When you're thinking about your business concept (or when you're talking about it to partners or investors) a natural question is "well how much money could this reasonably make?" In just about any business, the way to answer that question is:

No. of customers * price of thing = revenue

So a very important part of your business plan analysis is to determine how many customers you can expect to have. This is called market sizing and there's two main ways to do it: top-down and bottom-up.

<aside> ➡️ If you're already familiar with market-sizing thanks to prepping for consulting interviews, feel free to skip through this page.

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Top-down market sizing

With top-down market sizing, we're looking to winnow a population from the entire geographical region where something might sell to the amount of customers we actually expect. If your product was a new hard seltzer, you might do some rough math like:

• There's 330 million people in the U.S.
• Of those 330 million, let's assume 70% are 21 or older (231 million)
• Of those 231 million, let's say half don't drink alcohol
• Of the remaining 115,500,000 what do we think our market share will be?
  • If you say 10% that's 15 million customers! Looking good 😎
  • Even if you say just .1% you're looking at 1.5 million buyers

As you can see, the important part of doing top-down market sizing is determining the rates by which you narrow your overall population. All of our numbers here were made up, but the more accurate you can be on demographic data and consumer preferences, the more accurate your final prediction.

<aside> ☝ The best way to determine that final percentage of customer adoption is to run tests where you can track adoption rate on a small scale (our next page addresses this in detail)

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Bottom-up market sizing

Bottom-up market sizing is a bit more precise. You start by making a persona of your ideal customer. Somebody you think would be hard pressed not to buy your product. Then you do research to determine how many people fit into the requirements you've set for that persona.

When you're validating your business idea, it's best to do both of these market-sizing techniques and check to see whether the numbers you end up at are relatively similar. If one technique gives you a radically different number than the other, something is probably wrong in either set of assumptions. Once you're comfortable with your market size, it's time to move ahead on validating your idea within that market.

Up next:

Experimentation (Lean)

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