Market sizing questions are often presented within a wider case, but they can sometimes feel like mini standalone case questions themselves.
They include questions such as: “What is the estimated monthly revenue of a sandwich shop near inner city offices” or “What is the estimated number of SUV cars sold per year in North America?”
Here’s how to approach them.
Clarify the problem
The first thing to do is to fully clarify the question and scope of the answer. You don’t want to start sizing the wrong market.
Make sure to clarify important parameters such as whether the answer needs to be in units or currency, what the relevant time frame is, and what type of product is in question (e.g., only new cars, or new and used).
Don’t dive into estimating the market without defining the parameters first!
Decide on which of the two approaches to use
Market sizing questions can be solved in two ways: top-down or bottom-up.
The top-down approach involves starting with large macro numbers and working down. You might begin with the population of the relevant country, break out some segments based on age, estimate the propensity of each age group to buy the item you’re sizing the market of, and then make assumptions about how frequently these people make purchases.
The other approach is bottom-up where you start with small numbers and work your work back up. Begin by considering how many vendors there are in any given locality and the sales that we assume go through each vendor, then scale that up to population at large. For example, if you’re estimating the number of takeaway coffees purchased per day in the UK, you may estimate the number of coffees bought per coffee shop, then the number of coffee shops per town, multiplied by the number of towns in the country.
Sometimes you’ll have a personal preference for using top-down or bottom-up approaches and usually either can work.
Make sure to lay out your approach and share it with your interviewer before performing the calculations. This will give the opportunity to decide upon the best method and will reduce the risk of getting lost in the numbers.
Use segmentation
By generalizing the market too much, you’re likely to estimate a market size that’s way outside the ballpark. Instead, by segmenting the market into 3-4 segments, you can get to a more accurate number and show your ability to simplify—but not over-simplify—a complex market.
For example, if you’re estimating the number of takeaway coffees purchased in London every week, you might consider the population of London and bucket them into three different types of coffee buyers: those who love a daily coffee, those who buy coffee 2-3 times a week, and those who prefer to make it at home.
By segmenting the market, you’re able to account for different buying behavior and to avoid overgeneralization.
Make the right assumptions
In any given market sizing question, you’ll need to make assumptions to calculate figures, such as population sizes, the number of households, and the average number of children per family. You’ll typically get some information specific to the case from your interviewer, but beyond this, you need to make assumptions and apply your own judgment.
If your assumptions are too far off, you’re unlikely to reach a sensible answer and may even look a bit silly in front of the interviewer. There are some key facts you’re definitely going to want to know, such as populations of key countries, average life expectancy, the average number of people per household, median income, GDP growth rate, inflation rate, and the base interest rate.
Rounding these figures is perfectly fine. Just make sure they’re in the ballpark of logic and sense!
Sanity check your answer
When you reach an answer, make sure to check it makes sense and that it’s not too large or too small. Do this by comparing the figure to other figures you know. For example, is it reasonable that 50 million coffees are purchased every day in London if there are only 10 million people in the city?
If your answer doesn’t look right, you may have made a miscalculation or a wrong assumption, so review your approach to remove mistakes.
Check out our video examples of estimations question within the Pure Fresh Sandwich and Space Explorer cases inside the Interview Prep Course to learn how to nail this type of case questions.
