Bottom-up market sizing involves analyzing individual market segments and then aggregating them to arrive at a total market size. This approach is useful when detailed market data is available and the goal is to arrive at a precise market size estimate.
Top-down market sizing, on the other hand, involves estimating the total market size first and then breaking it down into individual segments. This approach is useful when detailed market data is not available, and the goal is to arrive at a rough estimate of the market size.
Both methods have their own advantages and limitations and can be used in conjunction with each other to arrive at a more accurate market size estimate.
Bottom-up market sizing for a B2B software company servicing other B2B software companies and C-level executives might involve analyzing the market size of different segments such as enterprise resource planning (ERP) software, customer relationship management (CRM) software, and human resource management (HRM) software. The market size of each segment would be calculated separately by researching the number of companies in each segment, the average revenue per company, and the growth rate of the segment. The total market size would then be calculated by adding the market size of each segment.
For example, if there are 100 companies in the ERP software segment with an average revenue of $1 million per company and a growth rate of 10%, the market size of the ERP software segment would be $100 million. If there are 50 companies in the CRM software segment with an average revenue of $500,000 per company and a growth rate of 15%, the market size of the CRM software segment would be $25 million. And, if there are 25 companies in the HRM software segment with an average revenue of $250,000 per company and a growth rate of 20%, the market size of the HRM software segment would be $6.25 million. The total market size would be $100 million + $25 million + $6.25 million = $131.25 million.
Top-down market sizing for a B2B software company servicing other B2B software companies and C-level executives might involve researching the total market size of the B2B software industry, and then breaking it down into segments based on the company’s target market and product offerings. For example, if the total market size of the B2B software industry is $500 billion and the company’s target market is C-level executives in the ERP, CRM, and HRM segments, the market size for the company would be a percentage of the total market size, such as 10%, which would be $50 billion.
It’s important to note that both methods have their own limitations, and combining them can provide a more accurate picture of the market size. Additionally, an effective market sizing also considers key external factors that can affect the market size such as market trends, regulations, and competition.