Guesstimates

Hi there! 

Like in any market estimate questions, a good structure goes a long way. 

If you want to prepare for such a question, but don't know where to start, I would suggest you take some basic market sizing structure (e.g., can be as simple as number of users x frequency of payment x payment value) and try to think what specifically you need to know / apply for a software company. 

For example, what is the business model of the software (e.g., payment per user or per enterprise regardless of users, does it even have paying users or is it a free software with add revenues?), is it an established business or a new comer (in which case you would need very different approaches) and so on. 

Happy to share more concrete thoughts if you want to let me know with what specifically you are struggling. 

Good luck, 

Ariadna 

There are multiple logical ways to approach this question. I am providing one approach to tackle such a question 

1. Clarify the Scope

• Ask Clarifying Questions: Determine the specific software market (e.g., CRM, ERP, cybersecurity), geographical region, and market segment.
  • "Are we focusing on a specific type of software?"
  • "Is the market size for a particular region or globally?"
  • "Are we considering all business sizes or focusing on a specific segment like SMBs or large enterprises?"

2. Choose an approach

Decide whether to use a demand side or a supply side approach. Lets proceed with demand side estimation

3. Demand side approach

1. Identify Potential Customers:
   • Estimate the number of businesses or entities in the target market.
   • Example: "There are approximately X large enterprises in the U.S."
2. Penetration Rate:
   • Estimate the percentage of these potential customers that use the software (e.g. CRM software)
   • Example: "Assume X% of large enterprises use CRM software."
3. Average Revenue per User (ARPU):
   • Estimate the average spending per customer on the software.
   • Example: "The average company spends $Y on CRM software annually."
4. Calculate Market Size:
   • Multiply the number of potential customers by the penetration rate and the ARPU.
   • Market Size = Number of Businesses × Penetration Rate × ARPU

5. Sanity Check

• Cross-check assumptions and ensure they are reasonable.
• Adjust based on any known market trends or logical reasoning.
  
  Hope this helps. Happy to discuss further
  
  Thanks, Ashwin 

Hi there,

1. Define the scope

What type of software are we talking about? What markets/countries are we looking at? 

This helps you/us figure out what the target market looks like and what types of firms are using the software.

Also, ask about market size in what way. Number of units sold/licensed or total revenue?

2. Come up with the approach and assumptions

Bottom-up: 

a. Think of a specific firm and how many users/licenses they have (ideally per FTE) and why. If the interviewer wants to go deeper, you could suggest segmenting based on firm size and/or industry

b. Aggregate it up to the total number of firms/FTE in the given market

c. Add a price tag per license to calculate the total market size

3. Calculate

Make sure to be swift and directionally correct rather than slow and precise.

4. Interpret it

• Too high/too low?
• What lever or assumption could you change?
• Did you miss any important aspect of the problem (e.g., discounts for bulk licenses,…)?

Just a quick and dirty ballpark estimate, which you can get down end-to-end in maybe 5 minutes.

Cheers,

Florian

Wow, that's a nice one. 

There are lots of ways of doing it, but the way I'd start is by asking a few follow-up questions to the interviewer, such as:

what do we define as the software market?

what geography are we talking about?

do we want to find out the value in a year?

what metric should the value be expressed in e.g., $?

This back-and-forth has the role of clarifying the scope of the question. It also already signals to the interviewer that you would know how to work with a client and think through a problem. 

Once the scope becomes clear, then half of the problem is solved.

Then, you can think through top-down and bottom-up ways of solving it.

You might find this article helpful for it:

Expert Guide: Mastering Structuring & Brainstorming

Best,
Cristian 

Hi there,

I would be happy to share my thoughts on your question:

• First of all, it would be good to see your proposal first so that I can give you feedback on it.
• Moreover, please keep in mind that most strategy consulting firms have not used stand-alone market size estimations for a long time. While this does not mean that it never happens, this type of case study question may not be very meaningful for both the candidate and the interviewer, as only a few skills are being tested. That being said, simpler market size estimations can still be part of a case study.

If you would like a more detailed discussion on how to best prepare for your upcoming interviews, please don't hesitate to contact me directly.

Best,

Hagen

Please provide a suggestion, it's easier to give feedback that way!