What are market-sizing questions? They are what management consultants can expect at first meetings with their clients.
As one, you can bet these questions will be thrown at you at brainstorming sessions with them, and a question such as “What’s the US market for mattresses?” or “What’s the market for 60-inch LED TVs in London?” could jump out of the blue. You will have to offer a carefully estimated market size using facts and figures available but also sensible assumptions.
Market sizing is one of four financial models used by consultants and analysts, the others being profitability, market study, and mergers and acquisitions (M&A).
For market sizing, you need to be able to make assumptions that will influence the sensitivity of the final solution.
Market-sizing questions are quite straightforward, and you will be trying to answer questions such as “How many of ‘A’ exist in the market?”, “How rapidly is the market for ‘A’ growing?”, and “What is the opportunity in money terms if your client introduces ‘A’ into the market?” among many others.
How to tackle market-sizing questions
Approach is the key
What’s interesting about market-sizing questions, which are mainly used at consulting interviews, is that there is not one correct answer.
The interviewer doesn’t care so much about the correctness of the answer as much as how you, as the candidate, arrives at it. However, your answer has to be well inside the ballpark set by the interviewer.
What is the interviewer trying to find out? Logic, math, and common sense. He is assessing your quantitative and reasoning skills.
Can you work with numbers, can you make reasonable estimates and assumptions, and can you work through ambiguity?
We just mentioned “ballpark.” It means that your answer can be off the target by a maximum of 20 percent, in cases where a realistic answer can be worked out.
At all times, your approach should be logical and calculations accurate. More importantly, you need to share your approach with the interviewer as you go along.
How do you go about answering a market-sizing question at an interviews?
Experts suggest a four-step approach to solve market sizing questions:
- Ask questions to clarify the question itself and also your doubts.
- Make your calculations carefully.
- Round off numbers with your interviewer’s approval and make the calculations.
- Sanity-check the result.
Sample market sizing question with step-by-step solution
Let’s take a simple market-sizing question:
What is the market size for takeaway tea in Bangalore?
We go forward to the four steps prescribed.
The first step is to put clarifications questions to the interviewer:
- Do we want only Bangalore city or do we mean the whole of Bangalore Urban district of which the city is a part?
- Are we estimating the number of cups of tea sold every day, week, month, or year?
- Do we want to estimate the market total units, market total value, or the previous year’s figures?
Understand the product, the consumers, and the period for which the market size is being estimated.
Tip: Besides telling you exactly what the interviewer wants, these questions enable you to already start thinking about your approach to the question.
The second step is to decide on an approach. Imagine that the interviewer wants you to calculate the amount spent on takeaway tea in Bangalore city each year, or the annual market size in revenue terms.
First, you would calculate the number of cups of takeaway tea consumed by a Bangalorean per week; then, calculate the number of cups consumed annually in the entire city; third, calculate the annual market size for takeaways in revenue terms.
For the calculation, you need to have some facts or make your own assumptions, which you should discuss with your interviewer.
For example, you can say that you are estimating the city population at 10 million, of whom 1 million consume takeaway tea. You are fixing the price per cup of takeaway tea as Rs. 10.
The number of cups consumed by each person can be set at four per day (or, say, 25 each week, rounding off). Rounding off again, the year can be taken as consisting of 50 weeks.
Discuss your approach. For questions that involve a commodity that is replaced every few years, such as cars, you could use the “demand method,” that is, split the market into first-time buyers and those buying a car to replace another.
The “supply method,” on the other hand, estimates the market size by sale of new cars by the manufacturers (Ford, Toyota, GM, etc.). The “segment method” divides consumers into segments such as age groups.
Tip: Get your interviewer’s approval for your approach. You should talk out aloud. If the interviewer has a different course of action in mind, or if she feels that you are taking a complex course rather than a simple method, she will be able to correct you.
If you don’t discuss your approach and just show her your calculations at the very end, the interviewer may be put off and it may be too late to set things right.
She may ask you to make your own assumptions, such as the price of takeaway tea in Bangalore, or provide you with facts, such as the population of Bangalore.
The third step is the calculation. Using the facts/assumptions above, we could list the calculation as follows:
(Cups per person per week) x (Number of weeks per year) = (Cups per person per year)
That is, 25 x 50 = 1,250
(Cups per person per year) x (Number of takeaway-tea customers in Bangalore) = (Number of cups consumed in Bangalore per year)
That is, 1,250 x 1 million = 1,250 million cups per year
(Number of cups consumed) x (Price per cup) = (Takeaway tea market in Bangalore)
1,250 million cups x Rs. 10 = 12,500 million rupees, or Rs. 12.5 billion per year
Tip: Use simple, round numbers as far as possible, as this will help you to simplify calculations and prevent mistakes. Don’t try to impress by sticking too much to accuracy.
However, remember not to round off by more than 10 percent (for example, you can take the year as having 50 weeks instead of 52.
The fourth step is the sanity check. We calculated that the market for takeaway tea is Rs. 12.5 billion a year.
