason and get an idea of ​​the total demand potential of the business.