What Does Market Size Mean? A Simple Guide With Examples

If you’ve ever encountered a pitch deck claiming “We’re in a $100B market,” you’ve already been introduced to the concept of market sizing. The issue lies in the fact that many individuals perceive market size as a singular, enchanting figure.

It’s not.

Market size is a model. This estimate is constructed from a series of assumptions regarding potential buyers, the number of buyers in the market, their purchasing frequency, and the realistic price points they are willing to accept. When executed effectively, market size enables you to make more informed decisions. When executed poorly, it devolves into an illusion of mathematics.

This guide delves into the concept of market size, elucidates the workings of TAM/SAM/SOM, outlines practical methods for calculating market size, and provides strategies for verifying numbers before placing your trust in them.

The market size represents the projected demand for a product or service within a specified market during a particular timeframe, typically articulated as:

1. total revenue per year, or
2. number of potential customers/users per year

Market size is often broken into:

1. TAM (Total Addressable Market)
2. SAM (Serviceable Addressable Market)
3. SOM (Serviceable Obtainable Market)

What market size means (plain English)

The dimensions of the market provide insight into this inquiry:

“What is the financial potential or buyer interest for this product within this particular market during a defined timeframe?”

Market size vs market potential               

1. Market size: what exists today (or within a defined period).
2. Market potential: What possibilities might arise with the expansion of adoption or shifts in circumstances?

Market size vs market share

1. Market size: the whole pie.
2. Market share: the slice you capture from that pie.

Market size in revenue vs units

Both may indeed be accurate. The answer is contingent upon your specific requirements:

• Revenue sizing: essential for business plans and investor perspectives.
• Unit sizing: essential for strategic operational planning, pricing optimization, and precise demand forecasting.

TAM, SAM, SOM: the 3 layers you must understand

These three terms help you go from “big market claim” to “realistic plan.”

1. TAM: Total Addressable Market

TAM represents the complete demand that would exist if you were able to cater to every potential customer in need of your product.

It is the biggest circle.

2. SAM: Serviceable Addressable Market

SAM represents the segment of the TAM that you are capable of addressing based on:

1. your geography
2. Your product scope
3. Your segment focus
4. your distribution ability

SAM represents the specific market you are truly targeting.

3. SOM: Serviceable Obtainable Market

SOM represents what can be realistically achieved within a specified timeframe, considering:

1. competition
2. budgets
3. sales capacity
4. adoption barriers
5. brand trust and switching costs

SOM transforms sizing into execution.

How to calculate market size (the 3 practical methods)

1. Top-down market sizing

This begins with a comprehensive industry figure and subsequently refines it.

Example approach:

1. Start with an industry report number
2. Narrow by region
3. Narrow by segment
4. Apply realistic adoption assumptions

Pros:

1. fast
2. easy for early estimates

Cons:

1. easy to inflate
2. is significantly influenced by the underlying assumptions and the caliber of the report

Use top-down when:

• You have arrived ahead of schedule and require a preliminary assessment. You are evaluating
• Performance in relation to established industry classifications

2. Bottom-up market sizing (most credible)

This is grounded in actual buyer statistics and authentic pricing.

Formula examples:

1. Number of target customers × annual price
2. Number of buyers × average order value × purchase frequency

Pros:

1. grounded in reality
2. easier to defend

Connects directly to the market entry strategy

Cons:

1. takes more work
2. necessitates reliable data sources or approximations

Use bottom-up when:

• You are developing a comprehensive strategy and financial outline.
• You seek a figure that commands respect from investors.

3. Value-theory sizing (when the market is new)

This approach evaluates market size through the following criteria:

1. value created by the product
2. What is the price customers would be willing to pay to obtain that value?

Use it when:

1. There’s no clean category data
2. Your product creates a new market segment

Market size examples (with simple math)

Example 1: Local service business (a gym)

Scenario:

1. You’re opening a gym in a mid-sized area
2. You want to estimate the market size in revenue

Assumptions:

1. Local population: 300,000
2. Adults likely to consider gym membership: 150,000
3. Realistic “fitness joiners”: 10% = 15,000 people
4. Average annual membership value: 20,000 INR

Estimated market size:

1. 15,000 × 20,000 INR = 300,000,000 INR per year
   That’s 30 crores per year in your local area.

