What is the Bottom up approach for market estimation?
The bottom-up approach for market estimation starts with the most granular unit, such as individual consumers or entities, and scales up to derive the overall market size.
This method typically depends on primary data collected through direct interactions with potential customers or observations within the specific market segment.
Example:
An Indian startup planning to introduce an online grocery delivery service decides to estimate the market size starting with a single neighborhood in Bangalore.
They conduct door-to-door surveys to gauge the interest in online grocery delivery, finding that 40% of households are inclined towards using such a service. Assuming there are 1,000 households in the neighborhood, the potential customer base for that area is 400 households. To estimate the market size for Bangalore, they multiply this figure by the total number of similar neighborhoods in the city.
Process steps:
The bottom-up market estimation process involves:
1. Starting with a Small Unit: This could be individual customers, a single institution, or a specific locality.
2. Gathering Primary Data: Utilizing surveys, interviews, or direct market observations to collect data on demand, interest, or buying patterns for the unit.
3. Scaling Up: Extrapolating the gathered data to a broader market by multiplying the estimated demand from the unit by the total number of similar units.
4. Adjusting for Variability: Modifying the estimate to reflect variations in different market segments or geographic areas.
In the example, if Bangalore has 500 similar neighborhoods, the estimated city-wide market size would be 400 households x 500 neighborhoods = 2 lakh potential customers.
The bottom-up approach offers a detailed and often more precise market size estimation as it relies on first-hand data. However, it may require more resources and time compared to the top-down method.