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@@ -17,18 +17,21 @@ Market sizing provides the foundation for startup strategy, fundraising, and bus
### The Three-Tier Market Framework
**TAM (Total Addressable Market)**
- Total revenue opportunity if achieving 100% market share
- Defines the universe of potential customers
- Used for long-term vision and market validation
- Example: All email marketing software revenue globally
**SAM (Serviceable Available Market)**
- Portion of TAM targetable with current product/service
- Accounts for geographic, segment, or capability constraints
- Represents realistic addressable opportunity
- Example: AI-powered email marketing for e-commerce in North America
**SOM (Serviceable Obtainable Market)**
- Realistic market share achievable in 3-5 years
- Accounts for competition, resources, and market dynamics
- Used for financial projections and fundraising
@@ -37,18 +40,21 @@ Market sizing provides the foundation for startup strategy, fundraising, and bus
### When to Use Each Methodology
**Top-Down Analysis**
- Use when established market research exists
- Best for mature, well-defined markets
- Validates market existence and growth
- Starts with industry reports and narrows down
**Bottom-Up Analysis**
- Use when targeting specific customer segments
- Best for new or niche markets
- Most credible for investors
- Builds from customer data and pricing
**Value Theory**
- Use when creating new market categories
- Best for disruptive innovations
- Estimates based on value creation
@@ -61,12 +67,14 @@ Market sizing provides the foundation for startup strategy, fundraising, and bus
Start with total market size and narrow to addressable segments.
**Process:**
1. Identify total market category from research reports
2. Apply geographic filters (target regions)
3. Apply segment filters (target industries/customers)
4. Calculate competitive positioning adjustments
**Formula:**
```
TAM = Total Market Category Size
SAM = TAM × Geographic % × Segment %
@@ -84,12 +92,14 @@ SOM = SAM × Realistic Capture Rate (2-5%)
Build market size from customer segment calculations.
**Process:**
1. Define target customer segments
2. Estimate number of potential customers per segment
3. Determine average revenue per customer
4. Calculate realistic penetration rates
**Formula:**
```
TAM = Σ (Segment Size × Annual Revenue per Customer)
SAM = TAM × (Segments You Can Serve / Total Segments)
@@ -107,6 +117,7 @@ SOM = SAM × Realistic Penetration Rate (Year 3-5)
Calculate based on value created and willingness to pay.
**Process:**
1. Identify problem being solved
2. Quantify current cost of problem (time, money, inefficiency)
3. Calculate value of solution (savings, gains, efficiency)
@@ -114,6 +125,7 @@ Calculate based on value created and willingness to pay.
5. Multiply by addressable customer base
**Formula:**
```
Value per Customer = Problem Cost × % Solved by Solution
Price per Customer = Value × Willingness to Pay % (10-30%)
@@ -135,6 +147,7 @@ SOM = SAM × Realistic Adoption Rate
Clearly specify what market is being measured.
**Questions to answer:**
- What problem is being solved?
- Who are the target customers?
- What's the product/service category?
@@ -142,6 +155,7 @@ Clearly specify what market is being measured.
- What's the time horizon?
**Example:**
- Problem: E-commerce companies struggle with email marketing automation
- Customers: E-commerce stores with >$1M annual revenue
- Category: AI-powered email marketing software
@@ -153,12 +167,14 @@ Clearly specify what market is being measured.
Identify credible data for calculations.
**Top-Down Sources:**
- Industry research reports (Gartner, Forrester, IDC)
- Government statistics (Census, BLS, trade associations)
- Public company filings and earnings
- Market research firms (Statista, CB Insights, PitchBook)
**Bottom-Up Sources:**
- Customer interviews and surveys
- Sales data and CRM records
- Industry databases (LinkedIn, ZoomInfo, Crunchbase)
@@ -166,6 +182,7 @@ Identify credible data for calculations.
- Academic research
**Value Theory Sources:**
- Customer problem quantification
- Time/cost studies
- ROI case studies
@@ -176,18 +193,21 @@ Identify credible data for calculations.
Apply chosen methodology to determine total market.
**For Top-Down:**
1. Find total category size from research
2. Document data source and year
3. Apply growth rate if needed
4. Validate with multiple sources
**For Bottom-Up:**
1. Count total potential customers
2. Calculate average annual revenue per customer
3. Multiply to get TAM
4. Break down by segment
**For Value Theory:**
1. Quantify total addressable customer base
2. Calculate value per customer
3. Estimate pricing based on value
@@ -198,6 +218,7 @@ Apply chosen methodology to determine total market.
Narrow TAM to serviceable addressable market.
**Apply Filters:**
- Geographic constraints (regions you can serve)
- Product limitations (features you currently have)
- Customer requirements (size, industry, use case)
@@ -205,11 +226,13 @@ Narrow TAM to serviceable addressable market.
- Regulatory or compliance restrictions
**Formula:**
```
SAM = TAM × (% matching all filters)
```
**Example:**
- TAM: $10B global email marketing
- Geographic filter: 40% (North America)
- Product filter: 30% (e-commerce focus)
@@ -221,6 +244,7 @@ SAM = TAM × (% matching all filters)
Determine realistic obtainable market share.
