When would you use a top-down approach to market sizing?

Market sizing
Bearbeitet am 26. Aug. 2021
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Anonym A fragte am 17. Aug. 2020

I'm struggling to understand why you would ever want to use a top-down approach for market sizing. My understanding is that top-down means starting form a big pool and taking some percentage of that to equal the market size e.g. passengers at Heathrow = total passengers at UK airports* percentage market share of Heathrow (some semi-arbitrary number...). Why would this ever be more accurate than bottom-up e.g. Heathrow runways * runway utilization * plane takeoff/hour/runway * max capacity/plane (domestic/international) * plane utilisation (peak/non peak) * #runways *#working hours/day * #days/year?

Can someone please give a different example of a market sizing from the side of top down and bottom-up, where top-down makes some sense?

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Sidi
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antwortete am 17. Aug. 2020
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers

Hi!

Top-down market sizing is usually much easier to do and can give you a ballpark number within minutes (or even seconds). But it is usually far less accurate than a bottom-up approach. In a consulting context it usually only makes sense in two cases:

  • Either you lack the information/data for a bottom-up approach, or the influencing factors are too granular and complex to robustly combine them in a reasonable time frame
  • Or you use the top-down approach as a validation to your bottom up result (this is called triangulation)

Cheers, Sidi

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Ian
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bearbeitete eine Antwort am 26. Aug. 2021
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Hi there,

This is such a good question, and experts seem to always shy away from the answer here!

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

Coincidentally, I just answered a Q&A for a great market sizing question here asking to estimate # of electric charging stations in a city in 10 years:

https://www.preplounge.com/en/consulting-forum/how-would-you-solve-this-market-sizing-question-from-roland-berger-7631

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

(editiert)

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Anonym A am 17. Aug. 2020

Just to confirm, your answer in that post is top-down, right? You've said bottom-up twice in the post above :)

Allen
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antwortete am 17. Aug. 2020
Ex-McK Experienced Hire and EM - I show you how to perform at your best

Here's my simple approach for this quesiton:

Default to top-down since it's easier most of the time.

Bottom up is useful when you have a very specific constraint, like I can only do 1 per day.

It's that simple.

One more point: if you choose an approach, and believe you made a mistake, just admit it and use the other one. As an interviewer, if I see someone self-correct, I really like that. Just like in real life, the key is to know when you've made a mistake and fix it.

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Robert
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antwortete am 19. Aug. 2020
McKinsey offers w/o final round interviews - 100% risk-free - 10+ years MBB coaching experience - Multiple book author

Hi Anonymous,

In reality it depends which data you have. If you can't get good data on many variables or even proxies in a bottom-up calculation, I would not say at all that top-down is less accurate.

Additionally, it often makes sense to use both approaches simultaneously as kind of health-check and see where the numbers get you. If both lead to the same ballpark of results, good - if not, than you need to go back and see what causes it.

Hope that helps - if so, please be so kind to give it a thumbs-up with the green upvote button below!

Robert

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Anonym antwortete am 18. Aug. 2020

Dear A,

The truth is that actually you can use both approaches to structuring the market-sizing case - the top-down and the bottom-up approach. However in the case you simply should outline that there are 2 ways of thinking, 2 or even multiple ways of thinking about this market sizing case and you would like to use the following approach. So just discuss this with an interviewer and crack the case.

Then, accordingly afetr you have agreed on the logic. Usually the interviewer will guide you, if he/she doesn't like your approach, then the interviewer would ask you to elaborate a different approach. So you can, for the case of Heathrow you can use also your bottom-line approach. Simply get agreed on it with your interviewer and then go for it.

Hope it heps,

Wish you best of luck,

If you have any questions,just drop me a message.

Best,

André

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Sidi

McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers
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