Top-Down vs Bottom-Up: How Effective is Your Market Forecasting?

Aaron Call
August 04, 2021

Both top-down and bottom-up market forecasting have benefits. Medical device companies are most successful when they embrace both methodologies.

Every executive wishes that he or she could see into the future. To have insight into trends, market forces, and ancillary technologies. To understand customer preferences and sentiment, priorities and pain points. To know exactly how much stakeholders are willing to pay for a product. To predict how much cash they will have on hand, how quickly they will be able to sell, and the pace at which they will see growth.

But we all know that there is no crystal ball – not exactly. Instead, medical device leaders rely on market forecasting to carefully map out their product strategy. And the vast majority know that forecasting is not a “nice-to-have”; it is a foundational element of running a business and gaining market share. Market forecasting allows companies to not only see and define the opportunity, but establish the timeframe in which they will penetrate the market. A market forecast helps to drive a strategic plan forward – one that is necessary to succeed.

But not all market forecasting is created equal. It’s important for medical device leaders to understand the different types of forecasting and which they should utilize to best assess how their product will perform in the market.

Top-Down and Bottom-Up Market Forecasting Explained

Generally, companies have the option to perform top-down or bottom-up market forecasting. Here we discuss the benefits and challenges associated with each approach.

Top-Down Market Forecasting

Top-down market forecasting largely begins with the size of the market the company intends to target. However, it’s important to keep in mind that rarely does a medical device penetrate an entire market. Before establishing overall market size, ensure that you have already segmented for your target buyers and stakeholders.

For example, while reports show the global digital therapeutics market is predicted to be $14.5 billion by 2027, that number would not be appropriate for a telehealth company that is targeting small business to reference, as their segment of that market will be considerably smaller. That “homework” must be done in detail prior to forecasting.

Next, take your market size and apply your penetration percentage and timeframe, which, again, is established via market analysis. For example, the calculation might be to gain 10% of a $500 million over 10 years. In a top-down market forecast, those parameters are then applied to an S-curve growth trajectory (which is more typical in the medical device industry than the “hockey-stick”), which then informs a revenue forecast for the indicated time frame.

One benefit of a top-down market forecast is that it can be done quickly. It can be conducted in a week or less if a company has done that “homework” and already has the right information and inputs. But top-down forecasts, while great for setting targets, are limited in both scope and detail. They might point companies in the right direction, but they leave out the path that shows them exactly how to get there.

Bottom-Up Market Forecasting

Bottom-up market forecasts are more difficult to conduct than top-down forecasts, however they are more accurate. They can also be more believable and valuable to investors and executives because of a bottom-up forecast’s immense detail.

Bottom-up market forecasting starts at the ground level – how the company will get the product into the hands of stakeholders. Companies often build their forecast and determine associated revenue over a 5-year period based on their sales and marketing strategy, hiring schedule, and company infrastructure. The forecast may start by establishing sales tactics, such as selling directly using a sales rep. From there, the strategy is fleshed out, often addressing the following:

  • How many reps will the company start with?
  • How many hours will each rep be in the field?
  • How many sales hours will it take on average to close an account?
  • When will the company hire additional reps? How many?
  • Does hiring additional salespeople make closing business more efficient?
  • Will new clinical data increase sales?
  • When will these and other factors come into play?
  • When will the company scale up and add team members?
  • When will the company expand into other markets?

Clearly, bottom-up forecasting includes an immense amount of data, considerations, and strategic planning. It is a collaborative team effort that can take months and is expected to continually change and evolve based on new information and data.

Top-Down vs Bottom-Up Forecasting: It’s Not Either/Or

Top down vs bottom up forecasting

While there are benefits and drawbacks to each type of market forecast, the truth is that there is not one right or wrong answer. In the majority of instances, companies shouldn’t choose to perform either a top-down forecast or a bottom-up forecast: they should do both.

In nearly every instance, the most accurate forecasting starts with top-down analysis that helps the company establish a high-level view of the market opportunity, their ability to penetrate it, and associated targets and objectives. Next, companies should perform a detailed bottom-up forecast, to validate that they have the pieces in place to actually execute and hit those targets. Finally, they can use all the data to massage each analysis until they arrive at the most accurate combined forecast.

As your company explores the different forecasting methodologies, there are essential best practices that apply to both types of forecasts.

  1. Make sure your assumptions are valid. As mentioned above, you need the most exact numbers possible related to your market, including size, procedure volume, and more. When it comes to a 5–10-year forecast, those assumptions will carry immense weight. Make sure they are accurate.
  2. Ensure your assumptions fall within existing norms. You are more than likely going to be held to existing industry standards. Ensure assumptions and outputs are realistic, achievable, and believable.

Seeing Into the Future

While a crystal ball might be hard to find, the reality is that medical device startups have to be in the business of predicting the future. When introducing a novel product, it’s critical do de-risk its entry into the market through detailed and accurate forecasting.

To make the best predictions and create the most viable product strategy, medical device teams should pair a top-down analysis with a bottom-up forecast and compare the two, ensuring that their inputs are accurate and realistic. Because without clean data, no matter how well you forecast, the output will be unusable.

At the end of the day, emerging companies, their business development teams, investors, and all stakeholders need a clear, believable market opportunity that they can align to. Market forecasting gives them that clear foundation so decisions can get made, deals can get done, and medical technologies can begin changing lives.

Jaunt helps MedTech entrepreneurs, executives, and startups understand top down vs bottom up forecasting and use both to build accurate market forecasts and predict success. Contact us to learn more.

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