Bottom-up vs Top-down approach
In general there are two common approaches when estimating the size of a market: Bottom-up and Top-down. While each approach the challenge from opposite angles, each serves its specific function to highlight certain aspects and opportunities of a market. In best cases, both are relied upon to support the decision-making of investing in a new product, feature or business.
Top-down generally looks at a market from a total size of a market (number of companies, investments, revenue, etc.), and then step-by-step narrowing down the focus to the segments that are relevant for your business depending on a number of assumptions and facts that support your estimate. Top-down can also include factors such as macro-economic conditions, competitiveness, the market size of competitors, etc.
Bottom-up typically starts by looking at quantifying specific customer segments one at a time, and then in aggregate numbers determine the size of a market. In this way, step-by-step increasing and widening the focus, a detailed picture emerges of the larger opportunity and the components and boundaries of a market. Compared to the Top-down approach, Bottom-up is typically much more time-consuming, but tends to yields a more reliable and higher-quality estimate of a market.