Definition of top-down market sizing

How do you calculate your market size and the serviceable obtainable market??

This is a crucial part of any business plan, allowing you to gain a clear idea of how many customers you can potentially reach and how much revenue you can generate. This allows you to make more concrete plans and secure budget and buy-in from key stakeholders..

Top-down market sizing is one of the two main methods we can use to calculate the serviceable obtainable market. In this article, we’ll take a look at what top-down market sizing involves, how you can use it in your own business, and the strengths and weaknesses of this approach.

What is top-down market sizing?

When we calculate our serviceable obtainable market, there are two main ways to approach the calculation: top-down and bottom-up.

Top-down market sizing starts by looking at the current market as a whole, taking a macro view of all the potential customers and revenue, and then narrowing it down to a section you can realistically target. This gives you your serviceable obtainable market, (SAM).

Bottom-up market sizing, on the other hand, is where you start with your own product and the basic units of your business and work out how you can scale them. Where can your products be sold, how much for, and how much of the current market could you command? You start small and build up to the result.

What is Serviceable Obtainable Market or SAM?

The SAM refers to the portion of the total addressable market (TAM) that a company or business can realistically target and serve. It represents the market segment that aligns with the company’s resources, capabilities, and competitive positioning. The SAM is determined by considering factors such as geographical scope, customer demographics, and market demand.

In the context of top-down market sizing, the SAM is the result of narrowing down the initial macro view of the market to a segment that the company can effectively target. It represents the potential customers and revenue that the company can realistically obtain within its market segment. The SAM is an essential metric in market research as it helps businesses understand the true size and growth potential of their target market.

What is Total Addressable Market or TAM?

The Total Addressable Market (TAM) represents the entire demand for a specific product or service within a particular market or industry. It is the maximum potential revenue that can be achieved if a company were to capture 100% market share, considering all potential customers and their willingness to purchase.

TAM provides an estimation of the market size and serves as a starting point for market analysis and business planning. It encompasses all potential buyers who have a need for the product or service, regardless of whether they are currently being served by existing competitors or are aware of the product’s existence.

Calculating TAM involves considering various factors such as market demographics, geographic scope, industry trends, and customer behavior. TAM helps businesses understand the market’s overall revenue potential and serves as a benchmark against which to evaluate their market share and growth opportunities.

It’s important to note that TAM represents the theoretical market size and may not be fully reachable or realistic for a company due to constraints such as competition, resources, and market saturation. Nevertheless, TAM serves as a valuable reference point for strategic decision-making, market segmentation, and assessing a company’s growth potential within a specific market.

How to use top-down market sizing

To use top-down market sizing accurately, you should aim to start with a macro view of your market and work towards a micro view.

The first step is to look at industry size estimates to find the largest possible market size for your product. Then, reduce it to a segment that you can realistically target, and then calculate how many potential customers are in that segment.

For example, if you’re selling a payment management system for hair salons in the US, you’d start by calculating the total number of hair salons in the US. Then, reduce that to a smaller segment — how many of those salons have enough customers to justify a payment system? Finally, find out which ones you have already sold to, or which ones are already serviced by competitors and unlikely to buy from you, and so on, to find your serviceable obtainable market.

Here are some tips to do this process as effectively as possible:

Use reliable data sources. Some of the data that can help you calculate your market size is available for free or at low cost and can be obtained from analysts like Gartner and the Bureau of Labor Statistics. This can be supported by primary research to give you a rich picture of the market. Spend some time analyzing multiple, reliable sources to come up with an estimate..

Be consistent and clear in your approach. Make sure your calculations are well-documented and rely on the same data.

Ask lots of questions throughout the process. Who are our customers? Where are they located? Is the market growing? Aim to get as full and accurate a picture of your market as possible.

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What factors to consider when using market sizing

When deciding which approach to use for market sizing, it’s essential to consider various factors that align with your business, product, and market dynamics. Here are some considerations to help you choose the most suitable approach:

Market maturity: If you are entering an established and well-researched market with ample data available, a top-down approach might be more appropriate. The existing market data can provide a solid foundation for estimating market size and potential customers.
Product uniqueness and disruption: If your product or service is innovative, disruptive, or targets a niche market, a bottom-up approach can be advantageous. This approach allows you to analyze specific customer segments, understand their unique needs, and project adoption rates more accurately.
Available data and resources: Consider the availability and reliability of data sources. Top-down market sizing heavily relies on existing market research and industry reports. If comprehensive data is readily available, a top-down approach can provide a quick estimate. On the other hand, if you have access to internal data, customer insights, or primary research capabilities, a bottom-up approach using your own data can yield more accurate results.
Granularity and specificity: Depending on your business objectives, you may need a more detailed understanding of your target market. In such cases, a bottom-up approach allows for a more granular analysis, enabling you to assess market segments, customer behaviors, and potential adoption rates on a more specific level.
Time and resource constraints: Consider the time and resources you have available for market sizing. Top-down approaches are generally faster, as they rely on existing data and industry research. Bottom-up approaches require more in-depth analysis and data collection, which may be time-consuming. Evaluate the trade-offs between accuracy and the resources you can allocate to the market sizing process.