**Consider:**
- Current market share of competitors
- Typical market share for new entrants (2-5%)
- Resources available (funding, team, time)
@@ -229,12 +253,14 @@ Determine realistic obtainable market share.
- Time to achieve (3-5 years typically)
**Conservative Approach:**
```
SOM (Year 3) = SAM × 2%
SOM (Year 5) = SAM × 5%
```
**Example:**
- SAM: $720M
- Year 3 SOM: $720M × 2% = $14.4M
- Year 5 SOM: $720M × 5% = $36M
@@ -244,6 +270,7 @@ SOM (Year 5) = SAM × 5%
Cross-check using multiple methods.
**Validation Techniques:**
1. Compare top-down and bottom-up results (should be within 30%)
2. Check against public company revenues in space
3. Validate customer count assumptions
@@ -252,6 +279,7 @@ Cross-check using multiple methods.
6. Compare to similar market categories
**Red Flags:**
- TAM that's too small (< $1B for VC-backed startups)
- TAM that's too large (unsupported by data)
- SOM that's too aggressive (> 10% in 5 years for new entrant)
@@ -262,12 +290,14 @@ Cross-check using multiple methods.
### SaaS Markets
**Key Metrics:**
- Number of potential businesses in target segment
- Average contract value (ACV)
- Typical market penetration rates
- Expansion revenue potential
**TAM Calculation:**
```
TAM = Total Target Companies × Average ACV × (1 + Expansion Rate)
```
@@ -275,11 +305,13 @@ TAM = Total Target Companies × Average ACV × (1 + Expansion Rate)
### Marketplace Markets
**Key Metrics:**
- Gross Merchandise Value (GMV) of category
- Take rate (% of GMV you capture)
- Total transactions or users
**TAM Calculation:**
```
TAM = Total Category GMV × Expected Take Rate
```
@@ -287,11 +319,13 @@ TAM = Total Category GMV × Expected Take Rate
### Consumer Markets
**Key Metrics:**
- Total addressable users/households
- Average revenue per user (ARPU)
- Engagement frequency
**TAM Calculation:**
```
TAM = Total Users × ARPU × Purchase Frequency per Year
```
@@ -299,11 +333,13 @@ TAM = Total Users × ARPU × Purchase Frequency per Year
### B2B Services
**Key Metrics:**
- Number of target companies by size/industry
- Average project value or retainer
- Typical buying frequency
**TAM Calculation:**
```
TAM = Total Target Companies × Average Deal Size × Deals per Year
```
@@ -313,6 +349,7 @@ TAM = Total Target Companies × Average Deal Size × Deals per Year
### For Investors
**Structure:**
1. Market definition and problem scope
2. TAM/SAM/SOM with methodology
3. Data sources and assumptions
@@ -320,6 +357,7 @@ TAM = Total Target Companies × Average Deal Size × Deals per Year
5. Competitive landscape context
**Key Points:**
- Lead with bottom-up calculation (most credible)
- Show triangulation with top-down
- Explain conservative assumptions
@@ -329,6 +367,7 @@ TAM = Total Target Companies × Average Deal Size × Deals per Year
### For Strategy
**Structure:**
1. Addressable customer segments
2. Prioritization by opportunity size
3. Entry strategy by segment
@@ -336,6 +375,7 @@ TAM = Total Target Companies × Average Deal Size × Deals per Year
5. Resource requirements
**Key Points:**
- Focus on SAM and SOM
- Show segment-level detail
- Connect to go-to-market plan
@@ -345,26 +385,31 @@ TAM = Total Target Companies × Average Deal Size × Deals per Year
## Common Mistakes to Avoid
**Mistake 1: Confusing TAM with SAM**
- Don't claim entire market as addressable
- Apply realistic product/geographic constraints
- Be honest about serviceable market
**Mistake 2: Overly Aggressive SOM**
- New entrants rarely capture > 5% in 5 years
- Account for competition and resources
- Show realistic ramp timeline
**Mistake 3: Using Only Top-Down**
- Investors prefer bottom-up validation
- Top-down alone lacks credibility
- Always triangulate with multiple methods
**Mistake 4: Cherry-Picking Data**
- Use consistent, recent data sources
- Don't mix methodologies inappropriately
- Document all assumptions clearly
**Mistake 5: Ignoring Market Dynamics**
- Account for market growth/decline
- Consider competitive intensity
- Factor in switching costs and barriers
@@ -374,6 +419,7 @@ TAM = Total Target Companies × Average Deal Size × Deals per Year
### Reference Files
For detailed methodologies and frameworks:
- **`references/methodology-deep-dive.md`** - Comprehensive guide to each methodology with step-by-step worksheets
- **`references/data-sources.md`** - Curated list of market research sources, databases, and tools
- **`references/industry-templates.md`** - Specific templates for SaaS, marketplace, consumer, B2B, and fintech markets
@@ -381,6 +427,7 @@ For detailed methodologies and frameworks:
### Example Files
Working examples with complete calculations:
- **`examples/saas-market-sizing.md`** - Complete TAM/SAM/SOM for a B2B SaaS product
- **`examples/marketplace-sizing.md`** - Marketplace platform market opportunity calculation
- **`examples/value-theory-example.md`** - Value-based market sizing for disruptive innovation