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Market Sizing Query (please help)

Bain BCG Case Interview McKinsey
New answer on Dec 31, 2021
2 Answers
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Anonymous A asked on Oct 25, 2018

I have two questions regarding market sizings.

1) Take the example: "What is the annual revenue for bottled water in the US?". What I'm confused about is what counts as a purchase. Do I count both a retailer's purchase of water (in bulk) as a one stream of revenue (and put this in a commerical bracket) and then count the end-consumer's purhcase of water from the retailer (domestic)?

The same problem applies to estimating sugar demand. Do you include both domestic purchases of sugar (for tea, home baking etc) and then commerical use in resturants, and the mass production of sweets etc? You would then have to estimate number of resturants, sweet manafacturers so on and so forth.

2) I'm confused as to how to properly deploy the "new" and "replacement" purchase structure. Take mattresses again, estimating the number of people who have mattressess and then how often they replace is simple enough, but with the "new" bracket it gets harder - would it be: how many babies are born a year and then count the mattresses for these new births. But as they get older and bigger, new mattressess will be bought to accomodate their growing size - but isn't this a replacement purchase but just at a greater frequency?

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Anonymous updated the answer on Oct 25, 2018

Hi Anonymous,

reg 1) You don't count different intermediaries (wholesalers, retailers) into the total market size for a given product. That would be an analysis down the road when looking at who captures what part of the value-add in a given market (the producer, the wholesale, the retailer...).

However, in the sugar example, the sweets producers and restaurants "consume" the sugar as an ingredient to create something else with it (a biscuit or a sweetened ice tea). In that case, they will be counted into the total market size as a separate segment.

So - if a product is passed through unchanged, it is not counted, and only the final sale to the end user is counted into the market size. If it is transformed, that's the end of the road for that product, so the sale to the "transformer" needs to be counted.

Reg 2: In the mattress example there are indeed some blurry lines there. Market sizing isn't an exact science though, so just define how you treat things. You can say replacements are only "like for like" - so replacing one baby mattress with a different "baby mattress". That's clear-cut and can be defended. That way, baby/children's mattresses would mostly count into "new" but hardly ever be replaced. Fair enough...

You could just as well take the other argument, that one mattress is actually a replacement of the other. Although that makes things a bit murky, so I personally would stick with "like for like" replacements.

In any case, "new" mattress sales could also come from

  • population growth
  • increase in beds per person (i.e. vacation homes)
  • increase in hotel or hospital capacities
  • re-emergence of separate beds for couples
  • increasing number of singles
  • ...

Hope this helps,

Elias

(edited)

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Ian
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replied on Dec 31, 2021
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Hi there,

Providing some market sizing thinking for anyone revisiting this Q&A:

Remember that there's rarely a "best" answer with market sizing. What's important is that you break down the problem the way it makes sense to you. Importantly, break it down so that the assumptions you make are the ones you're most comfortable in.

For example, do you know all the major brands? Great go with that. Do you understand all the segments of that country's population (either age or wealth or job breakdown)? Go with that. Do you know the total market size of the tourism (or hotel) industry? Then break it down that way.

Some tips:

  1. Just like in a case, make sure you understand the question - what are you really being asked to calculate
  2. Decide whether a top-down or bottom-up approach is best
  3. Figure out what you know you know, and what you know you don't know, but could estimate
    1. This helps you determine how to split out buckets
  4. Stay flexible - you can start with a "high-level" market sizing, but gauge your interviewers reaction....if it looks like they want you to do more...then go along level deeper in terms of your splits
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