A quick guide to estimating your market size
A quick guide to estimating your market size
Top-down? Bottom-up? What's the best way to estimate market size? Here we provide a simple explanation.
This nugget was created by Ben Graziano.
Estimating market size is not easy and you may receive different advice about how to do it. There are two main methods, top-down and bottom-up:
Top-down market sizing
This is the first approach that most people take. First, consider the total size of the market for a product or service of the type under consideration (the Total Addressable Market, or TAM), work out the % that could be acquired by businesses like yours with a similar offer and business model (the Serviceable Available Market, or SAM) and then calculate the % share of this amount that you estimate you could capture versus the competition (the Serviceable Obtainable Market, SOM). This method is known as top-down market sizing and you can find out more about it here. It’s an important first step, but it often leads to statements such as “all we need is 5% of global touchscreen fitness watch sales and…”, which may lack credibility, especially prior to making your first sales.
Bottom-up market sizing
As your understanding of your business grows beyond the first sketchy ideas, you will need a more credible estimation of your potential market that allows you to make concrete sales plans with sales targets and other metrics for specific geographies and campaigns. Your key stakeholders, such as investors and new team members, will also expect a more detailed bottom-up understanding of where your customers are and how many of them you can realistically expect to sell your products and services to. In this blog post, the author provides an explanation of how to do a bottom-up calculation using a simple example.
For more comprehensive descriptions of both top-down and bottom-up sizing read this excellent blog post by investment analyst Alon Amar.
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