Top-Down Approach to Market Sizing

$$\text{Total Market size}=\text{Average price of product}\times (\text{New demand of product + replacement demand of product})$$

Replacement Demand

Replacement demand is the demand for replacement of an existing product and can be calculated using this formula:

$$\text{Replacement Demand}=\frac{\text{Estimated Number Of Product}}{\text{Lifespan of product}}$$

New Demand

This is the demand for a product and can be calculated with the following formula:

$$\text{New Demand of Product}=(\text{Estimated number of product}\times \text{Growth rate})$$

---

Example: Estimation of ACs in India

Total population - 1.3bn - 30% in rural and 70% in urban Urban - 376 mn Rural - 877 mn

5 members in each family

Total urban families - 75 mn Total rural families - 175 mn

Upper class - 2% Upper middle class 8% Lower middle class 50% Low income 40%

	Urban				Rural
	Percentage of population	No. of families (in mn)	No. of ACs per family	Total no. of ACs (in mn)	Percentage of population	No. of families (in mn)	No. of ACs per family	Total no. of ACs (in mn)
Upper class	2%	1.5	1.5	2.25	1%	1.75	0.2	0.35
Upper middle class	8%	6	1	6	10%	17.5	None	0
Lower middle class	50%	37.5	0.1	3.75	35%	61.25	None	0
Low income	40%	30	None	0	54%	94.5	None	0
Total ACs (in million): $(2.25+6+3.75+0)+(0.35)=12.35$

Replacement Demand for ACs: (assuming lifespan to be 7)

$$\frac{\text{Estimated number of proudct}}{\text{Lifespan of product}}=\frac{12.4}{7}=1.77\text{mn}$$

New demand for ACs: (assuming growth rate to be 10%)

$$\text{Estimated no. of product}\times \text{Growth rate}=12.4\times 0.1=1.2\text{mn}$$

Total Market Size:

• Assuming average price of an AC = ₹25,000

$$\begin{array}{rlr}& \text{Total Market Size}& =\text{Average price of product}\times (\text{New demand of product}+\text{Replacement demand of product})\\ & \text{Total Market Size}& =25000\times (1.2+1.8)\\ & & =75000\text{(or 75 billion rupees)}\end{array}$$