How to Do Bottom-Up Market Sizing: A Step-by-Step Guide (2026)

Startup founders don't have it easy. We're pitching investors who've seen thousands of decks. We're competing against teams with bigger budgets and more data. We need to prove our market opportunity is real – not with hand-wavy industry reports, but with numbers we can defend.

That's where bottom-up market sizing comes in. You build your market estimate from the ground up, customer by customer, segment by segment. It's harder than pulling a number from a Gartner report. But it's also far more credible – and it forces you to truly understand who you're selling to.

This guide walks you through the complete process, from identifying your customer segments to calculating TAM, SAM, and SOM. You'll also learn the common mistakes that sink market sizing analyses – and how to avoid them.

What Is Bottom-Up Market Sizing?

Bottom-up market sizing estimates market potential starting from individual customers. Instead of taking a $50 billion industry figure and carving out your slice, you identify exactly who would buy your product, how many of them exist, and what they'd pay.

The core formula is simple:

Number of Customers × Revenue per Customer = Market Size

For one-time purchases, revenue per customer equals price times purchase frequency. For subscriptions, it's your Annual Revenue Per User (ARPU).

This method takes more work than top-down sizing. But the payoff is significant: you end up with estimates grounded in real customer behavior, not analyst projections.

Breaking it down:

1. Average Selling Price × How often they buy.

2. Annual Revenue Per User (ARPU) for subscriptions.

So, for market sizing:

• For general products: Number of Customers × Average Price × Purchase Frequency = Market Size

• For subscriptions: Number of Customers × Average Revenue Per User (ARPU) = Market Size

This method offers a clearer, more tailored market potential estimate than top-down approaches. It considers your product, audience, and pricing. It leads to a realistic view of market opportunities.

Why VCs Prefer Bottom-Up Market Sizing

Investors have sat through countless pitches where founders claim "if we capture just 1% of this $100 billion market..." That math looks easy. It's also meaningless.

Here's the sobering truth: VCs dismiss top-down sizing because it reveals nothing about whether you understand your actual customers. Bottom-up sizing does the opposite. It shows you've done the research, identified specific segments, and calculated realistic revenue potential.

When you present a bottom-up analysis, you're demonstrating:

1. Deep market knowledge. You know exactly who your customers are – not a vague "enterprises" or "millennials."

2. Analytical rigor. Building a bottom-up model requires real data and defensible assumptions.

3. Strategic clarity. You've identified which segments to target first and why.

4. Realistic expectations. Your numbers reflect what you can actually capture, not theoretical maximums.

The effort signals commitment. VCs can see you've spent weeks researching, not minutes Googling.

TAM, SAM, and SOM Explained

Before diving into calculations, you need to understand three levels of market opportunity:

Total Addressable Market (TAM) represents the entire demand for your product category. If every possible customer bought from you, this is the revenue ceiling. It's your "if we dominated the world" number.

Serviceable Addressable Market (SAM) is the portion of TAM you can actually target given your product, geography, and go-to-market approach. A project management tool built for agencies can't realistically serve manufacturing plants – so they're excluded from SAM.

Serviceable Obtainable Market (SOM) is what you can realistically capture in the near term. It accounts for competition, your current resources, and market penetration rates. This is the number you'll actually plan against.

Think of it as a funnel: TAM is everyone who might ever need your solution. SAM is everyone you could reasonably sell to. SOM is what you'll likely win in the next 1-3 years.

How to Calculate Bottom-Up Market Size: Step by Step

Step 1: Identify Your Customer Segments

Start by defining who actually buys what you're selling. Generic descriptions like "small businesses" won't cut it. You need specific, identifiable segments.

Ask yourself:

• What industry are they in?

• What's their company size (employees, revenue)?

• What role does the buyer hold?

• What problem are they desperately trying to solve?

For a B2B expense management tool, your segments might be:

• Seed-stage startups (2-10 employees) with no finance team

• Series A/B companies (11-50 employees) with one part-time finance person

• Mid-market companies (51-200 employees) with a dedicated controller

Each segment has different needs, willingness to pay, and purchase behavior. Treat them separately.

Step 2: Estimate Potential Customers in Each Segment

Now quantify each segment. How many companies or individuals match your criteria?

Data sources include:

• Government databases (Census Bureau, Bureau of Labor Statistics)

• Industry associations and trade publications

• LinkedIn Sales Navigator for company counts by size/industry

• Existing customer data extrapolated outward

Let's say you're targeting Series A/B SaaS startups in the US:

• Crunchbase shows roughly 8,000 US companies raised Series A or B in the last 3 years

• Filter for software/SaaS: approximately 3,200 companies

• Assume 70% are actively spending on tools like yours: 2,240 companies

Document your sources and assumptions. VCs will ask.

Step 3: Calculate Average Revenue Per User (ARPU)

What would each customer pay you annually? This varies by segment.

