| name | market-sizing-methods |
| description | TAM/SAM/SOM estimation, ICP definition, and customer segment sizing. Use when estimating market opportunity, defining ideal customer profiles, or sizing addressable segments. |
Market Sizing Methods
Market sizing is frequently done wrong — either too optimistically (top-down from industry reports) or too vaguely (hand-waving about "a large and growing market"). This skill covers rigorous methods for estimating opportunity size and defining who to target.
When to Use This Skill
- Sizing the opportunity before committing to a product direction
- Defining the ideal customer profile (ICP) for a new product or segment
- Estimating TAM/SAM/SOM for business planning or investor materials
- Validating whether a niche is large enough to build a business on
- Segmenting an existing user base by value and growth potential
Core Concepts
TAM / SAM / SOM
| Term | Definition | Question It Answers |
|---|
| TAM — Total Addressable Market | Everyone who could theoretically buy this | How big is the universe? |
| SAM — Serviceable Addressable Market | The portion you can realistically reach with your current model | How much of TAM can you access? |
| SOM — Serviceable Obtainable Market | What you can realistically capture given competition and constraints | What can you actually win? |
TAM is for context. SAM is for planning. SOM is for forecasting.
Top-Down vs. Bottom-Up
Top-down: Start from industry size data, apply percentages down to your segment.
- Fast but often inaccurate — percentages compound errors
- Use as a sanity check, not a primary estimate
Bottom-up: Start from individual customer unit economics, build up.
- More work but far more defensible
- Forces explicit assumptions about pricing and adoption
Always do both and compare. When they diverge significantly, investigate why.
Bottom-Up TAM Estimation
Steps
- Define the unit: What's one customer? (one business, one user, one seat)
- Define the universe: How many units exist that match your target definition?
- Apply revenue per unit: What would each unit pay per year?
- Multiply: Universe × ARPU = TAM
Example
Product: B2B expense management tool
Target: SMBs with 10-200 employees in the US
Step 1 — Universe:
US businesses with 10-200 employees: ~1.5M (Census Bureau data)
Subset with travel/expense activity: ~60% = 900K businesses
Step 2 — ARPU:
Base price: $15/seat/month × avg 25 seats = $375/month = $4,500/year
Step 3 — TAM:
900K businesses × $4,500/year = $4.05B TAM
SAM (reachable via digital/PLG model):
Businesses with >5 employees that use SaaS tools: ~40% = 360K
360K × $4,500 = $1.62B SAM
SOM (Year 3 target):
0.5% market share = 1,800 customers × $4,500 = $8.1M ARR
Transparency Requirements
For every market size estimate, document:
- The data source for the universe size
- The assumptions behind any percentages applied
- The revenue per unit assumption and how it was derived
- Confidence level: High (primary research), Medium (secondary data), Low (estimation)
ICP Definition
The Ideal Customer Profile describes the type of customer most likely to buy, retain, and expand. It's not a persona (who they are) — it's a firmographic and behavioral profile (what kind of organization they are and what they're doing when they buy).
ICP Template
# Ideal Customer Profile: [Segment Name]
## Firmographics (B2B) / Demographics (B2C)
- Company size: [employees / revenue range]
- Industry: [specific verticals]
- Geography: [regions / markets]
- Tech maturity: [description]
## Behavioral Signals
- What triggers them to look for a solution like ours:
- What they're currently using (or doing) instead:
- How they evaluate and buy:
## Jobs to Be Done
- Primary job: [what they're trying to accomplish]
- Constraints: [what limits their current approach]
## Value Realization
- Time to first value: [how quickly they see benefit]
- Expansion pattern: [how usage grows after initial purchase]
- Retention risk: [what causes churn]
## Negative ICP (who to avoid)
- [Characteristics of customers who churn, are unprofitable, or require excessive support]
ICP Validation Signals
An ICP definition is a hypothesis until validated by:
- Win rate: Deals matching the ICP close at a higher rate
- Time to value: ICP customers reach activation faster
- Retention: ICP customers churn less
- NPS / satisfaction: ICP customers are more satisfied
- Expansion: ICP customers expand their usage
If your best customers don't match your stated ICP, update the ICP.
Segment Sizing and Prioritization
When multiple segments exist, score each on:
| Dimension | Question | Score |
|---|
| Size | How many potential customers? | 1-5 |
| Willingness to pay | How much would they pay? | 1-5 |
| Accessibility | How easy to reach and sell? | 1-5 |
| Strategic fit | How well does this segment align with our strengths? | 1-5 |
| Growth trajectory | Is this segment growing? | 1-5 |
Rank segments by total score. Focus initial go-to-market on the top 1-2 segments.
Common Sizing Mistakes
| Mistake | Why It's Wrong | Fix |
|---|
| "1% of a $10B market" | Doesn't explain HOW you get that 1% | Build a bottom-up model instead |
| Using industry reports uncritically | Reports define markets differently than your product | Redefine from first principles |
| Conflating TAM with SAM | Not all of TAM is reachable with your GTM model | Apply accessibility filters |
| No negative ICP | Targeting everyone means optimizing for no one | Define explicitly who you're NOT targeting |
| Static sizing | Markets change; a 3-year-old estimate may be wrong | Date estimates and refresh annually |
Best Practices
- Show your work — every number needs a source or a stated assumption
- Use ranges, not point estimates — $400M–$700M is more honest than $550M
- Start with SAM, not TAM — TAM impresses; SAM is what you can actually build a business on
- Test the ICP against real customers — your best customers define the ICP, not the other way around
- Update annually — market structure changes; stale sizing leads to wrong decisions
