Last updated on May 28, 2024
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Top-down approach
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Bottom-up approach
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Comparing the approaches
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Combining the approaches
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Tips for market sizing
Market sizing is a crucial skill for market intelligence professionals, as it helps them estimate the potential value and growth of a target market. However, there is no one-size-fits-all method for market sizing, and different approaches have their own advantages and disadvantages. In this article, we will compare and contrast two common methods: the top-down and the bottom-up approach.
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- Maja Himmer
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- Masarat K. Experienced Market Researcher | Specializing in AI, IoT, IIoT/Industry 4.0, Automation, Big Data Analytics…
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1 Top-down approach
The top-down approach starts with a large, general market and then narrows it down to a specific segment or niche. For example, if you want to size the market for electric vehicles in the US, you could start with the total number of vehicles sold in the US, then multiply it by the percentage of electric vehicles, and then adjust for other factors such as price, demand, and competition. The advantage of this approach is that it is relatively simple and quick, and it uses easily available data from secondary sources. The disadvantage is that it can be too broad and inaccurate, as it may overlook important details and nuances of the market.
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Top-down approach can be a useful tool for obtaining a quick estimate or a high-level view of a market. Pros includes efficiency as it requires fewer resources, useful for high-level decisions, it can leverage existing data and its simple to use.However, cons include lack of precision, relies on assumptions and generalizations, comes with risk of oversimplification, provides limited strategic insights, lack of validation, and its not suitable for all situations.
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- Masarat K. Experienced Market Researcher | Specializing in AI, IoT, IIoT/Industry 4.0, Automation, Big Data Analytics, Cybersecurity, Cloud and Quantum Computing, Semiconductor Chips, High-speed Data Converters and MEMS Sensors.
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Top-down market sizing involves examining the overall market and its potential customers and revenue, then narrowing it down to a specific area/sub-market that can be realistically targeted.Advantages:Useful in obtaining serviceable obtainable market (SAM) for a specific area/sub-market within an Industry.Disadvantages: Limited to pre-determined solutions and understanding of customer behavior for specific areas. There is a high possibility of inaccurate assumptions.
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The top-down approach is advantageous for providing a quick estimate. However, it may lack precision compared to the detailed bottom-up approach. On the other hand, the bottom-up approach tends to be more accurate and offers a granular understanding of the market.Using both methods and ensuring they align can lead to a more reliable market size estimate.
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- Gaurav Chopra
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Advantages: The top-down approach offers a quick estimate of market size and is relatively simple to execute. It leverages existing data from secondary sources, making it efficient for high-level decision-making.Disadvantages: However, it can lack precision and detail as it relies on assumptions and generalizations. Oversimplification is a risk, leading to potential inaccuracies, especially in complex markets with diverse segments.
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- Jessica Catherine Helping Brands with ROAS Driven Marketing
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The top-down approach provides a broad perspective but may lack precision, while the bottom-up approach offers detailed insights but can be time-consuming and resource-intensive.
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2 Bottom-up approach
The bottom-up approach starts with a small, specific market and then expands it to a larger, general market. For example, if you want to size the market for electric vehicles in the US, you could start with the number of customers who are willing and able to buy an electric vehicle, then multiply it by the average revenue per customer, and then adjust for other factors such as market share, growth rate, and competition. The advantage of this approach is that it is more detailed and realistic, and it uses primary data from surveys, interviews, or experiments. The disadvantage is that it can be too complex and time-consuming, and it may involve a lot of assumptions and uncertainties.
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- Maja Himmer
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When building a company, the bottom-up market sizing approach is the more important. Investors want to see that you understand your target market *in detail* and tailored the calculation to your specific business model.Another advantage is that you are better able to asses the quality of the numbers compared to market reports from e.g. McKinsey which in most cases had a very different goal when researching the market.
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Bottom-up approach is valuable when precision and granularity are essential, and when detailed data is available. Pros of this approach include: granular details, accurate assessments, data-driven approach, and identifies opportunities.Cons include: It is a resource-intensive approach, process is complex, may miss broader trends, not ideal for quick estimates, difficulty in data integration and analysis is limited to available data only.
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- Masarat K. Experienced Market Researcher | Specializing in AI, IoT, IIoT/Industry 4.0, Automation, Big Data Analytics, Cybersecurity, Cloud and Quantum Computing, Semiconductor Chips, High-speed Data Converters and MEMS Sensors.
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Bottom-up market sizing involves starting with your product and business units to determine how to expand and reach your target market. It involves analyzing where your products can be sold, at what price, and how much of the market you can capture. This approach begins with a small scale and gradually increases to achieve the desired outcome.Advantages: The bottom-up approach allows for changes at any process stage.Disadvantages: The bottom-up approach can be slow, as each component must be completed before moving on to the next. Sometimes, it can be difficult to manage complex projects with many components.
