Sizing the market and finding competitors
December 11, 2017
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:
- Finding out that the revenue of the Advertising industry in the United States is $103.7b.
- Identifying the filters and assumptions that will allow us to whittle down the number found in the previous step — in this case we may assume that every advertiser who wants to target individual between the ages of 18-24 relies on Snapchat and the advertising industry revenue by demographic is perfectly correlated with the demographic distribution, i.e. since 18-24 year olds comprise 9.5% of the population, 9.5% of advertising industry revenue will come from serving advertisers who want to reach them.
- Using the assumptions and filters to arrive at a number — based on the above, the advertising industry revenue from entities interested in reaching customers via Snapchat, the TAM, is $9.9b.
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:
- Identifying all the places artisanal chocolate is sold — these include a company website, Amazon, Target, Walmart, e-commerce and physical stores dedicated to artisanal chocolate, and the local artisanal coffee shops;
- Identifying the distribution channels that can be used — it’s hard to get, without significant capital investment, new products in front of customers at Walmart and Target and in search results on Amazon, so it’s best to focus on the company website, artisanal coffee shops, and physical stores dedicated to artisanal chocolate at first;
- Talking to those in-charge of the various distribution channels to gauge the number of outlets that can be used to distribute your product — for the purposes of our example, this will include estimating the number of local artisanal coffee shops and physical and e-commerce stores dedicated to artisanal chocolate that are willing to stock our brand of artisanal chocolate;
- Identifying the volume of competing or similar products that flow through these channels;
- Using these numbers to build up the expected number of items sold over the course of a year.
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.
Some tips on gathering market data:
The following techniques may be used to gather data:
- Googling the term “industry reports for XYZ”, where XYZ is the market you’re exploring;
- Using compete.com and similar sites to find the amount of traffic competitors’ websites are receiving;
- Using Google Adwords’ Keyword Planner. The tool will show you the search volume for various terms and the related terms people are searching for;
- Searching Twitter, Reddit, and other user forums. Doing so may also help you understand the gripes users face with the existing solution and provide ideas for features users want.
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.