You are a new telecomunicatons company and are planning to enter a new country with your mobile phones offer.
Country: 40 M people, located in Central-Eastern Europe
Competition: 4 companies with stronge presence and market well penetrated
How would you describe mathematicall/algebraically the market share that your company can achieve in 1 year from its market entry? (Part of case interview in MBB company)
Hello Mateusz,
By "mathemathically", you mean they asked you for a specific formula ? If yes, I would approach it this way:
1. Define the demand: define the number of mobile phones on the market. I'd divide it into contract phones (having a contract makes it much harder to switch for a competitor, thus knowing that contracts can be usually signed for 2 or 3 years, id say that on average 40% of the contract market can be replaced every year) and prepaid phones (basically a consumer can switch instantly, so id say 100% can be replaced in 1 year). Thus we have our demand.
2. I would look at the supply. It can be divided in two parts:
2a. Competition - what is their market share today ( A , B , C , D ) - what is the churn rate of every competitor (so that it would give me an info about the customer lifetime of every competitor) - i would look at ther services and prices
2b. Our client - look at the service / price with which they want to enter the market. That would give me a better feeling about how many "churners" we can approach / wether the churn rate will even increase with our entry.
3. New entrants. what is the average market growth of the mobile market ? Maybe with our super low price (if it is the case) we can get a big part of the new contracts ? I'd say with a very compelling offer we could secure up to 50% of newcommers (some of the people may still want to take bundle offer within the family, even though theres's a great offer from the competition).
My formula would look somewhat like this :
( 40% x # of contracts + 100% x # of prepaid ) X [ ( churn A x Market Share A ) + (churn B x MS B) + .... ] + 50% of new clients
SANITY CHECK : I think that a new entrant, even in a such dynamic market like the mobile carriers' one, could not expect more than on average 10% of the MS. So I would go for anything in the 5 - 15 % brackets as a reasonable answer.
PS. this formula gives you a fact-based answer, of course the churn rate might increase if your service is much better or the price is much lower. Comparing the offers of your competitors and your client should give you insights whether it is reasonable to assume the churn rate could increase. PS2. it is important to mention a competitive response. the competitors could have a quick answer to our aggresive pricing - hard to quantify the effects but very important to mention.
Hey Lukasz,
In general i would have done the same thing as you did.
I like your answer, but there are some parts i would like to refer to and make 3 suggestions to improve your quantification.
1. There is a general mistake in your formula. The question was to mathematically describe the market share our client can achieve in one year. You quantified an absolute number of mobile phones they can sell. To fix this we just have to divide your result by the total amount of mobile phones in one year. Easy and no biggy but important to answer the right question.
2. I really like your idea of using churn rates, but the churn rate of A has to be split up. Not all former customers of company A are going to switch to our client, they might buy their new phone from company B, C or D. Therefore we have to quantify the probability of switiching customers to the mobile phones of our client.
3. You did not offer a solution to quantify the number of mobile phones. To estimate the number of mobile phones i would assume an equal distribution of the population of the country and divide it into groups. Normally i would like to divide the population into 3 groups, but in this case it seems more realistic to divide it into 5 Groups.
1-16 -->8 m --> 25% share of mobile phone owners = 2m
17-32 --> 8m --> 90% = 7.2m
33-48--> 8m--> 80% = 6.4m
49-64 --> 8m --> 60% = 4.8m
65-80 --> 8m --> 30% = 2.4m
Summed up i assume that there are 22.8m mobile phones.
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