Market Size
A good analysis involves careful segmentation of the truly addressable market and thoughtful descriptions of how customer segments will pay for the solution over time to build up a picture of realistic market size.
Bottom-up Market Size = [# of Customers] * [Price They’ll Pay]
- Who is your specific customer?
- How many of them are there?
- How many of them can you realistically reach?
- At what price will they buy?
- Then, perhaps the most challenging: How many will buy from you?
For more information, see the full framework .
🎙 Hear how Michael taught it the lecture, cleaned & woven in
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Once you’ve done that, you still have to answer the question for us: does that make a big market? There’s some level of angst I always have when we look at these slides, because very rarely does anybody know what the market’s going to be in five to seven years’ time. So we certainly aren’t expecting you to have accurate data down to the nanometer.
Top-down view. What we’re looking for is a top-down view. That may be as simple as going to a Gartner or Forrester and getting a report. But it’d be better if you can actually do your own math and say, okay, the potential audience is this size, and therefore this is the market opportunity for us. That’s the sort of top-down view we’re looking for.
Bottom-up view. But the more important one is the bottom-up view. The bottom-up view we’re looking for is to say: we’re going to start by targeting this particular segment. For argument’s sake, if you were building a mobile app, what’s the particular customer that’s going to buy this? If you could get very specific and say, “We’re going to sell this to doctors in hospitals for this particular critical-care application, and there are, in New England, this number of hospitals with those kinds of doctors doing this kind of application, and the average selling price will be $100 per doctor per year,” now we’re starting to hear something that makes sense to us. Because you’re being very clear about not just your target, but also what your value is to them and how you’ve built out a market sizing that, at least in a mathematical sense, makes sense.
That makes a lot more sense to us than “Gartner says the mobile applications market is worth $5 billion.” I’m sure they do say that; I don’t know their latest number, but it’s probably bigger than that, and it usually goes up every year by 10% just to keep us buying their research. The reality is, we’re looking for you to give us more of the specifics in market sizing around what really goes into your first assumptions about who you’re selling to, how you’ll sell to them, and at what price, and then build that basic bottom-up model. So clarify the basis when you’re doing the bottom-up, and quote the sources when you’re doing top-down.