This method is generally chosen by larger companies rather than start-ups, and usually ones in established industries with lots of available data. It involves analyzing macro data of the market your company is in, by first establishing the total addressable market (TAM) size in whichever currency you’re doing business in.
This is how business owners performing top down forecasting calculate their projected revenue. It suits larger companies better because they are entering established markets and determining how they will fit into them, rather than trying to break through into emerging markets which have more potential for growth.
Before performing top-down forecasting, review your decision:
- Do these estimates make sense for your company size?
- Are these kinds of market projections within your company’s operating capabilities?
To begin top-down forecasting, accumulate all the relevant data in your chosen market, on the major companies you will be competing with. You then need to calculate the TAM, which is done with this equation:
Revenues = TAM Size ($) x Market Share (%)
The percentage you are left with is the total revenue of the TAM your company can reasonably obtain.