Skills
skills/slgoodrich/agents/market-sizing-frameworks

market-sizing-frameworks

SKILL.md

Market Sizing Frameworks

Frameworks and methodologies for estimating market size and validating market opportunity.

Overview

Market sizing answers the critical question: "Is this opportunity large enough to pursue?" It provides the foundation for strategic decisions, resource allocation, and investment prioritization.

Core Principle: Market sizing is educated guessing with documented assumptions. The goal is reasonable estimates and order-of-magnitude accuracy (is it $1M, $10M, or $100M?), not false precision.

Key Insight: Always use multiple methods (bottom-up, top-down, value theory) to triangulate and validate estimates. If methods disagree by more than 2-3x, your assumptions need scrutiny.

When to Use This Skill

Auto-loaded by agents:

  • market-analyst - For TAM/SAM/SOM calculation and market validation

Use when you need to:

  • Assess if a market opportunity is worth pursuing
  • Calculate TAM, SAM, and SOM for business planning
  • Validate market assumptions before building
  • Support fundraising or strategic planning
  • Evaluate competitive landscape impact on opportunity
  • Determine realistic revenue projections

The Three-Tier Framework

TAM (Total Addressable Market)

Definition: Total revenue opportunity if you achieved 100% market share globally.

Purpose: Understand the absolute ceiling of opportunity.

Typical Range:

  • Side project: $1M+ TAM minimum
  • Full-time business: $10M+ TAM minimum
  • VC-backed startup: $100M+ TAM minimum

Calculation: See three methods below.

SAM (Serviceable Addressable Market)

Definition: Portion of TAM you can realistically serve given your business model, geography, and product capabilities.

Purpose: Your realistic target market after applying real-world constraints.

Filters to Apply:

  1. Geographic reach: Where can you operate?
  2. Customer segment: Which types of customers fit your solution?
  3. Product capabilities: Who can your product actually serve?
  4. Distribution channels: Who can you reach?

Typical Range: SAM is usually 10-40% of TAM for focused products.

Formula:

SAM = TAM × Geographic % × Segment % × Product Fit % × Distribution %

SOM (Serviceable Obtainable Market)

Definition: Portion of SAM you can realistically capture in the near term (1-3 years).

Purpose: Your achievable revenue target given resources, competition, and time constraints.

Realistic Benchmarks:

  • Year 1: 0.1-0.5% of SAM (new products)
  • Year 3: 1-5% of SAM (if successful)
  • Year 5: 5-15% of SAM (market leader position)

Formula:

SOM = SAM × Realistic Market Share %

Reality Check: Convert SOM to customer count. Is that number achievable per month/week?

Three Market Sizing Methods

Always use all three methods for robust validation. If they disagree significantly, investigate your assumptions.

Method 1: Bottom-Up (Most Reliable)

Approach: Count actual customers and multiply by revenue per customer.

Formula:

TAM = Total Potential Customers × Average Revenue per Customer

Process:

  1. Define who is a potential customer (be specific!)
  2. Count them using reliable data sources
  3. Apply realistic adoption/penetration filters
  4. Estimate average annual revenue per customer
  5. Multiply to get TAM

Strengths:

  • Most grounded in reality
  • Easy to validate assumptions
  • Can name actual customers

When to Use: Always start here as your primary method.

Complete methodology: See references/market-sizing-methodologies.md for detailed step-by-step process with examples.

Method 2: Top-Down (For Validation)

Approach: Start with total market size and estimate your segment percentage.

Formula:

TAM = Total Market Size × Your Segment %

Process:

  1. Find comparable market size data (Gartner, IDC, etc.)
  2. Identify what percentage is your specific segment
  3. Apply multiple filters to narrow down
  4. Compare to bottom-up calculation

Strengths:

  • Quick sanity check
  • Uses industry research
  • Good for validation

Weaknesses:

  • Often produces inflated numbers
  • Hard to validate percentages
  • Can feel like guesswork

When to Use: As secondary validation, never as primary method.

Complete methodology: See references/market-sizing-methodologies.md for examples and industry applications.

Method 3: Value Theory

Approach: Calculate value created for customers, then estimate capture rate.

Formula:

TAM = (Value Created per Customer × Potential Customers) × Capture Rate %

Process:

  1. Quantify value delivered (time saved, cost reduced, revenue increased)
  2. Calculate dollar value of that benefit
  3. Determine what percentage you can capture in pricing (typically 10-30%)
  4. Multiply by potential customer base

Strengths:

  • Tests pricing assumptions
  • Grounds estimates in customer value
  • Helps justify pricing strategy

When to Use: To validate pricing is reasonable relative to value created.

Complete methodology: See references/market-sizing-methodologies.md for value calculation frameworks.

Validation Framework

The Reality Check Questions

Before trusting your market sizing, validate with these critical tests:

1. Can you name 10 specific potential customers?

  • If no: Market may be too narrow or unclear
  • If yes: Proceed with confidence

2. Are there existing competitors making money?

  • If yes: Market is validated (good!)
  • If no: Either no market exists OR huge greenfield (risky)

3. Does TAM > SAM > SOM make sense?

  • Progression should be logical
  • SAM typically 10-40% of TAM
  • SOM Year 1 typically 0.1-1% of SAM

4. Is Year 1 SOM achievable with your resources?

  • Convert to customer count per month
  • Is that acquisition rate realistic?
  • Do you have budget/capacity?

5. Is the market big enough to justify effort?

  • Minimum thresholds matter
  • Compare to your goals (bootstrap vs VC)

Complete validation checklist: See assets/market-validation-checklist.md for comprehensive 100+ point validation framework.

