Market sizing without the fiction
A single, confident number for "the size of the market" is usually the least reliable thing in a business plan. Three methods, honestly compared, tell you much more.
- By
- DGS Advisory
- Published
- Reading time
- 2 min read
Every business plan has a slide with a large number on it: the total addressable market. It is often taken from an industry report, multiplied by a share that feels modest, and presented to two significant figures. Investors and boards have learned to discount it, and they are right to.
The issue isn't that market sizing is impossible. It's that a single method, applied once, hides its own assumptions. The fix is to size the same market three ways and look closely at where the answers disagree.
Three lenses
Top-down starts from a published total, such as a national category value, and narrows it by geography, segment and channel. It is quick and easy to defend because someone else published the starting number. It is also the method most likely to include things you don't sell.
Bottom-up builds the market from units you can count: the number of potential customers multiplied by what each one spends. It takes longer and depends on good primary research, but every assumption is explicit and testable.
Supply-side adds up what is produced and imported, minus exports. It is a useful reality check in physical goods markets, where customs and production data are often better than demand data.
Three ways to size the same market
Estimated annual market value, € millions. Bar shows low–high range; dot shows central estimate.
- Top-down (industry report share)240
- Bottom-up (outlets × spend)118
- Supply-side (imports + production)131
Show data table
| Method | Low | Central | High |
|---|---|---|---|
| Top-down (industry report share) | 180 | 240 | 310 |
| Bottom-up (outlets × spend) | 96 | 118 | 142 |
| Supply-side (imports + production) | 104 | 131 | 155 |
Read the gaps, not the averages
In the worked example above, the top-down estimate is roughly double the other two. The temptation is to average the three methods. Don't. Find out why they differ.
Here, the answer was category definition: the industry report included product lines our hypothetical client doesn't make. Strip those out and the top-down figure falls into line with the others.This is the most common source of disagreement we see. The second most common is double-counting across channels, such as wholesale sales that are counted again at retail.
When the methods converge after you correct for definitions, you can be reasonably confident. When they still disagree, you have learned where the real uncertainty is, which is often more valuable than the number.
Report a range, and say what moves it
We report market size as a range with a central estimate, and we list the two or three assumptions that move it most. For a bottom-up model that is usually the number of active customers and the spend per customer.
That turns a static number into a working tool. If the board thinks spend per customer is too optimistic, they can see what happens to the market, and the plan, if it's 20% lower.
Checklist
- Define the market by what you sell, to whom, through which channels.
- Size it at least two ways; three if the decision is large.
- Explain every gap between methods before reconciling them.
- Report a range and the assumptions that drive it.
- Keep the model. Update it when you learn something.