Top Down vs Bottom Up (Estimations)

Question

Why might someone prefer the top-down method for market sizing over the bottom-up approach? From what I gather, the top-down method involves using a larger data set and applying a percentage to determine a specific market size, like estimating the number of smartphone users in a city based on the city's population and the national smartphone penetration rate. In contrast, the bottom-up method seems to be more detailed, as it would involve estimating the number of smartphone sales per store in that city and then multiplying by the number of stores. Could you provide another example where the top-down approach might be advantageous compared to the bottom-up method?

Answer 1

Hello!

The top-down method for market sizing is typically quicker and provides a general estimate promptly. However, it's often not as precise as the bottom-up approach.

In a real consultancy setting, the top-down method is mainly useful in two scenarios:

When there's insufficient data for a bottom-up analysis or when the variables involved are too intricate and time-consuming to consolidate effectively.
When the top-down estimate serves as a cross-check for the results derived from the bottom-up method, a technique known as triangulation.

Hope this helps! Sidi

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Dr. Sidi S. Koné

Former Senior Engagement Manager & Interviewer at McKinsey | Former Senior Consultant at BCG | Co-Founder of The MBB Offer Machine™

Answer 2

Hi there,

I would be happy to share my thoughts on your question:

First of all, top-down market size estimations are typically quicker to perform because they require fewer data points to arrive at a conclusion. This can be particularly beneficial when time is a constraint or when an immediate ballpark figure is necessary for a strategic decision.
Moreover, the top-down method can be more effective when data on smaller segments is unavailable or unreliable. For instance, if you are trying to estimate the market size for electric vehicles in a country where the industry is just emerging, and there's limited data on sales per dealership.
Lastly, I would advise you to use the top-down approach when the market dynamics are influenced by macro-level factors more than micro-level factors. For example, estimating the demand for residential solar panels can be more accurately done by looking at overarching trends in green energy adoption and government incentives, rather than starting with individual sales figures which might not be readily available.

If you would like a more detailed discussion on how to best prepare for your upcoming interviews, please don't hesitate to contact me directly.

Best,

Hagen

Answer 3

Hi there,

In my view, top-down generally provides a better frame of reference and lends more credibility to your market sizing.

REASON: Bottoms-up at a market level tends to rely on arbitrary variables and leads to market sizes that have no real frame of reference. Mathematically it works, but if you're not exactly sure about the scaling variables, it's more wishful thinking than anything else.

EXCEPTION: Instances where bottoms-up does work, is where your market is very confined, e.g. literally a little street market, an actual store, restaurant etc. This is more related to estimating revenue and not commonly thought of as market sizing.

Hope this helps a bit. Best of luck!

Moritz

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Answer 4

Hi there!

When it comes to market sizing, the top-down approach is known for its speed in providing a quick, rough estimate. However, it may lack the precision that the bottom-up method offers.

In a real consulting scenario, the top-down method is particularly valuable in two main situations:

When there's a lack of data to perform a thorough bottom-up analysis or when the factors involved are complex and time-consuming to consolidate effectively.
When the top-down estimate is used as a cross-reference to validate the results obtained through the bottom-up method, a technique often referred to as triangulation.

I hope this clarifies things for you!

Answer 5

Thank you for your question. The top-down method for market sizing can be advantageous over the bottom-up approach in certain situations. One such example is when there is limited data available at a granular level or when the bottom-up approach would require significant time and resources to gather detailed information.

In cases where data is scarce or difficult to obtain, the top-down approach allows for a quicker estimation of market size using broader, readily available data sets. This method relies on making assumptions and applying percentages or ratios to estimate the market size based on higher-level indicators.

For instance, let's consider a scenario where you are asked to estimate the market size for a specific type of luxury car in a country. If detailed data on the number of luxury car sales per dealership or region is not readily available, the top-down approach can be more practical. You can start by gathering data on the total number of registered vehicles in the country, the percentage of luxury cars within the overall vehicle market, and the average price of luxury cars. By applying these percentages and ratios, you can estimate the market size for luxury cars in the country.

The top-down approach is particularly useful when time is limited during a case interview or when the focus is on obtaining a high-level estimate rather than a detailed breakdown. It allows you to quickly assess the market potential and make informed decisions based on available data.

However, it's important to note that the choice between top-down and bottom-up approaches depends on the specific case context and the availability of data. In cases where detailed information is accessible and the objective requires a more granular analysis, the bottom-up approach may be more appropriate.

I hope this clarifies the advantages of the top-down approach in certain scenarios. If you have any further questions, feel free to ask.

Answer 6

Hi there,

It's not about someone, it's about the question.

Some prompts are best answered with one approach for the other.

For example, estimating coffee shop revenue wouldn't make sense top down. Nor would estimating airport throughput. However, bottom-up wouldn;t make sense for the size of a fruit market.

Make sense?

It depends on the prompt…if you are GUESSING you have the wrong approach.

Here's a case where I show BOTH approaches (watch the video solution):

https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/beginner/market-sizing-with-solution-number-of-taxis-317

And here are two where I walk you through the approach, again via video:

https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/intermediate/market-sizing-with-solution-coffee-shop-revenue-318

https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/advanced/market-sizing-with-solution-number-of-internet-users-319

Answer 7

Hi!

Yes, that's it high-level.

Sharing here a guide on how these two techniques can be employed in structuring for frameworks, brainstorming and market sizing:

Expert Guide: Mastering Structuring & Brainstorming

Good luck!
Cristian