How to do bottom-up market analysis

Mari Luukkainen
8 min readApr 17, 2023

As a startup founder, it’s critical to understand your target market and how your product or service fits into it. One effective way to do this is through bottom-up market analysis, a method that involves starting with individual customers or users and working up to estimate the size and potential of the overall market.

In this post, we’ll explore the steps involved in doing bottom-up market analysis and provide actionable advice on how to apply this method to your startup.

Step 1: Identify your customer segments

The first step in bottom-up market analysis is to identify your customer segments. This involves understanding who your target customers are, what their needs and pain points are, and how they currently address those needs. To do this, you can use a variety of methods, including surveys, interviews, and market research reports.

Here are some tangible steps you can take to identify your customer segments:

  1. Define your ideal customer: Start by defining your ideal customer persona. This involves creating a profile of your ideal customer that includes information such as their demographics, behaviors, goals, and pain points. Use this profile as a guide when conducting research to ensure that you’re targeting the right people.
  2. Conduct customer surveys: One effective way to identify customer needs and pain points is by conducting surveys. Surveys can help you gather information about your customers’ preferences, pain points, and behaviors. Consider using online survey tools like SurveyMonkey or Typeform to create and distribute surveys.
  3. Conduct customer interviews: Another effective way to gather insights about your customers is by conducting interviews. This can involve reaching out to customers directly or conducting focus groups. Use open-ended questions to encourage customers to share their thoughts and feelings in their own words.
  4. Analyze market research reports: Market research reports can provide valuable insights into your target market, including trends, growth projections, and competitor analysis. Look for reports from reputable sources such as Gartner, Forrester, or Nielsen.
  5. Monitor social media and online forums: Social media platforms like Twitter, Facebook, and LinkedIn, as well as online forums like Reddit and Quora, can provide insights into your target market’s behaviors and preferences. Monitor these platforms to stay up-to-date on the latest trends and conversations related to your product or service.

Remember, the key to identifying your customer segments is to gather as much information as possible about their needs, behaviors, and pain points. By using a combination of methods, including surveys, interviews, market research reports, and social media monitoring, you can gain a deep understanding of your target market and tailor your product or service to meet their needs.

Step 2: Determine your customer acquisition channels

Once you have identified your customer segments, the next step is to determine how you will acquire customers. This involves identifying the channels through which you will reach your customers, such as social media, paid advertising, or partnerships with other companies. By estimating the cost and conversion rates for each channel, you can determine which channels are the most effective for acquiring customers.

Here are some tangible steps you can take to determine your customer acquisition channels:

  1. Analyze your competitors: Start by analyzing your competitors and identifying which channels they are using to acquire customers. Look for patterns and trends that can help you identify the most effective channels in your industry.
  2. Define your customer acquisition goals: Before choosing your customer acquisition channels, define your goals. Are you looking to acquire a large number of customers quickly, or are you focused on acquiring high-quality customers over a longer period of time? Knowing your goals will help you choose the right channels.
  3. Conduct a cost-benefit analysis: Estimate the cost and potential return on investment (ROI) for each customer acquisition channel. Consider factors such as the cost per click (CPC), cost per acquisition (CPA), and conversion rates. Use this information to identify the most cost-effective channels.
  4. Experiment with different channels: Don’t be afraid to experiment with different customer acquisition channels to see which ones work best for your business. Test channels like social media advertising, search engine marketing (SEM), email marketing, and influencer partnerships to see which ones generate the most leads and conversions.
  5. Refine your strategy: As you experiment with different customer acquisition channels, track your results and refine your strategy. Monitor your ROI and adjust your budget and tactics accordingly.

Remember, the key to determining your customer acquisition channels is to focus on the channels that are most effective for your business and your target audience. By analyzing your competitors, defining your goals, conducting a cost-benefit analysis, experimenting with different channels, and refining your strategy, you can identify the most effective channels for acquiring customers and achieve your growth goals.

Step 3: Calculate your customer lifetime value (CLTV)

The next step in bottom-up market analysis is to calculate your customer lifetime value (CLTV), which estimates the total value that each customer will bring to your business over their lifetime. To calculate CLTV, you’ll need to consider factors such as the average customer lifespan, the average revenue per customer, and the average cost of acquiring a customer.

