All questions tagged Market sizing - Consulting Q&A - PrepLounge.com

Hi,

The first approach seems a lot like guessing taking into account the nature of the question (%, not the absolute number)

The second approach is better

Another option might be calculating the number of electric charging stations, their occupancy and frequency, assume % charged at home and then get the # of cars

Best

Hi,

Your question is unclear, could you pls clarify?

Thanks

Hi Anonymous

This seems to be an interesting ask and can be a bit intriguing. You may get this if you are an experienced candidate and have something like this on your CV.

I hope you are aware of what Internet of Things (IoT) is. If not then , IoT is a system of interconnected interrelated computing devices that measure specific paramters/function and have the ability to transfer data over a network without requiring human interaction.

Basis this a candidate should first identify the areas of application of IoT and then monetization of IoT services:

1. Application of IoT : This can be very diverse and exhaustive. But it would be good for a candidate to detail the segments and appraoch and then check with the interviewer which segment he would prefer to focus on. Also note that the adoption of IoT services would vary across each segment based on the benefit of having IoT services.

Consumer Segment : (a) Individual : Wearable Devices (b) Home : Home Solutions like Smart LIghting, Surveillance, Smart Lock etc

Enterprises Segment : (a) Manufacturing (b) Logistics and Transportation (c) Healthcare (d) Smart Cities - Government (e) Automotive (f) Real Estate and many more

2. Monetization of IoT : There are broading 3 ways to monetize IoT services :

Device Revenue : Generated from the sales of IoT devices as per the identified applciatoin

Connectivity Revenue :The revenue from internet connectivity. Usually this is very nominal less than 8% and declining, also many devices are connected to already present Wifi so for ease the candidate should just mention this and not include this.

Value added Revenue : this may include revenue from value added services like monetizing data captured through devices as data as a service (DaaS), for up sell and cross sell or Platform as a Service (PaaS). During the interiew it would be good to mention these and not calculate the value impact as these too can have tiered monetization strategy - Freemium, Transactional, Volume Based etc.

So for easy the candidate should look at revenue from the sales of devices only.

Thus you can calculate the Market Size of IoT by application or function = # of Devices Sold Annually * Price of Device

Hope this help. For practice I would suggest (1) you work of calculting the size of few segments and (2) do some research on IoT. Please feel free to reach out to me in case of any queries.

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.

Hi,

The general framework for pricing is: Cost base - Value based - Competitor based - pricing strategy

1. Cost based - you actually check what are the costs and apply standard industry / target markup

2. Value based pricing can be done in 2 ways:

• For existing products you compare the value proposition and features of your product vs. the VP of your competitors. If you have a significant difference in value prop - you have to define how much value you propose to the customer in $ terms.
• For new products you have to calculate the value of the closest alternatives and think how much additional value we provide by replacing them. Basically it's the customer WTP - the willingness to pay. Think of the discount airlines compared to trains or buses

3. Competitor based pricing - basically it's benchmarking against competitors. Make sure you take into account the segment (i.e. in premium higher price may be the proxy for quality)

4. Pricing strategy - here you define how you will price the product taking into account 1,2,3 and your company strategy. Maybe you decide to have a zero margin if you can crossell other services. Or maybe you would like to subsidize to win the competition. Also think of price differentiation and having different pricing tiers (e.g. basic, premium or even fremium) and how it helps to drive price perception and fulfill strategic goals

Good luck!

The question has a bit of a disconnect. The amount of money given to grow trees does not have to correlate to the number of trees that can be planted.