Now refine to SAM:

1. Your radius is smaller than the entire city
2. Your gym positioning targets working professionals
3. You can realistically reach 40% of that population slice

SAM estimate:

1. 30 crores × 40% = 12 crores/year

SOM (your realistic capture):

1. Let’s say you can capture 5% of SAM in 2 years
2. 12 crores × 5% = 60 lakhs/year

That SOM is more useful than a huge TAM.

Example 2: B2B SaaS market sizing (bottom-up)

Scenario:

1. You sell a SaaS tool for agencies
2. Your ideal customers: agencies with 10–100 staff
3. Average annual contract value (ACV): $3,000/year

Assumptions:

1. Number of ICP agencies in your target region: 50,000
2. ACV: $3,000/year

TAM estimate:

1. 50,000 × $3,000 = $150,000,000 per year

SAM (you only serve English-speaking markets initially):

1. 60% of TAM = $90,000,000/year

SOM (what you can capture in 3 years with your capacity):

1. 2% of SAM = $1,800,000/year

This gives you a realistic target and a hiring plan.

Read More: https://linkgrowthwizard.com/saas-marketing-essentials/

Example 3: E-commerce category sizing

Scenario:

1. You sell premium skincare
2. You want the market size in a specific region

Assumptions:

1. Target buyers in your region: 2,000,000
2. Buyers who purchase premium skincare: 15% = 300,000
3. Average order value: 1,200 INR
4. Average purchases per year: 4

Market size estimate:

1. 300,000 × 1,200 × 4
2. = 300,000 × 4,800
3. = 1,440,000,000 INR per year
   That’s 144 crores/year.

Now, if you only sell through online channels and premium buyers are split across platforms, your SAM and SOM will shrink. That’s normal and healthy.

Why market size matters (real business uses)

Market sizing is not just for investors. It helps with:

1. Pricing decisions (what the market can bear)
2. Go-to-market strategy (which segment to start with)
3. Budget and hiring planning (can revenue support scale?)
4. Expansion decisions (new industries, new geographies)
5. Product roadmap clarity (build what the largest paying segment needs)

Market sizing mistakes to avoid

If you want your numbers to be credible, avoid these traps:

1. Defining TAM as “everyone who uses the internet.”
2. Confusing interest withthe ability to pay
3. Ignoring adoption constraints (switching costs, trust, complexity)
4. Using one big report number with no explanation
5. Mixing geographies and segments in one estimate
6. Not defining timeframe (annual vs lifetime value)
7. Forgetting pricing reality (discounts, churn, deal cycles)

A simple rule: if your assumptions aren’t written down, your market size is not real.

A simple market sizing template you can copy

Use this checklist to build a clean TAM/SAM/SOM in 30 minutes.

1. Define your product category clearly
2. Define your geography (where you sell)
3. Define your ICP or buyer profile
4. Estimate the number of potential customers in that segment
5. Estimate ARPU/ACV (B2B) or AOV and purchase frequency (B2C)
6. Calculate TAM
7. Apply constraints to get SAM (region, segment, channel, product scope)
8. Apply realistic capture assumptions to get SOM
9. Create low/base/high scenarios by adjusting 2–3 key assumptions

Pro tip: your capture assumption should match your sales capacity and marketing reach, not your optimism.

FAQs

What’s the difference between market size and market share?

Market size is the total demand. Market share is what you capture.

Is TAM the same as market size?

TAM is one definition of market size, but it’s the broadest version. For planning, SAM and SOM matter more.

How do investors evaluate market size?

They look for:                        

1. clear assumptions
2. defensible customer counts
3. realistic pricing
4. believable SOM based on distribution and competition

What’s a good market size for a startup?

There’s no universal number. A “good” market is one where:

1. The segment can pay
2. You can reach them efficiently
3. You can differentiate
4. You can expand into adjacent segments over time

Can market size be measured in users instead of revenue?

Yes. Units are useful. Revenue is often more actionable for budgeting and strategy.

Market size is a model, not a fact

Market size isn’t about sounding big. It’s about being right enough to make decisions.

If you build your TAM/SAM/SOM with clear assumptions and bottom-up math, you’ll have a number you can actually use, not just a number you can brag about.

If you want, tell me your business type, target region, and pricing model. I’ll calculate a sample TAM/SAM/SOM with low, base, and high scenarios using your exact context.