Market Sizing: Top-Down Analysis

This is part 2 of our series on Market Sizing. Previous segments are available on our archives page.

Starting From the Top

Our first approach to estimating your total addressable market (TAM) is a Top-Down analysis. As the name implies, in a Top-Down analysis we will start with the largest possible size estimate, and reduce it using information and assumptions about our business and market.

As an example, let us assume we want to start a new business called Tomatology, which delivers tomatoes on demand. How big is the market for Tomatology? We will start with how much consumers spend on food today.

There are many publicly available sources of market data, especially here in the US where the new Data.Gov initiative makes a lot of raw data about the size of commerce available. You can find out everything from the US’s balance of payments for goods and services to how much parents spend on their children. The Bureau of Labor Statistics publishes an annual Consumer Expenditure Survey (CES) which tells us that the average household spends $751 on fruits and vegetables every year, for a total of $94.4B spend every year in the US.

Not everyone who buys fruits and vegetables will want them on demand or be reachable with deliveries! In fact, it only makes sense to offer Tomatology in large cities. About 30% of the population (according to the CES) lives in large cities so we’ll assume only 30% of those sales can be served by Tomatology. That reduces our estimate to $28.3B.

Also, not all of the fruits and vegetables that are purchased are tomatoes! According to the USDA, only 5% are tomatoes (which are legally classified as a vegetable in the US). That reduces our estimate to $1.4B.

Of course, not everyone will order their tomatoes on demand! Supermarkets will always have some market share, so we will assume that 20% of households would order their tomatoes on demand if offered. That brings our estimate to $140M.

Finally, our business model assumes consumers will buy more tomatoes when they are delivered straight to your door! Our expectation is to grow tomato consumption by 10%. This increases our estimate to $154M.

A shorter version of our Top-Down analysis might look like the following:

Total spent on Fruits and Vegetables $94.4B
… 30% spent in cities $28.3B
… 5% spent on tomatoes $1.4B
… 20% desire delivery $140M
… +10% growth from Tomatology $154M

For a real top-down analysis you would continue this process with more rigorous assumptions, getting to the most refined market size you can. Obviously, if you miss any important assumptions you will over-estimate your TAM using this technique. That is why, tomorrow, we’ll discuss Bottom-Up estimation!

Quote of the Day:Botanically speaking, tomatoes are the fruit of the vine, just as are cucumbers, squashes, beans and peas. But in the common language of the people…all these vegetables…are usually served at dinner in, with, or after the soup, fish, or meat, which constitute the principal part of the repast, and not, like fruits, generally as dessert.” – Justice Horace Gray of the US Supreme Court in 1894 when legally defining a tomato as a vegetable.

(Note: Tomatology is a bad idea. However, if you start that business based on this idea, I expect you to give me credit.)