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Interview Questions

Market Sizing - How Big?

How Many? 

Intro

 

Market sizing questions (sometimes known as guesstimates) are often used in interviews because they require a mix of logic, maths and common sense. They can be asked as a standalone question or as part of a larger case interview. Candidates that are competent with market sizing questions can find them extremely easy to execute and if included in an unstructured interview it can result in the candidate having an extra 20% time to answer other questions.

 

All the top tier consulting firms are likely to test their candidates with a market sizing question at some stage in the process as it is considered a “back-of-the-envelope” calculation. For instance, you may be sat talking to a UK clothing retailer about their growth strategy and someone may put forward the idea of opening an e-commerce store inviting the question “how much revenue could we expect to generate from an e-commerce store?” and on the back of an envelope (or more likely a piece of paper) you could estimate the size of the UK’s online clothing market and apply a market capture percentage for the client to give them a rough figure. Being quick with these calculations keeps the conversation flowing with the client and maintains a good impression.

 

Although there are many assumptions made in a market sizing, the answers are usually very indicative of the real number, especially whether it is in the region of hundreds, thousands or millions. Using the online clothing example, we know there are roughly 60 million people in the UK, let us assume they spend £500 online clothes shopping each year then 60 million x £500 gives us a market size of £30bn and the actual answer is £46.3bn. Applying a market capture rate of 1% gives us a final estimate for the potential revenue that would be generated of £300m. Whilst the estimate is £160m less than the actual answer it is close enough to indicate whether it is something the client might want to consider and whether more research should be done.

 

As you may have gathered, maths is important when working through these questions as you won’t have a calculator to do the sums. Whilst good long multiplication and long division can be extremely beneficial the most important thing is being able to handle big numbers such as millions and billions as well as percentages. More on this later.

 

Segmentation

 

If you have been reading into consulting interviews before arriving at market sizing questions you may have already come across some areas where segmentation is required. Segmenting data is a common theme throughout multiple types of consulting questions, and it is no different with market sizing questions. Segmenting is the concept of breaking down large data groups without losing any data in the process. The principle you need to understand in order to do this correctly is the MECE principle.

 

The MECE principle can be applied to demographics such as populations, used to formulate problem statements and to process data sets. In simple terms breaking down a data group in a MECE way means creating sub groups that do not overlap, and their sum equals the original number i.e no data has gone missing. An example useful to know for market sizing questions is how to segment a country’s population into age groups (as age groups often behave differently):

 

0-17                = 20%

18-34              = 20%

35-49              = 20%            

50-64              = 20%

65+                  = 20%

 

Notice that none of the groups overlap so no ages get counted twice but also no ages are missed. Now that the population is segmented properly, we can treat each group differently. Continuing with the e-commerce clothing example, if we had broken the UK population into the above groups then we could estimate the spend per person in those groups and common sense would suggest it is likely that the spend per person is less in the 0-17 group compared to the 18-34 group. We can reason this judgement as the majority of the 0-17 group will not be buying their own clothes online.

 

Two Essential Frameworks

 

The two frameworks that can be used when answering market sizing questions are an issue tree or a table. Both can usually get you to an answer so if you are short of time then only learn one, but it will definitely make your life easier if you can master them both.

 

It is really important to sense check your answer during a market sizing question as it is a test of your business acumen, a candidate that states that the global freight market is worth £1 million immediately reveals to the interviewer that they are lacking the level of business judgement a consultant needs.

 

  1. Issue Trees

 

An issue tree (sometimes referred to as a logic tree) is the visual breakdown of a question into its component parts vertically. Once you start breaking the question down further it continues in the same format to the right eventually leading to a single answer. If the question asked you to estimate how many fridges there were in India you could use an issue tree as follows:

 

 

 

 

 

 

 

 

 

 

Issue trees are a popular method of answering market sizing questions because the logic applied is easy to trace and so the interviewer can physically see the steps you have made in order to arrive at your answer. They are also easy to extend if necessary, as you can bring in other branches without disrupting the logic and simply changing the calculations required.

 

When using an issue tree, we recommend that you use as much of the page you have available and start with your first branch(es) on the left-hand side and then follow these steps:

 

  1. Draw out your tree with only the branch labels

  2. Turn the page round to the interviewer and confirm that your logic is reasonable

  3. Fill in the data that you do know

  4. Ask the interviewer if they are able to fill in any of the blanks (they may refuse to fill in any)

  5. Fill in the remaining blanks with sensible estimations of your own and justify them to the interviewer

  6. Do the required maths

  7. Sense-check your answer (if it seems unreasonable then go back to step 5)

  8. State your answer to the interviewer

 

Following these 8 steps gives the interviewer chances to course correct if you have missed or overcomplicated something and demonstrates your logic and maths skills clearly.

