Commercial diligence tests market claims by building them from countable customers and realistic prices, then checking the parts the company can actually reach.
10 min read · Level 3
A market figure I cannot rebuild from named customers and real prices is, for my purposes, not a market figure. The rebuilding almost always produces a smaller number, and the conversation about how the company plans to grow beyond it is far more useful than any headline from an industry report.
A top-down market claim starts with a large industry figure and takes a percentage. A bottom-up estimate starts with customers you can count.
Top-down claim: 'The dental software market is worth 5,000,000,000. We only need 1%.'
Bottom-up test: Independent dental clinics in target countries 12,000 (from a professional register) Realistic annual price per clinic 3,000 (from current contracts) Serviceable addressable market 36,000,000
12,000 x 3,000 = 36,000,000.
Then narrow further to what can be reached with the company's current sales approach:
Clinics using compatible practice software 60% Reachable market 12,000 x 60% x 3,000 = 21,600,000
The top-down '1% of 5,000,000,000' is 50,000,000. The bottom-up reachable market is 21,600,000. A company would need a very large share of its realistic market to reach the size the pitch implies.
Because market size determines how large a company can become, and top-down figures often include customers who will never buy.
Bottom-up sizing also produces diligence questions that can be checked: how many customers exist, what do they pay today, and what share can the company reach?
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Checking the inputs.
Clinic count: confirmed from two public registers (primary source) Price: company contracts average 3,000; three customer calls confirm budgets of 2,500 to 3,500 Compatibility share: company says 60%; a software distributor estimates closer to 45%
With 45%: 12,000 x 45% x 3,000 = 16,200,000.
The realistic market is 16 to 22 million a year. The investor now asks whether the company has a credible plan to expand beyond it, into new countries, clinic types or products.
Accepting a top-down market figure from an industry report without checking how many of those customers could actually buy this product.
Use registers, directories or public data rather than the company's estimate.
Base price on current contracts and customer budgets.
Remove customers the product or sales approach cannot serve.
Judge what share of the reachable market the plan requires.
When a company's valuation or plan depends on the size of its market.
Do not over-narrow for companies with credible plans to create or expand a category; size the expansion path separately.
Venture investors frequently write that they prefer bottom-up market sizing built from customer counts and pricing over top-down percentages of industry reports, because bottom-up estimates expose the assumptions that determine whether a company can become large.
If a market cannot be built from the bottom up, the top-down figure is doing work it cannot support.
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