That means 1 million consumers spend that amount on tea every year, which again means that each takeaway tea consumer spends Rs. 12,500 on their favorite beverage each year, Rs. 250 a week, and Rs. 35 a day (for about four or five cups), which sounds reasonable.
The replacement concept should be used in market-sizing questions that involves finding a market value for any commodity that is replaced regularly, for example, light bulbs, smart phones, or cars.
For example, if you are asked to calculate the annual market for residential light bulbs in existing homes in Australia, you would have to use the replacement concept.
The population of Australia is about 25 million. If we take three people as making up a household, there would be 25/3, or 8.3 million (or, rounding off, 8 million) households, or homes, in that country.
Let’s assume that each home has about six rooms, and each room has about four bulbs. This means that 48 million rooms have a total of 192 million bulbs (8 million x 6 x 4).
Now, let’s assume that each light bulb lasts three years, which means that 192 million bulbs are bought every three years, or 64 million each year.
If we assume that each bulb costs A$ 1, then A$ 64 million is spent on light bulbs each year, which is the market for residential light bulbs in existing homes in the country.
Here, too, we need to sense-check our result. We found that annually, A$ 64 million is spent on light bulbs in Australia, which has a population of 25 million.
This means that “light bulb bill” per person is about A$2.5 per year ($64 million/25 million, or A$2.56, or A$2.5, rounding off), which appears reasonable.
New and emerging markets
In the example above of light bulbs, if the question were “the annual market for residential light bulbs in existing and new homes in Australia,” we should take into account the bulbs required for new homes, too.
The population growth of Australia is about 2 percent. So, in a year, the population will grow from 25 million to 25.5 million. To accommodate this 0.5 million additional population, about 165,000 new homes will be built.
Using the calculation above, 165,000 new homes will use 3.9 million bulbs every three years (165,000 homes x 6 rooms each x 4 bulbs each), which is 1.3 million bulbs each year.
Therefore, the total annual market size for light bulbs in Australia is 64 million bulbs for existing homes + 1.3 million bulbs for new homes = 65.3 million, or say, 65.5 million. The total annual market for resident light bulbs is 65.5 million x A$1 = $65.5 million.
Sense-checking this, we see that $65.5 million is spent by 25.5 million Australians, which is the same as in the existing-home example, or about A$2.5. So we have an answer that is well within the ballpark.
An issue tree, also known as logic tree, can be used to chart out the steps to the solution to a market-sizing problem.
An issue tree makes it easier to check each step and the calculations you make. It also helps you explain your steps clearly to the interviewer or client.
For more on issue tree, read this article: MECE framework McKinsey
The replacement concept may not help in all situations. For example, for a question such as estimating the market size for taxi services in London, we cannot use the concept. However, segmentation of the market comes in handy in such cases.
Here, again, segmentation such as “Uber vs traditional Black cab service” or “Airport transfer vs city journeys” won’t help to calculate the number of rides per week.
But segmenting the market into age groups helps, as there can be a near-correct estimate of how many times people in various age groups use taxis.
For example, the age group 20-30 may take a taxi only on weekends, whereas 31-40-year-olds may use taxis twice a week and 40-50-year-olds three or four times a week.
Top-down or bottom-up approach?
Market-sizing questions can be classified as either top-down or bottom-up.
For example, for a question like “Estimate the number of teachers in Moscow,” you could use the top-down approach.
First, take the population: 12 million. Let’s assume that an average family has four members. We get the number of families: 3 million. Assuming that there are two children in each family, the number of children is 6 million. The number of school-going children can be roughly put at 3.5 million in the ages of 0-12.
For the bottom-up approach, let’s take the question:
What is the annual revenue of your neighborhood fruit-juice stall?
Here, you assume that 20 people visit the stall each hour, and in an eight-hour day, sells 160 glasses of juice.
With each glass priced at Rs. 40, the revenue per day is Rs. 6,400 and per week Rs. Rs. 44,800, or Rs. 45,000, rounding off. In a year, the revenue would be Rs. 45,000 x ~50 = Rs. 22,50,000.
Sample market-sizing questions
The “Healthful Sandwich” restaurant is planning to expand its market from one locality in Dubai to the entire emirate. They have come to you to estimate the market size for breakfast at restaurants.
Cheat sheet: According to facts previously provided by the client, 50 percent of Dubai residents are breakfast eaters; 25 percent of them eat breakfast at home.
Of the rest 75 percent residents, 50 percent buy breakfast on their way to work to eat at their workplace and the rest 50 percent stop at restaurants. Dubai’s population is 3.2 million, and each breakfast is priced at an average of 10 UAE dirhams.
What is the annual market size for breakfast in Dubai?
Another one: What was the revenue from flat-screen TVs sold in Canada in the past 12 months?
Cheat sheet: Population of Canada is 37 million, and the average household is of three people. Each household owns two TVs and replaces their TV every five years. The average price of flat TV in Canada is C$500.
Other sample questions can be found at Reference nos. 1, 5, 8, and 10, besides other websites.