Working Your Way Up
While Top-Down market sizing is usually easy to do, it can be misleading. Can you really reach that entire market? How much would it cost you even if you could? The good news is that Bottom-Up market sizing gives us a clear picture of those factors.
To do a bottom-up analysis you start with the basic units of your business (your product, price, customers) and estimate how large you can scale those units.
Back to our example company, Tomatology (tomatoes delivered on-demand!), a Bottom-Up market sizing needs to start with the price of tomatoes which are around $1 for a large tomato in my area. Our local customer survey tells us that consumers buy 3 tomatoes when they go to the market once a week. That means the average consumer would buy $150 of tomatoes per year.
How many consumers can we reach? Based on the effectiveness of commercials, billboards and other channels our head of marketing thinks we can reach about 35,000 households in our hometown of Oakland, CA. That brings our estimate to $5.3M.
Finally, we will assume that we can expand into the top 30 cities based on our operating plan and available capital. That gives us an audience of 1.1M households or a total of $156M.
A shorter version of our Bottom-Up analysis might look like the following:
|Price per tomato||$1|
|… 150 per household||$15|
|… 35,000 reachable households per city||$5.3M|
|… 30 cities||$156M|
This is, like our Top-Down model, simplistic and a real Bottom-Up model would include many more steps to get to a better estimate.
Note that our Bottom-Up model ignored some important factors like how long it would take us to reach consumers, churn rates of customers and whether there is competition. Remember, we are trying to size our Total Addressable Market which is only our market potential. The market reality in your business plan will need to address these other concerns and determine what percentage of your TAM is really achievable.
So now that we have Top-Down and Bottom-Up market sizing experience, which do we choose when sizing a market? Tune in tomorrow, the answer may surprise you!
Statistic of the Day: 145,000 kg. Total amount of tomatoes thrown during La Tomatina, the tomato fight festival held annually in Spain.