Conservative Marketing

Dear Jeff,

We've developed a new product, are about to take it to market, and need to develop a market analysis for our business plan. Which forecasting approach is better: top down or bottom up?

-- Name withheld by request

Understanding market size, and understanding your ability to penetrate that market, is all-important: If your market is too small you can't make money, no matter how innovative the product or how competitive your pricing.  Top down and bottom up analyses are two basic ways to evaluate that market.

A top down analysis is calculated by determining the total market, then estimating your share of that market.  A typical top down analysis might go something like this:  "Hmm... I will sell a widget everyone can use, and since there are 300,000 people in my area, even if I only manage to land 5 percent of that market I'll make 15,000 sales."

Sound a little fuzzy? Sound a little optimistic? That's how a top down analysis usually goes; it's like the stereotypical, "2 percent of a $1 billion market is $20 million!" sales forecast heard in hundreds of pitch meetings every year.

A bottom up analysis is calculated by estimating potential sales in order to determine a total sales figure. A bottom up analysis evaluates where products can be sold, the sales of comparable products, and the slice of current sales you can carve out. While it takes a lot more effort, the result is usually much more accurate.

Here's how a bottom up analysis might work in real life. Let's pretend you just developed a prototype for a bicycle pump and you want to determine if there is a market for your pump--a profitable market that will sustain a real business.

Let's walk through the steps:

1. Where are bike pumps typically sold? Most are sold, fairly obviously, in bike shops, but also by major retailers, and online. You decide to focus on bike shops for now, since landing shelf space at Walmart or Target isn't particularly likely, at least not at first.

2. How many bike shops are...