Market Sizing

Market sizing, especially in the early phase of innovation projects, is not about reaching exact predictions, but about clarifying assumptions in a clear structure and about providing a ballpark range of innovations’ market potential. We typically combine top-down and bottom-up approaches to define the market size. We then make assumptions on the penetration rate and pricing evolution to project how total revenues will evolve over time.

Top-down approach

As the figure here shows, the top-down approach involved 3 steps. First, you need the total market size. This is typically taken from external or internal reports. Second, you want to drill down to the market size per segment. Here you either have information or need to make an assumption of the size of each segment. Third you need to calculate your market share per segment. Here your assumptions can be based on your typical shares in the past or preferably based on customer input.

The pros of the top-down approach is that it is relatively easy to calculate and provides important information on the total market. However, its simplicity is a double-edged sword. Top-down estimates are sometimes seen as superficial, possibly inflated, and thus not believable (especially if assumptions on market share are not robust). The typical example of someone saying: “this is a huge market, and we would make a lot if we would only capture 10% of the market”.

Bottom-up approach

The bottom-up approach is more rigorous. It also involves 3 steps. Yet, these are repeated per relevant customer segment. Here, we start by choosing a specific key customer segment. We then define their willingness to pay, typically through customer interviews. We then translate these ‘willingness to pay’ into a price point (or range) that is then multiplied by the number of customer who are willing to buy from us. Once again, this number is typically based on customer interviews. These 3 steps are then repeated across all relevant segments that we are targeting to calculate the total market size.

This approach provides clear assumptions on how you estimated your market size, and provides important details such as customer names, willingness to pay, and number of customers willing to buy from us. Of course, it is also more difficult to gather this information and may be challenging if the solution is not clear (e.g., at an early phase of an innovation where it would be difficult to gather reliable customer input on willingness to pay).

We typically use a mix of both approaches, with a top-down approach in the earlier phases of development and a bottom-up approach as the innovation matures.

Visualizing the market share

Depending on the information we want to share, we visualize the market share in different ways. A typical approach is to visualize the (i) TAM (total available market), (ii) the SAM (serviceable available market), and (iii) SOM (serviceable obtainable market). The Figure on the right depicts these three market estimates simply as “total market” (TAM), “segment size” (SAM), and “our share” (SOM).

Market penetration

Beyond the market size, you also want to calculate the market penetration. This can be based on the voice of customer, prior innovations you have launched, competitive innovations launched, or innovations in related fields. The graph here shows different penetration rates over time with different s-shaped penetration curves.

Some of our customers work with archetypes, whereby you can fill in an excel that gives you the penetration based on prior introductions, while we others we create assumptions based on voice of customer or other innovations.

Market sizing over time

We then want to bring it all together in a slide such as the one shown here. Here we include

  1. revenues per year,
  2. number of customers per year,
  3. total market size,
  4. market shares per year, and
  5. key assumptions we are basing our numbers on.

The information you provide will vary across innovation projects, but this gives you an impression of the type of details presented. 

Benefits of market sizing

When developing innovations, it is important that teams understand what is expected of them and what are the different approaches to market sizing. You want to provide your teams with clear guidelines on which numbers you want them to deliver so there is uniformity across teams and management can make an informed decision. The tools shown here help innovation teams to understand that they need customer input and need to present clear assumptions.

Download the Market Sizing tool

MTI2 Website - Market Sizing - Tool to download