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.