bottom up market sizing

“It’s a $100 billion market! All we have to do is capture one percent of the market and we’ll be making money hand over fist. You can’t lose by investing in our company.”

This “top-down” model is a common – yet extremely dangerous – way of sizing a potential customer market for a new company or product. It provides little data useful for strategic financial forecasting and can give entrepreneurs an over-inflated perception of their company’s business potential.

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How does top-down market sizing work? The entrepreneur looks at a given area – say, the population of China, or the total sales figures for all software sold anywhere on the planet, or the purchasing power of every household in America. “If we only sell to (some tiny, insignificant percentage), we’ll make a killing… but since our product is so incredible, we’re bound to sell more.”

It’s unrealistic and doesn’t’ actually provide much useful data. It will make investors run for the hills.

Forecasting the Market from the Bottom Up To Get Better Data

Investors listening to a company’s pitch want to hear a “bottom-up” forecast of your sales market. Instead of relying on someone else’s market numbers and extrapolating a small percentage from that, you need to generate your own information to have better accuracy. (more…)