What is top-down market sizing?

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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.

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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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.

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.

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