Market sizing approach

Market sizing
New answer on Nov 28, 2019
4 Answers
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Anonymous A asked on Nov 27, 2019

Hi,

Whenever I try to answer market sizing questions, I tend to get stuck with the ones that require making assumptions regarding to companies´s behavior, like for example: what is the size of the management consulting industry in a given country?, or how many companies hire cloud services in the US?. What is the best way to come up with valid assumptions regarding to how companies behave in a given market.

Thanks.

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Antonello
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replied on Nov 28, 2019
McKinsey | MBA professor for consulting interviews

Hi,
personal experience and common business sense are the 2 key levers to approach these type of cases with

Best,
Antonello

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Anonymous updated the answer on Nov 28, 2019

Hi

Your questions is a very valid one. However, the answer lies in how you address the problem.

1. Addressing a Sizing Problem

A typical market sizing problem can be addressed from either Demand Side or Supply Side. For either of the approach you need to indentify it's drivers.

In the demand side appraoch you would have to address the drivers of demand of consumption/user/buyer base. This appraoch is good in straight forward cases how many LV bags are sold in Indonesia. Size of beer market in the US etc.

In the supply side approach you would have to look to estimating the total capacity/production output. This appraoch is good for tricky cases like how many Red BMW cars in Germany. Number of Passengers communting daily via London Undergroung.

Candidates perform well when they are asked to size the market for conventional industries like consumer goods, food and packaged, automotive, electronics etc. However they face issue with industries like business services, digital services, technology related new age services.

One of the main reasons, I have encountered while interviewing candidates is that they are not well aware of the business and operating models of industries like these.

Thus, the first thing as a candidate you should do is to learn at a high level about how different industries operator. There is also no harm in asking the interview to tell you about the industry in question - revenue streams, operating model, etc.

2. Making Assumptions

Once you have identified your approach and the drivers, it should be easy for your to determine parameters for that driver and respctive degree of assumption

However, the trick lies in your logic and reason of assuming a certain parameter. Easier said than done

- Always try to classify the parameter into categories of reasonings - economic, customer preferences, substitutional, complementary, operational.

- Leverage your knowledge across industries to arrive at a suitable number

- Always cite examples to substantiate your assumption.

Now lets take your example of consulting market in the US. This can be aptly sized using the supply side appraoch. And I would use my set of assumptions which may vary candidate to candidate.

Revenue stream of a management consulting firms is mainly billing of the consultants on client engagements. Thus lets determine the number of consultants and the revenue they would generate.

- Assuming Top 10 firms command 70% - 80% of the Management Consulting market in the US. MBB + Big 4 + Niche Firms.

- On an average each of these firm has 2 offices across each state in the US.

- Each office houses close to 350 management consultants on an average. Big 4 firms would have larger number compared to niche.

- Thus, total consultant strength across top 10 firms = 2* 52*350*10 = 364,000 consultants.

- Average industry utilization per consultant - 80% with an average billing rate of $ 300 dolalrs per hour with 40 hours a week for 50 weeks/year.

Why 80% utilization, because junior consultants have 95% target and as you rise up the ladder that target reduces so a blended 80% is relatively close to actuals. Why $300 /hr - juniors are billed around $100 - $200 full time where as principles and above are way to high but they work across engagements. So blended $300.

The idea is to communicate your thinking not focus on the accuracy of the number, once you are in the real words you would have benchmarks, actual data, and excel sheet to capture the averages :-)

- Therefore, Market captured by top 10 firms = 364,000 * 80% * 40 hr/week * $200/hr *50 weeks/year = 174 Billion

- Thus, the total market value of management consutling in the US = 174 Billion /70% = ~USD 250 Bn

I hope this helps providing you the approach and essense of market sizing problems. In case you would like to know more about it please feel free to contact me.

All the best.

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Anonymous A on Nov 28, 2019

Thanks, your explanation helped me a lot

Stephenie on Nov 29, 2019

Thanks that's a very detailed and helpful approach

Vlad
Expert
Content Creator
updated an answer on Nov 27, 2019
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

Hi,

These cases are quite rare. But in both cases, you can calculate the total number of companies the following way:

  • Assume % share of population working in businesses
  • Split the population by working in enterprises, medium and small businesses
  • Allocate an average number of employees in each business segment
  • Calculate the number of companies
  • Make the relevant assumptions in each segment

Alternatively, you can use the Fortune 500 as very large enteprises and make an assumption of various business segments from there

Best

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Oleksandr (Alex)
Expert
replied on Nov 27, 2019
Very experienced ex-McKinsey consultant with cross-country expertise

Hey there,

You aren't the only one who has the problems here.

In order to get it right - you have to build up on your current experience, use industry knowledge (if any) and your critical thinking. What it means is the following:

* Experience - in whatever industry you worked before or now - try to get market-sizing for that industry. If you worked in airlines for example, think how many planes you have seen daily and where they were going to, and how often per day, etc.

* Industry - you have to understand some industries. Really! Start reading newspapers (business) and try to understand why/what/where. Once you understand what is the difference between steel and coal - you are quite ok. But never stop! Build it up to become your habit.

* Critical thinking - try to link your potential answer to some figure you're aware of. For example, number of ppl in US, number of countries, growth of population. It will make your assumption much stronger and you will avoid great pitfalls.

This is a great skill to develop! Try to play about market-sizing wherever you are: for example, what is the size of official sexual services in Germany, or what is the market for yogurts for vegetarians, or how many providers of leasing vehicles you may have in India and why. Often the answer is very easy to find if you follow two approaches:

* Top-down (think about industry wise/total supply or consumption, and the divide by segments and then by products, etc.)

* Bottom-up (think about customers and how much an average customer consumes, then think about the number of customers, cities, etc.)

Hope this helps!

Cheers,

Alex

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Antonello gave the best answer

Antonello

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