Ultimately, the choice between top-down and bottom-up approaches depends on your business context, market characteristics, and the level of precision required for decision-making. In some cases, using a combination of both approaches can provide a more comprehensive view of the market size and potential opportunities.

Remember, market sizing is an iterative process, and as your business evolves and gathers more data, you can refine and update your estimates using the most suitable approach for each stage of growth.

The top-down and bottom-up approaches — which one is best?

So, which approach is better? The reality is that each method has its pros and cons. What works extremely well for one business might not work well for yours, and vice versa. Let’s take a look at the advantages and drawbacks of each method.

Top-down market sizing: the pros

It tends to be faster than a bottom-up approach.. The process of gathering existing data to estimate your market size isn’t enormously time-consuming, making it . the best option to get a quick estimate of the serviceable obtainable market, which you can supplement with primary data at a later date to reach a more accurate forecast. .
It tends to work well for big, established markets, where there is already plenty of data and existing analysis

Top-down market sizing: the cons

It doesn’t work as well for new, smaller markets and disruptive products. If there’s a good chance your product could have a disruptive effect on its market, this could significantly affect serviceable obtainable market and render your top-down analysis largely meaningless.
The initial research relies on general information collected by others, so the data isn’t specific to your business and situation. It’s a good general guide, but does need to be supported by primary research that’s specific to your particular market for greater accuracy.

Bottom-up market sizing: the pros

It’s tailored to your specific circumstances and uses your own data
It’s especially useful for new markets and markets where your product is likely to make a big, disruptive impact
It tends to result in better forecasting and more accurate data on amore granular level, helping you better understand how your individual projects will make an impact

Bottom-up market sizing: the cons

It can take longer and require more resources than a top-down approach, as a bottom-down approach requires much more in-depth analysis of your own business.
It has a tendency to assume there will be more customers than there actually will. This is important to look out for.
Any errors you make early on at the micro-level become compounded as you work up to the macro-level. It’s important to ensure you’re doing everything the right way, or these mistakes and misunderstandings will carry through your entire analysis.

Examples of Top-down and Bottom-up Market Sizing

To provide a clearer understanding of top-down and bottom-up market sizing, let’s explore some real-world scenarios:

Top-down market sizing example: Imagine you are launching a new line of organic skincare products. To calculate your serviceable obtainable market (SAM) using a top-down approach, you would start with a macro view of the market and narrow it down. Here’s a step-by-step breakdown:

Step 1: Begin with industry size estimates: Research industry reports and studies to determine the total skin care market size.
Step 2: Identify your target segment: Narrow down the market to a specific segment that aligns with your organic skincare products, such as “organic skincare for sensitive skin.”
Step 3: Calculate potential customers: Determine the number of potential customers within your target segment. For instance, you might find that there are 5 million people in your target market based on demographics and consumer behavior analysis.
Step 4: Refine the SAM further: Consider factors like geographical location, purchasing power, and competition to determine the portion of the target market that you can realistically capture.

By following this top-down approach, you can estimate the SAM for your organic skincare products and make informed decisions about market entry and potential revenue.

Bottom-up market sizing example: Let’s say you’re a software startup developing a productivity app for freelancers. To perform bottom-up market sizing, you would start with your own product and gradually build up:

Step 1: Identify your target audience: Determine the specific segment of freelancers you are targeting, such as graphic designers or copywriters.
Step 2: Determine the basic units: Calculate the number of potential customers within your target segment, considering factors like industry reports, freelance platforms, and online communities.
Step 3: Assess market penetration: Estimate what percentage of the target market you can realistically capture based on your value proposition, pricing, and competition.
Step 4: Calculate revenue potential: Multiply the estimated number of customers by the average revenue per customer to determine your potential revenue within the target market.

By employing a bottom-up approach, you can analyze the granular details of your specific market segment and tailor your strategy accordingly. This approach allows you to make projections based on your own data and assumptions.

These examples showcase how top-down and bottom-up market sizing approaches can be applied in different scenarios. Remember, the choice of approach depends on factors such as market maturity, product uniqueness, available data, and the goals of your business.

Ultimately, it can be useful to use both models in your market sizing. If they both roughly agree, then you can probably assume you have a fairly accurate estimate of your market size. The approach you opt for will also depend to some extent on the type of business you’re building and the product you’re selling.

Regardless of which approach you go with, it’s important to do it right. At Kadence, we have many years of experience helping businesses with their market research, and in sizing the market and we can help you do the same. To find out more, get in touch.