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Market sizing is the process of estimating the annual spending of a particular category of product. It represents the maximum revenue a product could generate if it captured 100% market share. It is a type of estimation or guesstimate question.
For business, market sizing is a critical step in strategic planning to enable businesses to make informed decisions on product development, pricing, marketing strategies, and resource allocation.
Market sizing or estimation questions are commonly asked in consulting interviews because they assess a variety of skills, including analytical thinking, problem solving, and communication.
For consulting interviews, nailing market sizing is critical to land a consulting job offer. You will not be able to break into consulting unless you can nail the market sizing questions you will be asked.
If you’re looking to learn how to do market sizing, we have you covered. In this comprehensive guide to market sizing and estimation questions, we’ll cover:
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Market sizing is the process of estimating the annual spending of a specific category of product or service. It involves determining the total addressable market (TAM), which represents the maximum revenue a product or service could generate if it captured 100% of the market.
Determining the size of a market is a critical step in business planning that helps businesses make informed decisions regarding product development, pricing, marketing, and resource allocation.
Entrepreneurs and startups, business development and sales teams, investors, marketing and product development teams, management consultants, and market research firms all use market sizing.
It is a versatile skill used by a wide range of professionals and organizations to make more informed decisions.
Market sizing is not a static process. It can be revisited and refined as new data becomes available or as market conditions change.
The skill of market sizing is so valuable that management consulting, investment banking, private equity, and tech companies ask market sizing questions, also known as estimation questions or guesstimate questions, in their interviews.
Market sizing is used for a variety of purposes, including: strategic planning, resource allocation, product development, pricing strategies, investment and funding decisions, and market entry and expansion.
In consulting interviews, market sizing questions assess several key skills and qualities, including analytical thinking, problem solving, quantitative skills, communication, creativity, attention to detail, adaptability, and confidence.
It's worth noting that interviewers are not always looking for an exact "correct" answer in market sizing questions.
They are more interested in the candidate's thought process, ability to structure the problem, and arrive at a reasonable estimation. Additionally, candidates are often encouraged to verbalize their assumptions and reasoning to demonstrate their approach.
Overall, market sizing questions in consulting interviews are used to evaluate a candidate's ability to approach complex problems in a structured, analytical, and logical manner.
There are five steps to solve any market sizing or estimation question. We’ll go through these steps while answering the question: What is the market size of toothbrushes?
Step 1: Ask clarifying questions
When given a market sizing question, make sure you fully understand what you are being asked to calculate or estimate. You can ask clarifying questions to understand how market size is being defined and to understand what types of products should be included and excluded in your calculations.
For this question, you may ask:
For this market sizing example, let’s say that we define market size as the total sales in one year. We are specifically determining the market size of disposable, non-electric toothbrushes. Finally, let’s say that the interviewer tells us that we are determining the market size in the United States only.
Step 2: Develop a market sizing approach or framework
Now that you understand what we are being asked to guesstimate, you’ll want to structure an approach or create a framework before you begin doing any calculations.
Developing a market sizing approach or framework will help you avoid making unnecessary calculations and prevent math calculation mistakes.
There are two market sizing approaches you can take.
Top-down approach: In top-down market sizing, you start with a large number and then refine and break down the number until you get your answer.
In determining the market size of toothbrushes in the United States, a top-down market sizing framework would look like the following:
Bottom-up approach: In bottom-up market sizing, you start with a small number and then build up and increase the number until you get your answer.
In determining the market size of toothbrushes in the United States, a bottom-up market sizing framework would look like the following:
Whether you use a top-down or bottom-up market sizing framework, both approaches can lead you to a reasonable answer.
In some market sizing questions, a top-down approach may be easier. In other estimation questions, a bottom-up approach may be easier. You will need to decide which approach and framework to use, so pick whichever one is easier.
For this market sizing example, let’s use a top-down approach.
Step 3: Make assumptions and calculations using round numbers
Once you have your market sizing approach or framework, the rest of the market sizing case is simple arithmetic.
Unless the interviewer provides you with numbers or data to use, you’ll need to make assumptions to guesstimate figures.
To make the market sizing question as easy as possible for you, choose round numbers and estimates when making your calculations. For example, multiplying 300 million people by 50% is way easier than multiplying 311 million people by 43%.
Many people make the mistake of aiming for too much precision and end up using numbers that make the calculations very tedious to do.
This false sense of precision does not guarantee that your final answer is more accurate. It does, however, significantly increase the likelihood that you will make a math or calculation mistake.
Therefore, it is almost always better to use simple, round numbers in your market sizing calculations, than to use numbers that are too precise and complicated.
For this market sizing example, we will assume there are roughly 320 million people in the United States.
If 90% of the population brushes their teeth. The 10% of people that don’t brush their teeth include babies that don’t have teeth and people that do have teeth, but choose not to brush them.
That means 320 million * 90% = 288 million people brush their teeth.
Assume that 25% of people use electric toothbrushes, so 75% of people use regular toothbrushes.
That gives us 288 million * 75% = 216 million people that use regular toothbrushes.
Let’s estimate that the average person uses 10 toothbrushes per year or that they roughly change toothbrushes a little less than once per month.
That means 216 million * 10 = 2.16 billion toothbrushes are purchased each year.
Assume that a regular toothbrush costs $2.
