Top-Down Market Sizing

Before embarking down the road to build a mobile app, it’s useful to first run a market sizing test to determine if your investment in time and money will be worth the effort.

For example, as a simple thought exercise – what if you wanted to build a mobile app to help people in Chicago find artisanal craft beers. Given that Chicago has a population of about 2.7 million. Perhaps 2% of them are craft beer enthusiasts, which means an addressable target market of 54,000 people. If 21.5% of them have Iphones and 4% at a maximum are willing to buy your app, that’s only 464 customers. If you price the app at $0.99, you likely won’t get a return on your investment from serving these 464 customers.

Generally speaking there are two approaches to market sizing: Top-down market sizing and Bottoms up market sizing. This post is going to explain the basics behind top-down market sizing.

Top-Down Market Sizing

Step 1: Get an estimate of your total market size. Use reputable research companies such as, Forrester, Pew etc. It’s useful to also review industry associations or business publications if you’re targeting a niche field. In this step you’re trying to estimate the maximum potential for your product. As shown above, it could start with the total population of Chicago or be a statement such as:

“The US beer, wine and spirits distributions industry includes 4000 companies with combined annual revenue of about $100 billion.”
— First Research, Inc., March 2012

Step 2: Segment the market. Define a group of potential customers who can use your solution or suffer from the problem and share several characteristics. I wrote another article about market segmentation criteria, but common factors to consider are: geographic, standard industrial classifications, demographics, purchase/usage groups. Or even custom characteristics such as product attribute preferences, purchase patterns, price sensitivity, lifestyles, and dealer loyalty.

Step 3: Find your addressable target market by multiplying the total market size by your segmentation criteria. As my initial example elucidated, a mobile app to serve craft beer fanatics needs customers that share the following attributes: they love craft beer, are iphone users, and have a willingness to spend money on apps.

Top-down market sizing is the least accurate method when performing market sizing, but it does serve several useful purposes. It’s quick and relatively easy. It’s also useful as a gut-check to understand if this project is more hobby than business. Lastly it forces you to think about identifying customers and a path to positive cash flow.

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