Here are some actionable steps you can take to calculate your customer lifetime value (CLTV):

  1. Determine your average customer lifespan: To calculate your CLTV, you need to know how long, on average, your customers stay with your business. This can vary widely depending on your industry and product or service. Look at your historical customer data and calculate the average customer lifespan.
  2. Calculate your average revenue per customer: Next, you need to determine the average amount of revenue that each customer generates over their lifetime with your business. This can include both initial purchases and any repeat business or upsells. Divide your total revenue by the number of customers to get your average revenue per customer.
  3. Calculate your customer acquisition cost (CAC): The next step is to calculate your customer acquisition cost, which is the total cost of acquiring a new customer. This can include marketing and advertising costs, sales commissions, and other expenses. Divide your total acquisition costs by the number of new customers to get your average CAC.
  4. Use the formula to calculate your CLTV: Once you have these three pieces of data (average customer lifespan, average revenue per customer, and average CAC), you can use the following formula to calculate your CLTV:

    CLTV = (Average revenue per customer x Average customer lifespan) — Average CAC
  5. Refine your CLTV calculations: As you gather more data and insights, you can refine your CLTV calculations to make them more accurate. For example, you may want to segment your customer base by demographics or behavior to calculate CLTV for specific customer segments.

Remember, CLTV is a powerful metric that can help you understand the value of each customer to your business over their lifetime. By calculating CLTV, you can make data-driven decisions about customer acquisition, retention, and marketing. By following these steps and refining your CLTV calculations, you can gain a deeper understanding of your customers and build a more successful business.

Step 4: Estimate your addressable market size

Using the insights from steps 1–3, you can estimate the size of your addressable market. This involves calculating the total number of potential customers in your target market and the revenue potential of each customer. By multiplying the two, you can estimate the total size and revenue potential of your addressable market.

Here are some additional actionable steps you can take to estimate the size of your addressable market:

  1. Define your target market: Start by defining your target market based on the customer segments you identified in step 1. This should include information such as demographics, behaviors, and psychographics.
  2. Estimate the total number of potential customers: Using market research reports, industry data, and customer surveys, estimate the total number of potential customers in your target market. This can involve looking at factors such as population size, purchasing power, and market trends.
  3. Estimate the revenue potential of each customer: Next, estimate the revenue potential of each customer in your target market. This can involve looking at factors such as the average purchase value, frequency of purchases, and customer lifetime value (which you calculated in step 4).
  4. Calculate the total size and revenue potential of your addressable market: Finally, multiply the total number of potential customers by the revenue potential of each customer to estimate the total size and revenue potential of your addressable market.
  5. Refine your market analysis: As you gather more data and insights, refine your market analysis to make it more accurate. This may involve adjusting your customer segments, refining your revenue projections, or exploring new market opportunities.

Remember, estimating the size and revenue potential of your addressable market is a critical step in bottom-up market analysis. By defining your target market, estimating the total number of potential customers, estimating the revenue potential of each customer, and calculating the total size and revenue potential of your addressable market, you can make data-driven decisions about customer acquisition, product development, and overall business strategy. By refining your market analysis over time, you can stay ahead of market trends and build a successful, sustainable business.

Step 5: Refine your market analysis

It’s important to refine your market analysis as you gather more data and insights. This involves continually iterating on your customer segments, acquisition channels, CLTV, and addressable market size based on feedback and new information.

Here are some actionable steps you can take to continually refine your market analysis:

  1. Monitor customer feedback: Collect and analyze customer feedback to better understand their needs, behaviors, and pain points. Use this information to refine your customer segments and tailor your product or service to better meet their needs.
  2. Test new customer acquisition channels: Continually test new customer acquisition channels to identify the most effective channels for your business. Experiment with new advertising and marketing strategies, social media platforms, and influencer partnerships.
  3. Re-evaluate your CLTV calculations: As you gather more data and insights, re-evaluate your CLTV calculations to ensure they are as accurate as possible. Look for ways to increase customer lifetime value through strategies like upselling, cross-selling, and referral programs.
  4. Monitor industry trends: Keep a close eye on industry trends and competitor activity. Look for opportunities to differentiate your product or service and stay ahead of the competition.
  5. Use data to make informed decisions: Finally, use data to make informed decisions about your market strategy. Continuously track and analyze data on customer behavior, acquisition channels, and market trends to make data-driven decisions that drive growth.

Remember, refining your market analysis is an ongoing process that requires continuous monitoring, experimentation, and analysis. By monitoring customer feedback, testing new acquisition channels, re-evaluating your CLTV calculations, monitoring industry trends, and using data to make informed decisions, you can refine your market strategy and build a successful, sustainable business.

By following these steps, you can effectively apply bottom-up market analysis to your startup and gain a deeper understanding of your target market. Remember, the key is to start with individual customers and work up to estimate the size and potential of the overall market. By doing so, you can make data-driven decisions and build a successful startup that meets the needs of your customers.

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Mari Luukkainen

Pre-seed VC investor, growth operator, startup growth advisor, and keynote speaker. Pitch me on Call of Duty.