Insights / Guide / Market positioning and growth strategy
GuideHow to size a market without false precision
Market size estimates drive investment decisions, yet they often rest on a single optimistic number. A practical method: build from the bottom up, show a range and check with buyers.
Market size estimates drive investment decisions, yet they are often built on a single optimistic number. A business case states that the market is worth a certain amount, assumes the company can capture a few per cent of it, and arrives at a revenue figure that justifies the investment. The figure looks precise. It is usually nothing of the sort.
The problem is not that estimates are uncertain. All estimates of the future are. The problem is false precision: a single number, presented to several significant figures, that hides how much it depends on a handful of guesses. Decision-makers then treat it as fact, and the guesses are never tested.
This guide sets out a practical method that produces a more honest estimate in a few days. It works for new products, new regions and new customer segments, and it needs no specialist software.
Why the usual approach misleads
The most common method is top-down. Start with an industry figure for the total market, apply a series of filters for region, segment and product, then assume a share. Each step looks reasonable. Together, they compound.
Suppose an industry report puts a national market at a large figure. The analyst estimates that the target region is a fifth of it, that the relevant segment is a third of that, and that the company can win a tenth of the segment within three years. Each of those fractions is a judgement. If each is out by a modest amount in the optimistic direction, the final figure can easily be double what is achievable.
The share assumption is the weakest link. “We only need a small share” sounds cautious, but it says nothing about how the company will win those customers, from whom, and at what cost. A small share of a large market is still a large number of customers who must each be persuaded to change supplier.
Work from the bottom up
Count customers you can reach, multiply by realistic spend and compare with the top-down view.
A bottom-up estimate starts with the customers rather than the market. It asks: who, specifically, would buy this, how many of them can we realistically reach, and how much would each spend? The arithmetic is simple. The work lies in making each input as concrete as possible.
- Define the target customer precisely: by type, size, location and the situation that makes them need the offer.
- Count them, using business registers, industry association lists, your own customer data or public sources.
- Estimate how many you can reach in the period, given your sales capacity, channels and marketing budget.
- Estimate what share of those you reach will buy, based on conversion rates from comparable products or pilots.
- Estimate annual spend per customer, based on what similar customers spend today on this or on alternatives.
Consider a typical business software firm assessing demand from independent veterinary practices in its home country. Rather than starting from a figure for the national veterinary software market, it counts the independent practices in the regions it serves, estimates how many its two sales staff can contact in a year, applies a conversion rate based on its experience with dental practices, and multiplies by the annual subscription it expects to charge. The result is smaller than the top-down figure, but every part of it can be checked.
Reachable is not the same as existing
A market of ten thousand potential customers means little if your sales team can contact five hundred a year. Capacity to reach customers is often the binding constraint, and the bottom-up method makes it visible.
Compare with the top-down view
The top-down estimate still has a role. Used alongside the bottom-up figure, it acts as a sense check. If the bottom-up estimate implies that you would capture most of the total market, something is wrong. If it is a tiny fraction, the opportunity may be bigger than your current reach allows, which raises a different question about channels and partners.
Where the two estimates differ widely, the gap itself is useful. Work out which assumptions explain it. Often, the top-down view includes customers that are not truly reachable, such as large organisations served by specialist providers, or segments with different needs. Sometimes the bottom-up view is too conservative about spend per customer. Resolving the gap sharpens both.
Show a range
Give low, expected and high cases. The decision should hold even in the low case.
Build each case by varying the inputs that matter most: the number of customers reached, the conversion rate and the spend per customer. Avoid the temptation to make the low case only slightly below the expected case. A useful low case reflects a plausible disappointing outcome, such as slower sales hiring, lower conversion than in the pilot, or customers choosing a cheaper tier.
- Low case: what happens if the key assumptions disappoint in ways that have happened before?
- Expected case: your honest best estimate, not the figure you hope for.
- High case: what happens if things go well, and what would have to be true for that to happen?
Then test the decision against the range. If the investment only makes sense in the high case, it is a bet and should be sized as one, perhaps through a smaller first step. If it makes sense even in the low case, leaders can commit with more confidence. Either way, the range gives a far more honest basis for discussion than a single figure.
Check with buyers
A handful of buyer conversations can confirm or overturn a spreadsheet in a day.
Most market sizing is done at a desk. Yet the most uncertain inputs, how many customers would buy and what they would pay, are best tested by asking the customers. Five to ten conversations with target buyers often reveal more than weeks of analysis.
- Ask how they solve the problem today and what it costs them, in money and time.
- Ask who else in their organisation is involved in buying decisions of this kind.
- Describe the offer briefly and ask what would make them consider it, and what would stop them.
- Ask what they would expect to pay, then listen for hesitation rather than taking the number at face value.
Buyer conversations frequently overturn a key assumption. The software firm in our example might learn that most independent practices are locked into multi-year contracts, so the reachable market in the first year is much smaller than the count suggested. That is valuable to know before hiring a sales team, not after.
Our first estimate came from a report. Eight phone calls later we had cut it by half and found a segment we had missed entirely.
Commercial director, business services client
Present the estimate honestly
When presenting the estimate to a leadership team or board, show the range, the method and the three assumptions that most affect the result. Round the figures: a market estimate presented to the nearest thousand implies a precision that does not exist. State what evidence supports each key assumption and what further evidence would change it.
This approach invites challenge, which is the point. Decision-makers who can see the assumptions can test them against their own experience. The discussion moves from whether the number is right to which assumptions matter and how to test them quickly.
To start, take a growth option currently under consideration. Rebuild its market estimate from the bottom up, set out low, expected and high cases, and book five buyer conversations for the coming fortnight. The revised estimate may be smaller, but it will be one the organisation can rely on.
Source: Intelliversal analysis.