 

The limitations of an issue tree are easy to see when there is a lot of segmenting of the data required within the answer. Whilst the logic may be easy to trace still it can make the calculations messy and harder for a reader to understand. For a question that involves a large amount of segmenting it is usually easy to use a table.

 

2. Tabular

 

Using a table to construct your answer is a good method to choose if you are likely to be breaking a data set down. The breaking down of a population into age groups as shown in the segmentation section leaves you with five different groups. In this case it is beneficial to use a table in order to treat each group differently. For example, if the question asked you to estimate how many people go swimming each week in the UK we may estimate the answer using the following table:

 

 

Each row of the table is a different subgroup whilst each column is a different logical step. Some of the steps use the same figures for each group such as hours in a day and this makes the maths more time consuming. An alternative would be to move into an issue tree at this point meaning you only have to multiply by 24 once.

 

It is helpful to use lined paper if it is available when using a table to answer market sizing questions as it keeps the rows clear and legible. For the table framework we recommend using the same steps as the issue tree with a slight modification to the setup:

 

  1. Draw out your table with only your row and column labels

  2. Turn the page round to the interviewer and confirm that your logic is reasonable

  3. Fill in the data that you do know

  4. Ask the interviewer if they are able to fill in any of the blanks (they may refuse to fill in any)

  5. Fill in the remaining blanks with sensible estimations of your own and justify them to the interviewer

  6. Do the required maths

  7. Sense-check your answer (if it seems unreasonable then go back to step 5)

  8. State your answer to the interviewer

 

Following these steps will allow you to keep organised when working with multiple subgroups. Like the issue tree it is also easy for the interviewer to understand your logic and course correct where necessary.

 

Example

 

Question:

How many fridges are there in India?

To ensure a logical answer it is important to apply the MECE framework and physically draw out an issue tree. Always talk through your steps with the interviewer and they may give you hints if they are looking for something specific. A potential answer to the question might be:

 

Answer:

 

 

 

As the fridges have been segmented into two groups (domestic and commercial) using the issue tree has been straightforward. In this example it would be easy to only consider fridges in homes and households (domestic) but you must always consider any other potential sources. If you miss one, it is likely to be a follow-on question the interviewer asks; “where else might you find fridges in India?” testing your creative thinking and the collectively exhaustive part of the MECE framework.

 

A common question is estimating the number of passengers that pass through an airport and the type of aircraft that is often overlooked is cargo planes. Whilst they don't carry passengers there is usually a crew of two flying the plane and to be collectively exhaustive these need to be included. Recognising this will show the interviewer you are an exceptional candidate with a great mind.

 

Following the example through you can see the numbers used are incredibly easy and that isn't by accident, round them where it is appropriate but be mindful that you must also be able to justify the numbers you choose. An average of one fridge per household can be justified as sensible because there will be a wealthy demographic with two fridges but also as a country with high poverty levels there will be many households without fridges in India. An average of two fridges per business could be argued in many ways but things to be considered are restaurants and supermarkets that have many versus the small independent businesses with none. Remember to explain your logic out loud to the interviewer.

 

Useful Numbers

A stumbling block for many market sizing questions is the starting figure. Often the question is asking you to find a subset of a larger group or a number in relation to the larger group such as weekly swimmers in the UK or fridges in India. In order to do this it is helpful to know the population to start, in these instances the populations of the UK and India respectively. The following numbers are useful to know before answering market sizing questions:

  • US population = 300 million

  • UK population = 60 million

  • EU population = 500 million

  • Chinese population = 1 billion

  • Indian population = 1 billion

  • Australian population = 25 million

  • People per household (developed countries) = 3

  • People per household (developing countries) = 4

Practice

  1. What is the size of the European Shoe market?

  2. How many fast food meals are served in London each year?

  3. How many people go swimming in the UK each week?

  4. How many phones are lost at music festivals in the UK each year?

  5. How many phones are manufactured in China each week?

  6. How many houses are sold in the UK each year?

  7. What number of pretzels would you need to build a tower as tall as Big Ben?

  8. What is the size of the UK sofa market?

  9. Estimate the revenue generated by ticket sales from all US sports stadiums each year.

  10. How many people wear a tie on a Monday in the state of New York?

 

These ten practice questions are available for free download and an additional 30 are available in our Market Sizing 40 practice set that includes worked solutions.