Bottom-up Market Sizing

Continuing the review of market sizing, a second approach is to perform an analysis using the bottom’s up approach. As the name hints, it’s like the top-down approach, only in reverse. A bottom’s up analysis is much more granular in detail, a lot more time intensive, but it will produce a more honest estimate of your market opportunity.

Bottom-up Market Sizing

Step 1: Identify relevant market segments. For example if you are selling an educational product, two relevant criteria for you might be “user sophistication” and “resources.” Plotting all the different groups of customers might yield something like the below plot.

You can even go a step further with segmentation. For example, Universities come in all shapes and sizes. Universities may include: Research Universities, Liberal Arts Colleges, and Community Colleges. Likewise Government funded groups vary in size, from 100K students (small) to urban school programs (large) which may support up to 500K students.

education market segmentation

Step 2: Find the market contribution of each segment. Use resources such as Census data, Bureau of Labor Statistics, or other public databases. For example if you’re looking at Community Colleges, The National Center for Education Studies reports that there are 1,669 Community Colleges in the United States total. These schools spend 465 million dollars annually. Of this total, 15 million is allocated to IT services. If you can realistically capture 1% of this segment, then the Community Colleges segment can contribute $150,000 to your total annual market potential. Repeat the process for the Research University segment, Liberal Arts College segment etc.

How do you find what percentage of market share you can capture? Primary research is key.

Interview experts and customers. Identify what your sales funnel will look like. How many schools will you target? How many of these targets will turn into actual leads? How many leads will become prospective customers? And how many prospects will become actual customers? What will be the lifetime value of each customer?

Step 3: Iterative market analysis. These projections aren’t set in stone and they will change as you understand your market better. Refine this model as you learn more about competitors and customers. Maybe the market is much smaller than anticipated and you need to reposition your offering. Maybe it is much larger than expected, and you need to raise funding to achieve the necessary scale to become profitable.

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