Bottom-up approach
Also written Bottom-up market sizing
Sizing a market by taking the revenue of individual companies and aggregating it upward — accurate where companies disclose, blind where they do not.
In plain language
The bottom-up route to a market size starts where the data actually exists: in company accounts. Take each player's revenue, work out how much of it came from the product in question, and add the results together.
Where the industry is organised and listed, this is the more solid of the two methods, because most of the numbers are audited rather than assumed. Where it is not, the method quietly omits everyone who does not file.
How it works
The workbook's definition: in a bottom-up approach the market is quantified by looking at individual companies and aggregating their data to arrive at the industry size.
Its worked example is the mirror of the top-down one. To size a therapy market, look at the revenue of all the hospitals that provide the therapy, identify how much — or what proportion — of their revenue was earned from it, and aggregate.
Chapter 8 makes the dependency explicit: bottom-up market sizing involves obtaining revenue numbers from financial statements, which is one of the reasons financial statement analysis is taught before industry conclusions are drawn.
The workbook also names the method's weakness in the same section that introduces it: measuring the current market size is difficult especially where there are many unorganised players or private companies whose information is not available in the public domain. Whatever those players sell is simply missing from the total.
The formula
Market size = Σ ( company revenue × share of revenue from this product )
+ estimate for players who do not disclose
A worked example
Size the same Indian dialysis market from the bottom up.
| Source | Basis | Rs crore |
|---|---|---|
| Listed chain A | Dialysis reported as a segment | 310 |
| Listed chain B | Hospital revenue Rs 2,400 cr × 6% dialysis | 144 |
| Unlisted chain C | From filed accounts | 96 |
| Unlisted chain D | From filed accounts | 72 |
| Government and trust-run centres | Estimated | 540 |
| Standalone clinics, the long tail | Estimated | 700 |
| Total | 1,862 |
The top-down chain gave Rs 1,930 crore. The two methods differ by Rs 68 crore, or 3.5% — close enough that both sets of assumptions are probably reasonable. Had the gap been 40%, one of them would be wrong and the analyst's job would be to find out which.
Notice where the soft numbers are. Rs 1,240 crore of the Rs 1,862 crore — two-thirds of it — comes from the two estimated rows and from the "6% of hospital revenue" split. Only Rs 478 crore is genuinely read off audited statements. That is the shape of a bottom-up estimate in an industry with a large unorganised tail, and it is exactly the difficulty Chapter 6.4 warns about.
Why NISM asks about it
Chapter 6 (Industry Analysis, section 6.4) defines the bottom-up approach against the top-down one and gives the hospital revenue example; Chapter 8 refers back to it when explaining why financial statement analysis matters. Expect a question distinguishing the two approaches from a description.
Common exam traps
- Bottom-up aggregates companies; top-down narrows from macro data. The descriptions in the options are written to be confusable.
- Its blind spot is the unorganised sector. The workbook says so directly: private companies and unorganised players whose information is not in the public domain are missing from the sum.
- Segment disclosure is rarely clean. Where a company does not break out the product line, the "proportion of revenue" step is an assumption wearing a company's name.
- Double counting is the specific bottom-up hazard. A distributor's revenue and the manufacturer's revenue can be the same product counted twice; count one level of the chain only.
- Aggregate revenue, not volume or capacity, unless every player sells at the same price.
- Use it as a cross-check rather than a replacement. Chapter 6.4 presents both approaches; the analyst's confidence comes from the two agreeing.
Check yourself
1.An analyst estimates the size of a therapy market by taking the revenue of every hospital that offers the therapy, working out what proportion of each hospital's revenue came from it, and adding those up. This is:
- a)A top-down approach, because it starts from the industry
- b)A bottom-up approach, because it starts from individual companies and aggregates their data
- c)Neither, since market sizing is not part of fundamental research
- d)A top-down approach, because the total is an industry-level number
Show the answer
Answer: (b) A bottom-up approach, because it starts from individual companies and aggregates their data
The workbook defines the pair by where the analysis starts. In a top-down approach, we measure the size of the market starting from macro-economic factors and arrive up to the industry level. In a bottom-up approach, we quantify the market by looking at individual companies and aggregating their data to arrive at the industry size.
The workbook uses this exact therapy illustration. Top-down would be: count patients who underwent the therapy, find average expenditure per patient, multiply. Bottom-up is what the stem describes — hospital revenues, proportion attributable, aggregate.
Option D contains the trap. Both approaches end at an industry-level number; the ending point never tells you which approach was used. Only the starting point does. Option C is wrong — the top-down and bottom-up approach to fundamental research is named in the examination objectives.
Where this is taught
- Series XV · Chapter 4: Fundamentals of Researchintroduced here
- Series XIX-A · Chapter 11: Valuationintroduced here
Related terms
- Barriers to entryWhatever makes it hard, slow or expensive for a new competitor to enter an industry — and therefore what allows the companies already in it to keep earning above-normal profits.
- Fundamental analysisEstimating what a share is worth from the profits and cash flows the business will generate, then buying only when the market price sits below that estimate.
- MoatThe durable competitive advantage that lets a company keep earning high returns while competitors try and fail to take its business.
- Top-down approachSizing a market by starting from macro-economic or population-level data and narrowing down to the industry — the opposite of aggregating individual companies.