To answer the question on number of trees that can be donated, here is an alternative approach

1. Value donated to plant trees cannot exceed value of all charitable donations in the US
2. Total charitable donations (personal) can be a % of GDP. So assuming GDP of 20 Trillion, let's say 1% of GDP is donated to charitable causes - that is ~200Bn dollars a year
3. Next we can say that of that, causes related to the environment make up ~5% - 10% or so (most donations are to religious organizations), have some sort of a rationale for that
4. At 10% this is roughly $20Bn a year
5. Of that people donating specifically to plant trees would be a very small sliver - again 1%-5% is not an unreasonable number when you are competing with things such as national parks, WWF, PETA etc.
6. So that gives is ~500M per year. Divide that by the cost of planting a tree - maybe $25 seems reasonable - giving us 20M trees a year potentially.
7. Of course this does not mean you can plant 20M trees, but the question asked for number of trees donated not planted
8. Also this assumes you get 100% of all the donated money whereas in reality you will get a very small fraction of it

Hope this helps,

Udayan

Hi,

This is one of the common questions I solve with my trainees.

You can do the following:

• Think about the total number of liters consumed by one person per day (say 2L)
• You need to think about your consumption habits during one week (one day would be too short as it doesn't represent all of your habits, or one month would be too long as you won't remember all of your habits)
• Thus, break your consumption occasions into "at home", and "away from home" (this would include e.g. restaurants, at work, at gym etc.)
• For each consumption occasion, assign a % of your water consumption (and thus in total, it should sum up to say, 2L/day)
• To recap, you should have something as follows (as an example):
  • At home: 1L/day
  • Away from home (at work): 0.5L/day
  • Away from home (restaurants): 0.2L/day
  • Away from home (at gym): 0.3L/day
• The next step is that you need to say that you represent an average consumer and thus you can extrapolate your consumptions to the whole population
• For each consumption occasion, you can also segment into tap water/filtered water vs. bottled water dependent on the type of the question

Hope the approach was clear, sorry for the long explanation.

Best,

Deniz

Hi,

It's easier to:

1. Segment New York into blocks using the number of streets and avenues.
2. Calculate separately the area of the parks
3. Assume a certain number of trees per block and separately for the parks
4. Multiply and sum up

Best

Hi,

1. Check with the interviewer if it is the primary or secondary market
2. Calculate the number of households
3. Assume a certain # of cars per household
4. Calculate total # of cars
5. Calculate the market by applying the replacement rate (once it 10 years or 1/10 if we are just calculating the new cars)
6. Add commercial vehicles (e.g. every 5th car in the street is commercial, thus you need to divide by 80%. Apply a different replacement rate for commercial (e.g. 1/5)

Best

Hi,

One approach is highlighted below :

Few things to remember when sizing this market

1. It is important to divide umbrella purchases into planned vs impulse buys given the nature of the market
2. For planned purchases - you can take a household approach using standard assumptions and anything from less than to a little over 1 umbrella per member is reasonable
   1. One thing to note here is there are also non-household purchases (hotels, offices etc.). So scale up your household assumption by a reasonable number like10- 25% to account for these (depending on your assumptions)
   2. Replacement rate also matters but I think would be extremely small for non impulse umbrellas (I cant remember the last time I checked an umbrella without going in the rain!)
3. For impulse buys I think the following are the key markets
   1. Domestic buyers caught in the rain
      1. Look at number of rainy days in a year in Italy
      2. Make assumption on number of people there that would need to buy umbrellas because they are outside in the rain and got caught or umbrella didn't work (should be a very small % for each day)
      3. Add up the numbers for all the days
   2. Tourists
      1. Estimate total tourists (maybe by season so you can focus on rainy season if relevant)
      2. Estimate % that would need umbrellas on each rainy day(fair to say a high number of tourists like 50% or so don’t have space to or don’t remember to bring umbrellas on their trips). This number should be quite a bit higher than domestic number because tourists are looking to do things outside all the time.
      3. Add the numbers up
4. Also remember competition from things like ponchos - which should reduce all your numbers (make an assumption on poncho vs umbrella sales depending on factors like price and intensity of rainfall)
5. Accounting for all of the above get rough market size for annual umbrella sales in Italy

Hi,

I recommend the following:

1. Ask the clarifying question first: Are we looking only at the b2c segment or other segments as well. Mentioning this by itself will give you the extra points. In many interviews, the interviewer will allow you to neglect
2. Make a B2B branch in your analysis. But start analyzing with B2C first since it's easier.
3. There are many tricks on how to make a B2B calculation approximation depending on the industry. Here are some of them:

