Hi All,
When solving a market sizing question, how to decide whether to approach the problem from the demand side or the supply side? I generally do it based on the constraints of the problem and mostly my own intuition, but is there a better way to approach this?
For example, to estimate the # of luxury cars in the US, estimating demand for luxury cars would be more appropriate…
Vs.
For estimating the revenues of a restaurant in Paris, it is better to start from the supply side based on the # of tables available and avg. occupancy..
Thanks
Anuraag
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Market Sizing - Demad Vs. Supply Side
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You're exactly right!
And, the same logic goes for top-down versus bottom up.
Here are some you can practice on (with video explanations!):
Market Sizing WITH SOLUTION - Coffee Shop Revenue | PrepLounge.com
Market Sizing WITH SOLUTION - Number of Internet Users | PrepLounge.com
Market Sizing WITH SOLUTION - Number of Taxis | PrepLounge.com
How to approach market sizing
It's very simple: Do the approach the is the easiest for you given the question.
Are they asking you to estimate something where you don't even know where to begin from the top (maybe you have 0 clue as to the market size of the industry, the GDP of that country, etc. etc.)? Then do bottom-up!
Alternatively, does it seem impossible to do a realistic from-the-ground-up estimation of something (perhaps it requires just far too many steps and assumptions)? Then do top-down!
Fundamentally, you need to take the approach that just makes the most sense in that circumstance. Quickly think about the key assumptions / numbers required and whether you 1) Know them or 2) Can reasonably estimate them. If you can, go ahead!
An Example
He's a Q&A for a great market sizing question here asking to estimate # of electric charging stations in a city in 10 years:
This one could be answered top-down (as I did) by estimating population of the city, # of drivers/ cars, etc. etc.
OR, it could be answered bottom-up by estimating # of stations you see per block (or # of gas/petrol tanks), % increase this might be over time (or # of EV stations that would be needed per gas tank given EV stations take 10 times as long), and # of blocks you'd estimate the city to have.
Take a look here for additional practice! https://www.preplounge.com/en/management-consulting-cases/brain-teaser/intermediate/taxis-in-manhattan-market-sizing-229
Hi there,
Market sizing exercises are not about the solution but showing your thought process.
Use the approach you feel more comfortable with giving the question and context and make sure you clearly explain all your logic and steps.
Best,
Alberto
—
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Hi Anuraag,
Both approaches can work. You need to figure out whatever is easiest and best fitting in that particular scenrio.
A great candidate also typically suggests several alternative ways of solving the problem, instead of just giving one approach (e.g., demand side). An alternative approach can also then serve as a means of sanity-checking your approach.
Sharing with you here an article that discusses these top down vs bottom up methodologies to structuring:
Good luck!
Cristian
You can consider the fundamental nature of the market you’re analyzing. Some markets are inherently demand-driven (e.g., consumer goods), while others are more supply-driven (e.g., infrastructure projects) or assess the availability and reliability of data. Sometimes, one side (demand or supply) might have more accurate and readily available data.
Hi there,
Pick the approach you feel most comfortable with in the situation and the one that allows you to quickly come up with robust assumptions for the calculations.
Do not plan how you would want to frame a problem before even going into the interviewer.
Cheers,
Florian
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