For the expense management example:

• Seed-stage startups: $1,200/year (basic plan)

• Series A/B companies: $6,000/year (mid-tier plan with integrations)

• Mid-market companies: $24,000/year (full suite with dedicated support)

Base these figures on competitor pricing, customer interviews, or your own pricing strategy. If you're pre-revenue, use comparable products as benchmarks.

Step 4: Calculate Segment Revenue and Total TAM

Multiply customers by ARPU for each segment, then sum:

This is your Total Addressable Market: the revenue if you captured every customer in every segment.

Step 5: Narrow to SAM

Not everyone in your TAM is actually reachable. Filter for:

• Geography (US-only for now?)

• Product fit (does your current product serve all segments?)

• Sales capacity (can you sell to enterprises today?)

If you're starting with seed-stage and Series A/B only – no enterprise sales motion yet—your SAM might be:

$14.4M + $13.4M = $27.8M SAM

Step 6: Estimate Your SOM

SOM is what you can realistically capture near-term. Factor in:

• Current market share of competitors

• Your sales capacity and growth rate

• Realistic penetration rates for new entrants

For a year-one startup, capturing 2-5% of SAM is aggressive but plausible with strong execution. At 3%:

$27.8M × 3% = $834K SOM (Year 1)

This becomes your revenue target and sanity check.

Industry-Specific Considerations

Bottom-up sizing looks different depending on your business model. Here's how to adapt:

SaaS Companies

The SaaS market is hyper-competitive. Your segments should account for:

• Contract value by company size

• Expected churn rates (affects lifetime value)

• Expansion revenue potential (upsells, seat growth)

For SaaS, consider calculating both ARR (Annual Recurring Revenue) potential and LTV-adjusted market size. If average customer lifetime is 3 years and ARPU is $6,000, LTV is $18,000 – which changes how you think about customer acquisition economics.

Marketplaces

Marketplace sizing is tricky because you have two sides: buyers and sellers. You need to calculate:

• Supply side: How many sellers/providers exist? What's their average GMV through your platform?

• Demand side: How many buyers? What's average transaction value and frequency?

• Take rate: What percentage do you keep?

Your market size is the take rate applied to total GMV, not the GMV itself. A marketplace facilitating $100M in transactions at 10% take rate has a $10M market opportunity.

Hardware/Physical Products

Hardware companies must account for:

• Unit economics (COGS, shipping, returns)

• Replacement cycles (how often do customers repurchase?)

• Attach rates for services/consumables

A $500 device with a 3-year replacement cycle and $50/year consumables has lifetime revenue of $650 – but the timing differs from SaaS's predictable monthly revenue.

A Complete Worked Example: B2B Recruiting Platform

Let's walk through a full bottom-up analysis for a recruiting platform targeting tech startups.

The Product: AI-powered sourcing tool that finds engineering candidates. Subscription-based, priced per recruiter seat.

Step 1: Define Segments

Step 2: Count Potential Customers

Using Crunchbase and LinkedIn data:

• Early-stage tech startups (US, active hiring): 15,000

• Growth-stage tech companies: 3,500

• Scale-ups: 800

Step 3: Calculate ARPU

Based on competitor pricing (Gem, Hired, etc.):

• Early-stage: 1.5 seats average × $200/seat/month = $3,600/year

• Growth-stage: 5 seats average × $250/seat/month = $15,000/year

• Scale-ups: 12 seats average × $300/seat/month = $43,200/year

Step 4: Calculate TAM

Step 5: Define SAM

The product currently integrates with Greenhouse and Lever only, excluding ~40% of growth-stage and scale-ups using other ATS platforms:

• Early-stage (ATS-agnostic): 15,000 × $3,600 = $54M

• Growth-stage (60% addressable): 2,100 × $15,000 = $31.5M

• Scale-ups (60% addressable): 480 × $43,200 = $20.7M

SAM: $106.2M

Step 6: Project SOM

Year 1 targets with a 5-person team:

• Early-stage: 150 customers (1% penetration) = $540K

• Growth-stage: 35 customers (1.7% penetration) = $525K

Year 1 SOM: $1.07M ARR

This becomes your investor pitch: a $141M market opportunity, $106M addressable today, and a credible path to $1M+ ARR in year one.

Common Mistakes That Kill Your Market Sizing

We've reviewed hundreds of pitch decks. These errors show up constantly – and they destroy credibility with investors.

Mistake 1: Using "1% of a Huge Market" Logic

The classic blunder. "The global HR software market is $30 billion. If we capture just 1%, that's $300 million!"

This tells VCs nothing. It's not a calculation – it's wishful thinking. You haven't demonstrated any understanding of who specifically would buy or why they'd choose you.

The fix: Always build bottom-up first. Then sanity-check against top-down data.

Mistake 2: Ignoring Willingness to Pay

Your segment might be huge, but if they won't pay your price, the market doesn't exist. A survey showing "80% of users want this feature" means nothing if 0% would pay $50/month for it.

The fix: Validate pricing through customer interviews, competitor analysis, or actual pre-sales before locking in ARPU assumptions.

