For market sizing questions the following 3 aspects are important:
- State your approach: Which approach would you take? For example top-down approach, bottom-up approach, demand side, supply side etc.
- Sensitivity check: What are the parameters that significantly influence your result?
- Sense check: Conduct another approach, or even a third approach (often not necessary, but state this because you would do this in a real case!) and triangulate around your results
In general – and I am sure you know that – the result of your approach is much less important than you approach! Hence, use the opportunity to show that you can see the bigger picture but also consider the details and that you are structured in your approach.
Also: Do communicate with your interviewer!
Now, how could you structure your approach using a demand side framework?
- Start with the population of LA. Assume 8m inhabitants. Ask for a better number and use it if nothing else is provided.
- Assume a life expectance of 80 years and assume a uniform population distribution. Given these assumptions, there would be 1m people per 10 year age bucket (do use numbers that are easy to work with, especially in situations under stress)
- Assume bike penetrations (percentage of population that would use a bike):
- Age bucket 11-20: 5% --> 1m x 5% = 50k bikers
- Age bucket: 21-30: 10% --> 1m x 10% = 100k biker
- Age bucket 31-40: 5% --> 1m x 5% = 50k bikers
- Hence, there are 200k “would-be” bikers in total.
- Comment: For simplicity, assume 0% for the other age buckets. Ask the interviewer if you should be more specific – if so, make assumptions for the other age buckets as well.
- Assume that for each age bucket (note: simplification!), 80% of those who would use a bike own their own bike and 20% do not own a bike. Hence:
- 200k “would-be” bikers x 20% = 40k bikers that do not own a bike
- Assume that for each age bucket (note again: simplification!), 50% of those bikers who do not own their own bike would indeed pay for renting a bike. Hence:
- 40k bikers without own bike x 50% = 20k bikers who do not own their own bike but are willing to pay for renting a bike
- Assume that all of these bikers are served with an average capacity utilization of 20% (do ask for a better number!). Hence:
- 20k bikers who do not own their own bike but are willing to pay for renting a bike x 20% = 4k rental bikes
Now, in reality you would (and so you should do in an interview) sensitivity and sense check your numbers! In a sensitivity check, you would discuss with the interviewer what you think are the parameters that drove your result, e.g. is it realistic that there are no bikers aged 41-50 that would rent bikes? Probably not, so state again, that this is just a simplification. In a sense check, you would conduct a totally other approach, e.g. a supply side approach or try to get reference numbers from public registers, insurance registers etc.
Remember that the result is much less important than your approach! The interviewer wants to see that you think in a structured way about problems and he wants to be confident that you can easily replicate these results! Therefore, it is important that you communicate with your interviewer and let him participate in your approach. If you are given the problem, take 10 minutes without talking with the interviewer and then state the correct number you will not pass the interview.
I have more market sizing cases available and am happy to coach.
Hope this helps.