Part of course:
Sizing the market and finding competitors
- Top-down Analysis
- Some tips on gathering market data:
A big part of the job of a product manager is making sure that any product or service being developed is being targeted at a market large enough to justify the costs of development. As a product manager, you should be able to estimate the size of the market for the products and features that are being considered next. Over the course of this article, we will compare the two most-commonly employed techniques to estimate the size of a market — top-down analysis and bottom-up analysis.
In top-down analysis, you start with the total size of a given industry, devise a number of appropriate filters that reflect the segment of the market being targeted, and then apply those filters to come down to the market that can be addressed by the service or product being developed. This whittled down market is commonly referred to as the Total Addressable Market and is often shortened to TAM. The primary goal while performing top-down analysis is to get a sense of the magnitude of the market opportunity; accuracy of the estimate is not a concern for this purpose.
A simple example of this is evaluating the size of the market that is addressable by a firm creating ads for entities that want to advertise on Snapchat. A top-down approach to estimate the market addressable by this firm entails:
As you can see, getting the data in this situation is fairly straightforward but the estimate that one ends up with is hard to call accurate. Top-down analysis gives us ballpark estimates.
Bottom-up analysis is the opposite of top-down analysis. Rather than starting with the total size of the market and implementing filters to whittle it down, bottom-up analysis seeks to identify key market segments, size of each of these segments, and then put them together to build-up to the size of the total opportunity. For these reasons, bottom-up analysis is far more granular. When performed appropriately, it leads to more accurate estimates compared to the top-down approach.
Here's an attempt to size up the market for artisanal chocolates using the bottom-up approach:
The estimate made in this case will be far more accurate due to the effort made in getting out in the field to gather data and getting a more realistic sense of the competition in the process.
The following techniques may be used to gather data:
The differences between the two approaches are clear — top-down estimates are quicker since one needs to collect relatively less data but the time spent in collecting data to perform bottom-up analysis results in far more accurate estimates and ones that are more grounded in reality. Moreover, the top-down approach is based on total market size, which tends to result in optimistic estimates, while the bottom-up approach is based on current trends, granular market research, and an understanding of the market which tends to lead to more conservative estimates.