Mistake 3: Counting Everyone as a Customer

Not every company in your target industry will buy. Many are happy with their current solution. Others don't have the budget. Some don't have the problem you solve.

The fix: Apply realistic penetration rates. For most B2B categories, 5-15% of potential customers will actively evaluate new solutions in any given year.

Mistake 4: Confusing TAM with SAM

Your TAM might be $500M, but if you only sell in North America and your product only works for companies using Salesforce, your SAM is much smaller. Conflating the two makes you look naive.

The fix: Clearly separate TAM, SAM, and SOM in your analysis. Show you understand the constraints.

Mistake 5: Using Outdated Data

Industry reports from 2019 are irrelevant in 2025. Markets shift, competitors emerge, and customer behavior changes. Stale data undermines your entire analysis.

The fix: Use sources published within the last 12-18 months. Note publication dates in your citations.

Mistake 6: Single-Point Estimates Without Ranges

Claiming your market is exactly $87.3M suggests false precision. You're working with estimates and assumptions – present them that way.

The fix: Provide ranges or scenarios. "Conservative: $60M. Base case: $85M. Optimistic: $120M."

Validating Your Estimates

Your bottom-up analysis is only as good as your assumptions. Here's how to pressure-test them:

Cross-reference with top-down data. Run a top-down calculation using industry reports. If bottom-up says $50M and top-down says $400M, investigate the gap. One of your assumptions is likely off.

Interview potential customers. Ask about their current spending, purchase criteria, and budget constraints. Ten conversations will reveal flaws in your assumptions.

Study competitor signals. Public companies disclose revenue. Private companies sometimes share customer counts or pricing. Work backward from competitor data to validate your segment sizes.

Use multiple estimation methods. Calculate customer counts using two different approaches. If LinkedIn suggests 5,000 companies and industry associations suggest 12,000, dig into why.

The goal isn't false precision. It's building an estimate you can defend when challenged.

The Hybrid Approach: Combining Bottom-Up and Top-Down

Relying on one method misses key insights. The smartest founders triangulate – using both approaches to stress-test their conclusions.

Here's how it works in practice:

Bottom-up calculation (organic dog food company):

• Dog owners in target metro areas: 500,000

• Percentage likely to buy premium organic: 20%

• Average annual spend: $300

• Bottom-up estimate: 500,000 × 20% × $300 = $30M

Top-down calculation:

• Total US pet food market: $1B

• Organic segment share: 15%

• Dog food share of organic: 60%

• Top-down estimate: $1B × 15% × 60% = $90M

The $60M gap signals something worth investigating. Maybe your bottom-up assumptions are too conservative. Maybe the top-down includes segments you can't reach. Either way, the discrepancy forces deeper analysis.

When both methods converge within 20-30%, you can be confident your estimate is solid. When they diverge, you've found a productive question to answer.

Frequently Asked Questions

What is bottom-up market sizing?

Bottom-up market sizing is a method for estimating market opportunity by starting with individual customers. You identify specific customer segments, count potential buyers in each segment, estimate what each would pay, and multiply to get total market size. It's the opposite of top-down sizing, which starts with industry-wide data and narrows down.

How do you calculate market size using the bottom-up approach?

The core formula is: Number of Potential Customers × Average Revenue Per Customer = Market Size. First, identify your customer segments. Then estimate how many customers exist in each segment using industry data, databases, or research. Calculate expected revenue per customer based on pricing. Multiply and sum across segments to get your Total Addressable Market (TAM).

What is the difference between TAM, SAM, and SOM?

TAM (Total Addressable Market) is the entire market demand if you captured 100% share. SAM (Serviceable Addressable Market) is the portion you can realistically target given your product, geography, and go-to-market approach. SOM (Serviceable Obtainable Market) is what you can capture near-term given competition and resources. For planning purposes, SOM is most relevant.

Why do investors prefer bottom-up over top-down market sizing?

Investors prefer bottom-up because it demonstrates real understanding of the customer. Top-down sizing often produces inflated numbers that reveal nothing about whether the startup knows its market. Bottom-up forces founders to identify specific segments, validate pricing assumptions, and show analytical rigor – all signals that reduce investment risk.

How long does a bottom-up market sizing analysis take?

A thorough analysis typically takes 1-2 weeks. Day 1-3: Define segments and identify data sources. Day 4-7: Collect customer count data and validate ARPU assumptions. Day 8-10: Build the model, calculate TAM/SAM/SOM, and cross-reference with top-down data. Day 11-14: Validate through customer interviews and refine assumptions.

Market sizing goes beyond numbers on a slide. It's about understanding your customers, your positioning, and your path to capturing real revenue. The bottom-up approach forces this clarity – and that's exactly what makes it valuable.

The effort you invest in building a defensible market size analysis pays dividends beyond fundraising. It sharpens your strategy, focuses your go-to-market, and gives you benchmarks to measure progress against.