Follow these 6 steps to size a market using top-down and bottom-up approaches. Includes formulas, examples, and tips for product managers.
Last updated: April 2026
Decide what one customer of your product looks like and what they pay you per year, before any number goes in the model. Without this anchor, the market-sizing math is just round numbers.
Formula
Unit of demand = (buyer + product unit + geography) priced at ACV or ARPU per yearPro tip: Write the unit definition on top of your sizing model. Every number below has to be consistent with it.
Bottom-up market sizing starts from real, observable data: number of qualifying buyers and the price they’d pay. It’s almost always more defensible than a top-down number because you can show your work.
Formula
Bottom-up TAM = qualifying buyers x annual contract valuePro tip: Bottom-up assumes 100% market capture, which is fine for TAM. The realism check comes in the SAM and SOM steps.
Top-down sizing starts with a published total-category number and narrows it to your slice. It’s quick but easy to inflate, so use it as a sanity check on bottom-up rather than the primary number.
Formula
Top-down TAM = total category spend x relevant segment percentagePro tip: If your top-down and bottom-up numbers are within ~30%, you have a defensible TAM. If they’re an order of magnitude apart, one of them is wrong.
When top-down and bottom-up disagree, the cause is usually definitional drift between the two models. Track it down before sizing SAM.
Formula
TAM = the reconciled number, with gap drivers documentedPro tip: A reconciled TAM with both methods shown side by side is the single most credible market-size artifact you can put in a deck.
SAM is the slice of TAM you can realistically serve given your business model. Apply geography, segment, and channel filters. Don't apply competitor share yet. SAM still assumes you could win it.
Formula
SAM = TAM x serviceable filters (geography, segment, channel)Pro tip: SAM is where most market-size models lie. Be honest about which filters you can actually meet today versus aspirations for next year.
SOM is what you can actually win in the next 1-3 years given your team, sales motion, and competition. Investors expect SOM to be a small fraction of SAM, often 1-5% in year one for a seed-stage business.
Formula
SOM = SAM x realistic capture rate in the planning windowPro tip: A SOM larger than 10% of SAM in year one usually signals a misdefined SAM. Either the SAM is too narrow or the SOM is too optimistic.
Skip the spreadsheet. Use our free Market Sizing calculator with side-by-side top-down and bottom-up modes plus a SOM realism check.
Open Free Market Sizing CalculatorDo both, but lead with bottom-up. Bottom-up forces you to confront real buyer counts and pricing, which keeps the model honest. Use top-down as a sanity check that your bottom-up isn’t off by an order of magnitude.
For seed-stage startups, investors typically expect SOM to be 1-5% of SAM in year one and to scale into the high single digits by year three. Anything higher than 10% in year one usually means the SAM is too narrowly defined.
Government statistics agencies (Census, Eurostat), industry associations, public company filings (10-Ks for revenue figures), and commercial databases such as Crunchbase, ZoomInfo, or Apollo. Cite each source. If a number isn't sourced, it isn't credible.
Bottom-up only. Estimate buyer counts from analogous categories and use your own willingness-to-pay research for ACV. Be transparent that the number is a forecast, not a measurement.
Annually at minimum, more often if you're entering a new geography or segment. Sizing data ages quickly, especially in fast-moving categories where the buyer count or category spend can shift 20% year over year.