A QN related to market sizing

Market sizing
New answer on Jul 01, 2020
6 Answers
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Anonymous A asked on Jun 28, 2020

Hey all !!

I have a quick question regarding market sizing. In most market sizing questions, I would clarify with the interviewer on what customer segments I should focus on (i.e. B2B versus B2C). For instance, estimate the number of mattresses sold in a particular country.

In the scenario when the MS problem cannot be segmented into B2B or B2C, would it still make sense to clarify with interviewer on the appropriate segments? For example, estimate the number of people eating in restaurants on a specific day (we can divide into locals & tourists) (assuming I do a demand side approach).

(edited)

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Clara
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replied on Jun 28, 2020
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Hello!

Totally!

Indeed, it´s not "it would be nice to clarify about the segments..." but it´s a must!

You always need to know your market, and segmenting it (B2B vs. B2C, determined aged groups, etc.) is the way to advance towards the solution.

Hope it helps!

Cheers,

Clara

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Robert
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replied on Jun 28, 2020
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Hi Anonymous!

Yes, absolutely! Same principle as for the case interview - never assume anything implicitly, always clarify with your interviewer.

Worst case outcome is that interviewer will tell you no specific segment to focus on, so total market size > it's also relevant to know this and just asking the question/making it explicit is relevant for your evaluation.

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

Robert

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Anonymous replied on Jun 28, 2020

Hello,

Yes !

It is very important to show to the interviewer that you think holistically and ask him / her if you should only focus on a sub-perimeter to properly respond to the estimation requested in the MS.

Best

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Anonymous B replied on Jun 28, 2020

hey, I would say it depends. For mattresses you look at the demand side (B2B and B2C). However, restaurants the 'bottle-neck' or constraint is its capacity, ie you look at the supply side. I don't think it makes sense to differentiate between locals and tourists, but you integrate them in your assumptions about the capacity and utilization of the restaurant

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Anonymous A on Jun 28, 2020

But I am looking at all the restaurants and not a particular one. So wouldn't demand side would be more suitable?

(edited)

Axel on Jun 29, 2020

Yes I agree that you want to use a demand-driven approach for restaurants in general as most restaurants do not operate at 100% capacity. Rather revenue potential is limited by demand. Tourists vs. locals seems a bit contrived though unless we are looking specifically at a tourist hotspot!

Ian
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replied on Jul 01, 2020
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Hi there,

Just to add, I'm not sure I agree with "carifying with the interviewer on what customer segments to focus on"! You should be driving this and come up with your own segmentation. Just want to make sure you're not asking for too much guidance/hand-holding here :)

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Anton
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replied on Jun 29, 2020
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Hi,

I ran a specific course on market sizing.

You can use the following segmentation for market sizes:

B2C:
- Demographics (Age, education, income, family size, race, gender, occupation, nationality)
- Behavioral (Purchasing behavior, customer journey stage, occasion & timing,
customer loyalty & interest, risk tolerance, user status)
- Psychographic (Lifestyle, personality traits, values, opinions, interests of consumers)
- Geographic (Geographical boundaries)

B2B:
- Company characteristics (Industry, company size, number of employees)
- Geography (Geographical boundaries)
- Purchasing Approach (Occasion & timing, customer capabilities, nature of existing relationship)
- Personal Characteristics (Loyalty, risk attitude, user status)

B2G:
- Demographics (Type of agency, size of budget, the amount of autonomy)
- Geographic (Geographical boundaries)
- Government Tier (Federal , State, Local, Quasi-governmental, International)
- Bid type (Closed, Open)

But sometimes you don’t need to segmentation. Here is an example of case that could be solved with high level top down approach - estimate the size of credit card market in the US:

In this case you should follow demand-driven approach to market sizing. By market size I would assume value of credit card debt in the U.S. (not the number of Credit Cards issued).

First of all you can start by outlying an algorithm which would consist of 3 big steps:

1. Total addressable market

X

2. Product penetration

X

3. Average ticket size

Now let’s see how to calculate each of these blocks:

1) Total addressable market = US population X % bankable population

2) Product penetration = number of credit cards per capita in US X % of active cards

3) Average ticket size = average credit card limit X %limit usage

  • average credit card limit is usually estimated though debt-to-income ratio. In case of credit cards it is 5 monthly salaries on average
  • limit usage could be derived from your personal experience but on average it is 20%

Let’s plug-in the data:

1. Total addressable market = 330 mln x 80% bankable population = 264 mln

X

2. Product penetration = 2 X 50%

X

3. Average ticket size = 4k USD X 5 X 20% = 4k USD

Thus credit card market size is 264 mln X 1 X 4k USD ~ 1tn USD

Let’s double check with official statistics. STATISTA.COM provides the following data: Value of credit card debt in the U.S is 0,93 tr USD. Thus our answer is super close

You can also make your calculations a bit more sophisticated if you add segments (e.g. by income or credit score). In this case you would have to provide detailed assumptions on product penetration and average ticket size for each segment.

As for the sources for your assumptions you can use:

  • Input from interviewer, well known facts
  • Statistical data
  • Personal experience, e.g. from casual everyday situations
  • Workplace experience, e.g. from working on projects in the industry
  • An educated guess

Best,

Anton

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Clara gave the best answer

Clara

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