When is it best to approach a market sizing question from the demand side?
When is it best to approach it from the supply side?
Market sizing from demand or supply side
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When you're estimating NOT guessing.
If you're doing any approach and you're making up numbers, then it's the wrong approach!
It's very simple: Do the approach the is the easiest for you given the question.
Are they asking you to estimate something where you don't even know where to begin from the top (maybe you have 0 clue as to the market size of the industry, the GDP of that country, etc. etc.)? Then do bottom-up!
Alternatively, does it seem impossible to do a realistic from-the-ground-up estimation of something (perhaps it requires just far too many steps and assumptions)? Then do top-down!
Fundamentally, you need to take the approach that just makes the most sense in that circumstance. Quickly think about the key assumptions / numbers required and whether you 1) Know them or 2) Can reasonably estimate them. If you can, go ahead!
Here are 3 practices w/ video solutions that you can try for yourself!
Market Sizing WITH SOLUTION - Coffee Shop Revenue | PrepLounge.com
Market Sizing WITH SOLUTION - Number of Taxis | PrepLounge.com
Market Sizing WITH SOLUTION - Number of Internet Users | PrepLounge.com
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Rule of thumb: supply side works better in clearly outlined environments (e.g., how many people are served in a coffee shop per year, how many cars are fueled in a gas station, etc.). Nevertheless, your thinking always needs to include the demand side (even if just for validation).
Cheers, Sidi
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Hi,
It's simple:
- Start with an approach you are more confident about
- If you know how to do it both ways - mention it to the interviewer: "We can calculate this market both from the supply and the demand sides. Le'ts start with the supply / demand side and later, if we have time, check the answer using another method"
Best
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Generally speaking, I believe it is better to approach market sizing from the demand side - after all 100% of demand equals the market size. That may not be the case with 100% of supply - that may be a lot more or a lot less than the actual demand for a product.
However, there may be instances, where it would be interesting or sensible to come from the supply side. This may be the case if you want to demonstrate a market opportunity, i.e. "Total supply for left turning widgets is X, but the market potential is actually Y, which is a lot more than X.".
Also in some cases it may simply be easier to calculate, but that's a very weak argument.
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