What is the Top down approach for market estimation?
The top-down approach for market estimation begins with a broad market size or population figure and systematically narrows it down using specific criteria to estimate the potential customer base for a product or service.
This method typically uses external data sources like industry reports, government statistics, and market studies to drill down to the targeted market segment.
Example:
An Indian startup selling ayurvedic beauty products wants to estimate its potential customer base in Mumbai.
They start with Mumbai's total population, then narrow it down by considering the percentage of the population interested in beauty products, further refined by the proportion interested specifically in ayurvedic or natural products.
Process steps:
The process in a top-down market estimation typically involves the following steps:
1. Start with a Broad Metric: This could be the total population of a city or region, or total industry sales in India. For instance, the total population of Mumbai.
2. Apply Market Segment Filters: Refine the broad figure by applying filters related to your specific market. In our example, this includes the percentage of people in Mumbai interested in beauty products, and then the subset interested in ayurvedic products.
3. Utilize External Data and Reports: Accurate percentages are obtained from market research reports, government publications, or industry analyses. These sources provide insights into consumer behavior and preferences within the Indian market.
4. Calculate the Estimated Market Size: Multiply the initial broad figure by the successive percentages to estimate the market size. For example, if Mumbai's population is 2 crore (20 million), and 15% are interested in beauty products, with 25% of those interested in ayurvedic products, the estimated market size would be 20,000,000 x 15% x 25% = 7.5 lakh potential customers.
The top-down approach offers a macroscopic view of market potential and can be executed relatively quickly. However, it may not be as precise due to its reliance on generalized external data and assumptions.