When it comes to sizing your market, two approaches dominate: top-down—starting from broad industry figures—and bottom-up—building from customer-level data. Each has unique strengths, and using them together ensures both speed and precision in your TAM, SAM & SOM analyses.
Top-Down Approach: The Bird’s-Eye View
The top-down method leverages published industry reports and macroeconomic data. You begin with a large pool—like total software spending—then apply filters (geography, segment, user type) to zero in on your target. This approach delivers a rapid, high-level estimate:
- Quick insights: Great for early validation or benchmarking against competitors.
- Data sources: Industry analyst reports, government statistics, public filings.
- Watch out for: Overly broad assumptions that may mask niche opportunities.
Bottom-Up Approach: The Ground-Level Build
Bottom-up sizing starts with concrete data points—number of potential customers or units sold—multiplied by your average revenue per unit. It’s inherently more granular:
- Investor-ready: Builds a defensible model using tangible inputs.
- Customization: Tailor assumptions by segment, channel or pricing tier.
- Time investment: Requires detailed data gathering and validation.
When & Why to Combine Them
Rather than choosing one over the other, cross-verify bottom-up results against your top-down benchmarks. Discrepancies often highlight blind spots—missing segments, outdated data, or pricing misalignments. In practice:
- Run a bottom-up model in our Market Opportunity Simulator.
- Compare to industry totals via top-down reports.
- Adjust assumptions until both methods converge on a realistic range.
Practical Example: SaaS Startup
Imagine a SaaS company targeting mid-market CRM users:
- Top-down: $100 B global CRM spend × 10% mid-market share → $10 B TAM.
- Bottom-up: 200,000 target companies × $2K average contract → $400 M TAM.
- Reconcile: Investigate the $9.6 B gap to refine your segment definition.
From TAM to SAM & SOM
Once TAM is set, filter for what you can actually serve (SAM) and what you can capture quickly (SOM).
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