How successful have you been by using the 'Replacement Concept'?

Question

If you have used the replacement concept in an interview for MBB, could you share: 1) did it work? 2) did the interviewer ask you to use a different method instead?

Answer 1

Hi,

Replacement concept is just one of the tool, that you should use in combination with the other tools. In other words, it's not a magic pill (And yes it works)

1) First of all, there are 2 ways to structure market sizing:

Formula - basically a math formula to come up with a solution. The problem with the formula is that it is easy to forget something or get lost.
Tree - same as with regular cases you build a tree. A very simple example: you need to calculate the number of dogs on manhattan. A number of dogs = share of households having a dog * # of households. # of households = population / average household size. In the end, you'll have a pyramid where you have to fill the numbers on the base of the pyramid. This approach is much easier and help you track all the numbers

2) You should learn the key market sizing techniques:

Making assumptions based on personal experiences (Use the example of your house where out of 100 apt-s 10 have dogs)
Adjusting numbers (NY is a busy city thus fewer people have dogs)
Sanity check - try to apply your calculations to the real environment
etc.

3) You should learn the key tools:

Using age even age split (suppose life expectancy is 80 years. Assuming even age split we have 4 mln people in US of each age)
Using 80/20 split (suppose 20% people earn 80% wealth and the average salary is xx...)
Using approximations (Length of NY-SF flight and plane speed to calculate US length)
etc.

4) Learn key numbers: populations, gas price, gas consumption, Boeing speed and nmber of seats, average salary, # of gates in the airport, GDP growth rate, inflation, etc.

5) Practice 10-15 cases and you'll be fine. Almost all casebooks have good market sizing examples and the solutions

Feel free to PM for clarifications

Good Luck!