Case Study Question: Market Size

Questions about market size are frequently asked in case interviews in consulting because they require a blend of logic, mathematics, and common sense. They can be asked as standalone questions or as part of a larger case. Applicants who are familiar with market sizing questions can really perform here. What Are Market Sizing Cases?If you're applying to top consulting firms like McKinsey, BCG, or Bain, you're unlikely to escape a market estimation case. Market sizing cases are considered "back-of-the-envelope" calculations because they can be done on the back of an envelope. Despite the name, it's not just about estimating market sizes; other estimations may also be asked for.For example, if you're discussing a British clothing retailer's growth strategy, you could calculate on an envelope how large the online clothing market is and what percentage of the market the retailer already penetrates. If you perform these calculations quickly, the conversation with the client stays fluid, leaving a good impression.You can receive the question about market size as a standalone case (although this is less common) or as part of a more comprehensive problem, such as market entry. The good news: There's no right or wrong answer when it comes to the question of market size. The interviewer is less concerned about the specific number you come up with for the market than the approach you took to arrive at that number. Why Are Market Sizing Cases Commonly Used in Consulting Interviews?Market Sizing Cases are used to test your quantitative and logical abilities. The interviewer wants to ascertain whether you work well with numbers and if you can make informed assumptions and deal with ambiguities. Questions about market size aren't just about the size of markets; they also involve other types of estimations, such as the number of golf balls in a jumbo jet. As you may have noticed, math is crucial in tackling these questions since you don't have a calculator to rely on. Most importantly, you need to be comfortable dealing with large numbers like millions and billions as well as percentages. More on that later. How Do You Best Approach Market Sizing Cases?Now that we understand the theory behind Market Sizing Cases and their relevance to your case interview, let's take a closer look at the process.Segmentation – The Key to Market Sizing CasesIf you've done some reading on case interviews before delving into market sizing questions, you might have come across areas where segmentation is necessary. Segmenting data is a crucial skill you must master as both a candidate in a case interview and in your later career as a consultant. Segmentation generally refers to dividing a larger whole into smaller parts or segments. The principle you need to understand to do this correctly is the MECE principle.MECE stands for "mutually exclusive, collectively exhaustive." Simply put, segmenting a group of data according to the MECE principle means forming subgroups that do not overlap but collectively cover the entirety of the data, meaning no data is missing. An example useful for market sizing questions is dividing a country's population into age groups (as different age groups often behave differently).Below is a breakdown into Group 1 in the age range 0 to 14, Group 2 in the age range 15 to 64, and Group 3 for everyone over 65: Note that none of the groups overlap, so no age is counted twice, but also no age is overlooked. Now that the population is correctly segmented, we can treat each group differently. If we had divided the population of the United Kingdom into the aforementioned groups, we could estimate clothing expenditures per person in these groups in online retail. Common sense suggests that expenditures per person in the 0-14 age group are lower than in the 15-64 age group. We can justify this estimation by noting that the majority of 0-14-year-olds do not purchase their clothing online. 

Pricing plays a crucial role in a company's profitability as it directly contributes to it. For this reason, establishing optimal prices for products or services is of great importance. Business consultants therefore assist their clients in developing pricing strategies.A case study on pricing is an analysis focusing on the pricing of a product or service. It can stand alone or be part of a broader case, such as entering a new market.In a case interview, you can approach this case type in three steps: 1. Investigate the CompanyAt the outset of your case, you should gain a solid understanding of your client's business model.What products does the company sell and where does the company stand in the market? For instance, is the company a market leader? In terms of volume or quality or both?What is the company’s key objective? Profits? Market share? Growth? Brand positioning? Make sure to clarify the objective before starting the analysis. 2. Investigate the ProductAfter familiarizing yourself with the company's business model, it's time to learn more about the product. When examining the product, it's important to pay attention to the following aspects:Product differentiation: Analyze how the client's product differs from those of competitors. Explore not only the product's features but also its production processes and methods.Unique Selling Proposition (USP): Identify the unique selling point of the product. What makes it unique and attractive to potential customers?Alternatives and substitutes: Consider alternative or substitute products in the market as well. How do they compare to the client's product?Product lifecycle: Determine the stage of the product lifecycle. This can influence the pricing and marketing strategy.Predictability of supply and demand: Examine whether supply and demand for the product are predictable. This can help assess risks in pricing and take appropriate measures.Once you've thoroughly assessed these aspects, you'll have a clearer understanding of the product and its positioning in the market, which will inform your pricing strategy recommendations. 3. Choose a Pricing StrategyThe choice of strategy depends on the information gathered in the first two steps. There are three important pricing strategies:Competitor-Based PricingWith this strategy, also known as 'benchmarking', the price is determined based on the prices set by our competitors. So, you want to find out:Are there comparable products/services?If yes, how do they compare to the client's product?What are their prices? Important: Keep in mind that competitors are likely to adjust their prices once the client introduces their product.Cost-Based PricingWith cost-based pricing, the price of a product or service is set based on the accumulated item costs (break-even) plus a reasonable profit margin. This strategy varies by industry due to different cost structures and margins. Therefore, it's important to understand the specific customer costs before setting a price (taking into account fixed and variable costs).Although cost-based pricing offers a simple and transparent method, it does not consider the perceived value of the product or service to customers and may be less effective in certain markets. To determine customer willingness to pay, it's important to consider this and possibly break down the price into different components, such as a separate price for the product and delivery costs.Value-Based PricingValue-based pricing is a strategic approach based on assessing the customer's perception of the product or the amount customers are willing to pay. Different customer segments may have different willingness to pay. This means that companies can set different prices for different customer segments by adjusting the perceived value to justify price changes.A good example of this is the iPhone, a highly differentiated product for which customers are often willing to pay significantly more than the pure costs plus a "typical" margin. This illustrates how customers are inclined to accept a higher price for products they perceive as particularly valuable or differentiated. Key TakeawaysFrom what we've learned previously, we can now extract the following insights as key takeaways:There are three key pricing strategies: Competitor-based pricing, cost-based pricing, and value-based pricing. Cost-based pricing alone is sometimes considered insufficient.Understand the primary objective of the company (profit, market share, growth, brand positioning) as the basis for the pricing strategy.Know the business model, products/services, and market position of the company and consider it in your strategic approach.Understand the customers' willingness to pay and needs, and adjust the pricing strategy to customer preferences and market conditions.