Use 2 simple numbers to calculate a market sizing that investors will actually take seriously

Forget TAM/SAM/SOM. Answer 2 simple questions to size your market using numbers investors will actually take seriously:

What is your average ARR per customer?
How many customers are there in each market you plan to attack?

Example

You sell a compensation SaaS to employers and charge per employee. You start in North America.

You charge $100 per employee per year. Your average customer has 250 employees, so your average ARR per customer = $25K

There are 65K employers in North America who are qualified to buy your product (per some credible source)

Your Market Opportunity = $25K x 65K = $1.63B ARR

Adding Granualarity

Segment your customers. For example, by size. Repeat the calculation for each segment and add them up.

E.g.

Small customer ARR x small customer count = $$
Medium customer ARR x medium customer count = $$
Large customer ARR x large customer count = $$

Sizing your expansion opportunities

Product Expansion

You plan to add a second product that should grow average ARR per customer by $20K a year.

Your product expansion ARR = $20K x 65K customers = $1.5B

Geographic expansion

You plan to expand from North America into Europe. It will add another 50K potential customers. You expect your average ARR per customer to be very similar.

Your geo expansion ARR = $25K x 50K customers = $1.25B

TAM, SAM, SOM

If you really can't bear the thought of not listing TAM, SAM, SOM in your deck, consider the following:

TAM = Average ARR for your product x total number of potential customers in the world
SAM = Average ARR for your product x total number of potential customers in your initial target market (e.g. US employers)
SOM = Average ARR for your product x total number of potential customers in your first target customer segment in your initial target market (e.g. Top 500 US employers)

Summary

I haven't found any startup that can't calculate a simple, credible market sizing using this method. Drop a comment if you think you're an exception. I bet I can help.

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