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- Gaurav Chopra
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Advantages: The bottom-up approach provides granular insights into specific market segments, customer behaviors, and revenue potential. It uses primary data from surveys or interviews, enhancing accuracy and reliability.Disadvantages: This approach can be resource-intensive and complex due to detailed data collection and analysis. It may also be limited to available data, potentially missing broader market trends.
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3 Comparing the approaches
When it comes to choosing between the top-down and bottom-up approach for market sizing, the decision depends on the purpose and context of the exercise. Factors to consider include the availability and reliability of data, the level of detail and accuracy required, as well as the stage of the market. If data is scarce or unreliable, then the top-down approach is preferable, as it requires less data and more estimation. On the other hand, if a precise and granular estimate is needed, then the bottom-up approach is better as it captures more aspects and variations. Additionally, if entering a new or emerging market, bottom-up is more suitable for validating assumptions and testing hypotheses. Conversely, if operating in an established or mature market, top-down is better for benchmarking performance and comparing with market leaders.
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The choice between top-down and bottom-up approaches often depends on the specific context, objectives, and available resources for the analysis. In practice, a combination of both approaches may be used to achieve a comprehensive understanding of the market.
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Triangulation (when possible) is an important step in market sizing exercise. When you have to take the market sizing to the next step e.g. product development financial business case, investment decision etc. the Conversion, Diversion and Incremental (CDI) type analysis is helpful. It shows a realistic picture needed for decision making.
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- Masarat K. Experienced Market Researcher | Specializing in AI, IoT, IIoT/Industry 4.0, Automation, Big Data Analytics, Cybersecurity, Cloud and Quantum Computing, Semiconductor Chips, High-speed Data Converters and MEMS Sensors.
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The method used for market sizing, whether it is top-down, bottom-up, or a combination of both, depends on factors such as data availability, industry characteristics, level of detail needed, and research objectives.
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- Gaurav Chopra
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Purpose and Context: Choose based on the purpose and context of the market sizing exercise. Top-down is preferable when data is scarce or unreliable, while bottom-up is better for precise, granular estimates.Data Availability: Consider the availability and reliability of data. Top-down requires less data but relies more on assumptions, while bottom-up uses primary data but demands more resources.Market Stage: For new or emerging markets, bottom-up helps validate assumptions and test hypotheses. In established markets, top-down is suitable for benchmarking and comparison.
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4 Combining the approaches
A good practice for market sizing is to use both the top-down and the bottom-up approach and then compare and reconcile the results. This way, you can benefit from the advantages of both methods and avoid the pitfalls of relying on one method alone. Moreover, you can gain a deeper and broader understanding of the market dynamics and trends, and identify any gaps or opportunities for your business.
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- Masarat K. Experienced Market Researcher | Specializing in AI, IoT, IIoT/Industry 4.0, Automation, Big Data Analytics, Cybersecurity, Cloud and Quantum Computing, Semiconductor Chips, High-speed Data Converters and MEMS Sensors.
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We can use a combination of both approaches to have a more thorough market sizing strategy. This includes validating the overall estimates with detailed analyses to ensure a well-rounded and precise assessment.
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- Gaurav Chopra
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Best of Both Worlds: Combining top-down and bottom-up approaches allows for a comprehensive view. Start with top-down for a high-level estimate, then use bottom-up for detailed validation and adjustment.Validation: Compare and reconcile results from both approaches to identify discrepancies and ensure accuracy. This approach mitigates the limitations of relying on a single method.
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5 Tips for market sizing
Conducting effective and efficient market sizing exercises requires a clear and consistent definition of your market, as well as the use of multiple sources and methods of data collection and analysis. Documenting your assumptions and calculations is essential to ensure transparency and credibility of your market size estimate. Doing so will enable others to replicate or revise your estimate if needed. Additionally, it will help you explain and justify your estimate to stakeholders.
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- Masarat K. Experienced Market Researcher | Specializing in AI, IoT, IIoT/Industry 4.0, Automation, Big Data Analytics, Cybersecurity, Cloud and Quantum Computing, Semiconductor Chips, High-speed Data Converters and MEMS Sensors.
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Market sizing is an important part of market research, where you estimate the demand for a product or service. You can gather data from various sources like industry reports, surveys, and expert interviews. It's important to break down the market into smaller segments based on different criteria to get more accurate estimates. Use both quantitative and qualitative research methods to gather data. Also, input from the related industry experts can help validate your findings. The transparency of your findings improves their credibility.
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- Gaurav Chopra
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Clear Definition: Clearly define market segments and scope for consistent sizing.Use Multiple Sources: Combine data from various sources for validation and reliability.Document Assumptions: Document all assumptions and methodologies for transparency and credibility.Iterate and Validate: Continuously iterate and validate sizing estimates through feedback and testing.Effective Communication: Communicate findings clearly and focus on key insights for decision-making.
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