There is typically a lot of uncertainty in estimates made by companies. From determining the market size of an area that you plan on entering, to gauging demand for your product, it is difficult to precisely calculate the value. This article explores the importance of triangulation to increase the accuracy and your confidence in estimates.
What is triangulation?
Triangulation is the process of increasing our confidence in uncertain estimates by approaching the estimate from different directions. If we make multiple estimates – all based on completely different assumptions – and the estimates appear to line up with one another, then this gives us some confidence in the value that we are estimating. Each estimate alone may appear very uncertain, but together we likely have a much clearer understanding of the ‘true’ value we are investigating.
Why is triangulation important?
Triangulation is important because for many real-world estimations activities it is not never possible to ascertain the ‘true’ value, at least with any certainty. Take market sizing for example. Knowing how big the opportunity is for a product (and especially a new product) is very difficult. It involves estimations, often embodying assumptions.
Triangulation helps give confidence in the estimates. By arriving at the same or similar numbers via different approaches, you can be more confident in your estimations. Alignment helps illustrate that these estimates are plausible, while discrepancies between estimates help identify possibly erroneous assumptions.
Example of triangulation: Estimating market size
Approaches for triangulation involve looking at different ways of estimating a particular value. If we are for example interested in estimating the size of the market for a particular product, we could start by estimating the demand – the number of customers that there multiplied by the amount each customer is spending.
This would be one approach to calculating the market size, but we would become more confident in the estimate if we could derive a similar number in a completely different way. One approach would be to calculate the market size by estimating the size of each of the firms currently selling into that industry. Perhaps we know each of their individual revenues or are able to estimate them based on our knowledge of the size of their operations.
We may even go as far as to ask individuals in the industry what they believe the size of the market to be. They may or not know, but if their estimate lines up, it again reinforces confidence in the values estimated.
Cautions with triangulation: Overconfidence
A danger to be aware of with triangulation is over-confidence. While there is certainly some wisdom to the notion that approaching a number from multiple different dimensions will help arrive at an accurate estimating, there are still a lot of assumptions in each individual estimate.
As anyone who has ever made estimates with a spreadsheet knows, it is typically relatively easy to fudge the numbers. By slightly tweaking assumptions, it is possible to get the numbers to ‘triangulate’ and come to the same value.
The danger is that you use one estimate to help inform the next. Rather than each one being independently estimated (and happening to come to the same number), you embed assumptions that result in the second estimate coming out to be the same as the first. You want them to triangle – so you force them to. Now you have two estimates the same, it becomes even easier to justify a third approach that results in a similar number.
You should always be aware of how you are coming to your numbers – if you know that you are in some ways fudging the numbers to get them to converge, don’t be surprised if the true number ends up being quite different.