Common Mistakes to Avoid

  1. Confusing TAM with SAM - Be explicit which number you're discussing
  2. Top-down only sizing - Always validate with bottom-up
  3. Ignoring competition - Available market is smaller than total market
  4. Assuming linear growth - Use S-curves, not straight lines
  5. No customer names - If you can't name 10 customers, market may not exist
  6. One-and-done sizing - Update assumptions quarterly as you learn

Detailed guide: See references/market-sizing-best-practices.md for:

  • How to avoid each mistake
  • Industry-specific considerations
  • Competitive landscape analysis
  • Assumption management frameworks
  • Sensitivity analysis approaches
  • Case studies (Superhuman, Quibi, Figma, Slack)

Recommended Workflow

Step 1: Bottom-Up Calculation (Primary)

Use this as your primary estimate:

  1. Define universe of potential customers (be specific)
  2. Count them using reliable data sources
  3. Estimate realistic adoption/penetration percentage
  4. Determine average annual revenue per customer
  5. Calculate: TAM = Customers × Adoption % × Price

Tool: Use assets/market-sizing-calculator.md for step-by-step worksheet with formulas.

Step 2: Top-Down Validation (Secondary)

Validate your bottom-up with industry data:

  1. Find comparable market size from research firms
  2. Estimate what percentage is your segment
  3. Compare to bottom-up calculation
  4. If within 2-3x: Good confidence
  5. If >5x difference: Investigate assumptions

Step 3: Value Theory Check

Test pricing reasonableness:

  1. Quantify value delivered to customers
  2. Calculate dollar value of benefits
  3. Determine capture rate (10-30% typical)
  4. Validate pricing is within reasonable range

Step 4: Apply SAM Filters

Narrow TAM to realistic serviceable market:

Starting TAM: $__________

Geographic filter: × ____% = $__________
Segment filter: × ____% = $__________
Product fit filter: × ____% = $__________
Distribution filter: × ____% = $__________

Final SAM: $__________

Template: Use assets/tam-sam-som-template.md for complete calculation template.

Step 5: Calculate Realistic SOM

Project achievable market capture:

Conservative Approach:

  • Year 1: 0.1-0.3% of SAM
  • Year 2: 0.5-1% of SAM
  • Year 3: 1-3% of SAM

Consider:

  • Competitive intensity (high = lower %)
  • Switching costs (high = lower %)
  • Your differentiation (strong = higher %)
  • Distribution advantage (strong = higher %)

Step 6: Validate Thoroughly

Run through comprehensive validation:

  1. Complete all reality checks
  2. Verify unit economics work (LTV:CAC ratio)
  3. Check competitive landscape math
  4. Model three scenarios (pessimistic, base, optimistic)
  5. Conduct sensitivity analysis on key assumptions

Validation tool: Use assets/market-validation-checklist.md for systematic validation.

Step 7: Document Assumptions

Critical for updating as you learn:

## Key Assumptions

1. Customer count: [number]
   - Source: [where this came from]
   - Confidence: [High/Medium/Low]
   - Impact if wrong: [+/- X% on TAM]

2. Pricing: $[amount]/year
   - Basis: [competitive analysis, value-based, etc.]
   - Confidence: [High/Medium/Low]
   - Impact if wrong: [direct 1:1 impact]

3. Adoption rate: [%]
   - Basis: [customer interviews, analogies, etc.]
   - Confidence: [High/Medium/Low]
   - Impact if wrong: [+/- X% on TAM]

Templates and Tools

Calculation Tools

Complete TAM/SAM/SOM Template:

  • assets/tam-sam-som-template.md
  • Full calculation framework with all filters
  • Includes validation checklist
  • Assumption documentation section
  • Sensitivity analysis worksheet

Step-by-Step Calculator:

  • assets/market-sizing-calculator.md
  • All three methods with formulas
  • Worked examples
  • Comparison framework
  • Confidence scoring

Validation Checklist:

  • assets/market-validation-checklist.md
  • 100+ validation points
  • Reality checks and red flags
  • Customer count validation
  • Pricing validation
  • Competitive validation

Reference Guides

Comprehensive Methodologies

Complete Methods Guide:

  • references/market-sizing-methodologies.md
  • Detailed bottom-up, top-down, and value theory processes
  • Industry-specific approaches (B2B SaaS, Consumer, Enterprise, Marketplace, Dev Tools)
  • Method comparison and triangulation
  • Data source recommendations

Best Practices Guide:

  • references/market-sizing-best-practices.md
  • Common mistakes and how to avoid them
  • Validation frameworks
  • Competitive landscape analysis
  • Assumption management
  • Sensitivity analysis
  • Case studies: Superhuman, Quibi, Figma, Slack
  • Advanced considerations (timing, geographic expansion, platform effects)

Summary

Market sizing is educated guessing - the goal is reasonable estimates with documented assumptions, not precision.

The Three-Step Approach:

  1. Calculate: Use all three methods (bottom-up, top-down, value theory)
  2. Validate: Reality-check with customers, competition, and economics
  3. Document: Track assumptions and update quarterly

Key Principles:

  • Always start with bottom-up (most reliable)
  • Use top-down only for validation
  • Can you name 10 customers? (Critical test)
  • Update assumptions as you learn
  • Model three scenarios (pessimistic, base, optimistic)

Decision Framework:

  • If SAM < $10M: Too small for most ventures
  • If Year 1 SOM < $50K: Question if worth effort
  • If methods disagree >5x: Assumptions need work
  • If no competitors exist: Either no market OR huge opportunity (validate carefully)

Related Skills

  • product-positioning - Position against competitive landscape
  • product-market-fit - Validate market demand exists
  • competitive-analysis-templates - Analyze market attractiveness and competitive dynamics
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