• Personal experience (e.g. when I look on the street, every 10th vehicle is commercial. Thus there are (B2C / 10) commercial vehicles. Now you can calculate commercial gas stations, Tires, etc.)
• Calculating the space. For example, if you need to calculate the commercial real estate, you can 1) calculate how many buildings you have in the city (using the estimation of what % of the land is occupied by them), 2) subtract the apartment buildings 3) multiply by the number of floors and space.
• Calculating the number of businesses: (Working population - % working in public sector) / (SB, Medium, Enterprise split * avg number of employees in each). For each size of the business, you can calculate whatever you want, even light bulbs used.

To give you an example:

Once in the interview, I was Calculating the B2C tire market assuming that the new cars already have tires (sold via B2B channel). E.g. if the avg. lifetime of a car is 10 years, the replacement rate is 1/2 and the replacement rate per car is 4/10, since the first 2 years are covered by the tires from the b2b market.

Calculating b2b market included calculating the tires for the new cars (B2C market of the new cars * (4 tires + 1 extra)) + commercial vehicles * (avg number of tires per commercial vehicle).

Best

Hi Joe,
personal experience and common sense are the 2 main sources for numbers estimation. My advice is to go with easy-to-use number (e.g. instead of 47 use 50) and to check 1 or 2 important and uncertain numbers with interviewer (e.g. "I'm not familiar with this market, can I proceed with this number?" or "does it make sense?").

I share some examples of market sizing with some good number estimation arguments:

• https://www.preplounge.com/en/consulting-forum/how-much-would-you-charge-to-clean-all-the-windows-in-seattle-4965
• https://www.preplounge.com/en/consulting-forum/market-sizing-milk-consumption-5087
• https://www.preplounge.com/en/consulting-forum/how-would-you-calculate-the-value-of-a-cow-4982

Hope it helps,
Antonello

Hi,

1) Calculate the number of households

2) Calculate the number of vehicles (% households owning the vehicles)

3) Assume the lifetime of a car (let's say 10 yers) and the av. change of ownership rate (2 times in 10 years). Thus the replacement rate will be 1/5 cars per year

P.s. Don't forget about commercial vehicles. You can use personal experience to say that every 10th vehicle is commercial. Apply different replacement rate for them

Best

Hello,

I would propose several ways:

1) You start from the population of the city (12M) and make assumption on a theoritical structure of the demographics : XX% are workers, YY% are students , ZZ% are retired ... Then you take hypothesis on the % share of each part of the population using the subway everyday

2) it is also interesting to think about the capacity of the subway: you can assume that the subway is operated at almost full capacity all day long (which is kind of true) and then you count # of lines (14 subway lines) + number of train operated per line + hypothesis on the capacity for each train + frequencies of the trains

For market sizing, the idea is not to find the right answer but to show how you can break down and structure a problem. You need to find a way to break it down into smaller problems and take hypothesis with your interviewer on each parameter.

Hope this helps

Hi there,

Your approach is from the demand side. You can also use the supply side as a constraint and work from there. So how many people can actually be present in a gym, the percentage utilization for the peak and off peak hours, and peak and off peak seasons. You will get an average that you can work with.

As long as you can show the interviewer the logic and they can follow you, that's key.

Does this help?

Best, Aws

What I would do to approach this problem:

1. Start from population, estimate the amount of population with cancer. I would segment by age because I believe that cancer is much more prevalent in mature ages

2. I probably would've missed the diagnosed rate actually.

3. I would calculate % of people treated by immunotherapy, segmenting by income level since people with lower income will less likely be treated

4. Estimate amount of therapy one person require, probably by frequency (once a week?) and $/week (idk, 1k$?)

5. Calculate the final results

Let me know your thoughts

Hi,

1. Define the time it takes for a single person to pay
2. Define max number of people paying in a singly cashier line per shift
3. Multiply by the average utilization of the cashier line
4. Multiply by the number of lines
5. Multiple by the av check based on your personal experience
6. Multiply by the number of months, adjusting to seasonality

Best