Lean Analytics: Use Data to Build a Better Startup Faster (Lean (O'Reilly))

by Alistair Croll

If you’re trying to estimate the size of a market, it’s a good idea to do both a top-down and a bottom-up analysis, and compare the results. This helps to check your math. A top-down analysis starts with a big number and breaks it into smaller parts. A bottom-up one does the reverse. Consider, for example, a restaurant in New York City. A top-down model would look at the total money people spend dining out in the US, then the percentage of that in New York, then the number of restaurants in the city, and finally calculate the revenues for a single restaurant. A bottom-up model would look at the number of tables in a restaurant, the percent that are occupied, and the average price per party. Then it would multiply this by days of the year (adjusting for seasonality). This is an oversimplification — there are plenty of other factors to consider such as location, type of restaurant, and so on. But the end result should provide two estimates of annual revenue. If they’re wildly different, something is wrong with your business model.