What is top-down market sizing?

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

Understanding your market is a crucial part of any business plan, allowing you to know how many customers you can reach and how much revenue you can generate. This will enable you to make more concrete plans and secure a 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 look at what top-down market sizing involves, how you can use it in your business, and the strengths and weaknesses of this approach.

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. This is called total addressable market, or TAM. TAM is the entire market opportunity if no competition exists. Serviceable Available Market or SAM represents the portion of the TAM that a company’s products and services can serve. Lastly, the serviceable obtainable market, sometimes called share of market or SOM, is the piece of the SAM that can be realistically captured and served by your brand or product.
Bottom-up market sizing, on the other hand, is where you start with your product and the basic units of your business and work out how to 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 start with a macro view of your market and work towards a micro perspective.

The first step is to look at industry size estimates to find your product’s largest possible market size. Then, reduce it to a segment you can realistically target and 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. You might remove salons with insufficient customers to justify a payment system. Finally, find out which salons you have already sold to or are already serviced by your competitors and are unlikely to buy from you, and so on, to narrow the total market and find your serviceable obtainable market.

Here are some tips for doing 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 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 complete 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 exceptionally 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. Gathering existing data to estimate your market size is relatively simple, making it the best option to get a quick estimate of the serviceable obtainable market, which you can supplement with primary data later to reach a more accurate forecast.
It works well for big, established markets with plenty of data and existing analysis.

Top-down market sizing: the cons

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

Bottom-up market sizing: the pros

It’s tailored to your specific circumstances and uses your data
It’s beneficial for new markets and markets where your product will likely make a significant, disruptive impact.
It results in better forecasting and more accurate data on a more 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 business.
It tends 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 vital to ensure you’re doing everything correctly, or these mistakes and misunderstandings will carry through your entire analysis.

Ultimately, using both models in your market sizing can be useful. If they both agree, you can assume you have a reasonably accurate market size estimate. The approach you opt for will also depend on the type of business you’re building and the product you’re selling.

Regardless of your approach, 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.