Over the past few days we’ve reviewed Top-Down and Bottom-Up approaches to sizing a market. They both have advantages and disadvantages based on the kinds of assumptions you make as part of the approach.
So, which should I use: Top-Down or Bottom-Up?
Both. On their own, neither Top-Down nor Bottom-Up analysis gives you a complete picture. Top-Down hides the difficulties in reaching various segments of customers while Bottom-up assumes there will always be more customers in the segments than you know how to reach.
You have a good estimate of your market size when both your Top-Down and Bottom-Up models agree with each other. It may require updating your assumptions to get to such agreement, but those updates should be positive improvements that make the final estimate more accurate. It’s the equivalent of comparing your homework with a friend’s to see if you got the same answers.
Luckily our Top-Down and Bottom-Up models for Tomatology, our hypothetical leader in on-demand tomato delivery, roughly agree at a market size around $150M. If you aren’t so lucky, reexamine your assumptions and see where the gap might exist. If you cannot make the two estimates agree, there may be something fundamentally broken about your market or your business.
One more thing…
We can get even more confident in our estimates using comparables. Comparables are companies that are similar to yours, either in business model, product types, or market position. A good comparable is a company that is already at scale and serving the same customers that you will serve (both now and in the future).
For Tomatology, our hypothetical leader in on-demand tomato delivery, comparables might include:
- Amazon Fresh
By looking at the size of these comparable businesses, you can determine if your estimate is realistic. If your market estimate is $1B but no existing comparable does more than $10M in revenue, then you are probably overestimating the potential (or you have a clever way to grow the market!). If your estimate is $100M and some of your comparables do $200M in business, then you might be a little too small. Use it as a third check of your estimate!
Tomorrow we’ll look at how to size new markets, who don’t have existing customers or any available comparables. It will require us to get even more creative!
Quote of the Day: “Risk comes from not knowing what you’re doing.” Warren Buffett