Therefore, the market size of toothbrushes in the United States is 2.16 billion * $2 = $4.32 billion.
Step 4: Sense check your answer
Once you have your answer, make sure you sense check it.
Although having the correct answer does not matter as much as the market sizing approach and framework that you used, sense checking your answer can help you determine whether you might have made a major math mistake.
Is your answer way too large? Is your answer way too small? If it is, what step of your calculation likely caused this?
For this market sizing example, we can check our answer in the following way.
We calculated that 216 million people use regular toothbrushes. The United States population was estimated to be 320 million people, so roughly two-thirds of people use regular toothbrushes.
This number seems reasonable, but perhaps slightly on the lower side because electric toothbrush market penetration might not be as high as the 25% we originally estimated.
10 toothbrushes per person per year seems reasonable and a cost of $2 per toothbrush seems reasonable.
Therefore, we might conclude that our answer of $4.32B seems reasonable, but may be slightly underestimated because the assumption we made on electric toothbrush adoption may be too high.
Step 5: Determine the implications of your answer
Once you have sense checked your answer and have determined that it is reasonable, don’t just stop there.
To separate yourself from other candidates, take your answer one step further. What are the implications of your answer?
For example, if this toothbrush market sizing question is part of a case interview in which you are helping a client determine whether or not they should enter the toothbrush market, what are the implications?
Is the market size a large and attractive market to enter? Or is the market size a small and unattractive market to enter?
Does determining the market size of toothbrushes support a recommendation to enter the market? Or does it support a recommendation to not enter the market?
What other information relating to the toothbrush market would you need to know to help you support your recommendation? You may want to know what the market growth rate is or what the average market profit margins are.
Determining the implications of your answer shows that you can go above and beyond just doing the market sizing calculations. It shows to the interviewer that you are a high-level thinker and can think critically.
Market sizing and estimation questions typically don’t require any prior or specialized knowledge, but it can be helpful to memorize a few figures to help you make your assumptions.
For consulting interviews, here is a market sizing cheat sheet to make it easier to come up with assumptions:
For business strategic planning, the data points below can be helpful in determining an accurate market size for your particular category of product or service.
Example 1: How many iPhones does Apple sell in the U.S. each year?
Using a top-down market sizing framework, you could develop the following approach:
Following this approach, we’ll assume a U.S. population size of 320 million people.
If 75% of people have cell phones and 30% of cell phones are iPhones, this gives us 72 million iPhones.
If a person purchases a new iPhone every two years, that means 36 million iPhones are sold in the U.S. each year.
Example 2: How many TV ads are shown in the US each day?
One potential estimation framework could look like the following:
Starting with the number of TV channels in the US, let’s assume there are roughly 2,000 TV channels in the US. This estimate could be based on the number of channels that you get from your cable TV services.
Assuming each channel is on-air for 24 hours each day, that gives us 2,000 * 24 = 48,000 hours of airtime each day.
Based on personal experience, ads take up approximately 25% of total airtime. Therefore, ads run for 48,000 hours * 25% = 12,000 hours each day.
The average duration of an ad can be estimated to be approximately 30 seconds. Therefore, we need to divide 12,000 hours by 30 seconds to get the total number of ads run in a day.
12,000 hours is the equivalent of 60 * 12,000 = 720,000 minutes. 30 seconds is equivalent to 0.5 minutes.
So, 720,000 minutes divided by 0.5 minutes gives us 1.44M TV ads that are shown in the US each day.
Example 3: What is the volume of beer (in oz.) sold at an NBA basketball game?
A top-down estimation approach we can use to structure this problem is the following:
Multiply all of these figures to determine the volume of beer sold at an NBA basketball game
Let’s estimate that the average NBA basketball arena has 20,000 seats.
Assume that, on average, 70% of seats are filled. This means 70% * 20,000 = 14,000 people attend the average NBA basketball game.
Alcohol cannot be sold to people under the age of 21 in the US. If we assume that the average human life expectancy is 80 years and that there is a uniform distribution of ages, that means 20 / 80 = 25% of people cannot drink. Therefore, 75% of people can drink.
75% * 14,000 people = 10,500 people legally allowed to drink beer.
Let’s estimate that perhaps 60% of these people would purchase a beer. That means 60% * 10,500 people = 6,300 people purchase beer.
If the average person purchases 1 beer, that means 6,300 beers are purchased.
One beer is approximately 12 oz. Therefore, 6,300 beers * 12 oz. = 75,600 oz. of beer is sold at an NBA basketball game.
4. What is the market size of smartphone insurance in the United States?
You can watch the video below to see a full explanation of this market sizing practice question.
5. How many golf balls fit in a Boeing-737 airplane?
Watch the video above to see a full explanation of this guesstimate question.
Below is a list of market sizing, estimation, and guesstimate questions that you can practice on your own.
Avoid the following common mistakes when answering market sizing or estimation questions.
1. Neglecting to Ask Clarifying Questions: Failing to seek clarification on ambiguous aspects of the question can lead to misunderstandings and inaccurate estimations.
2. Skipping the Structured Approach: Not outlining a structured framework before starting calculations can result in a disorganized and incomplete answer.
3. Overcomplicating the Approach: Sometimes, candidates attempt to use complex methodologies when a simpler approach would suffice. This can lead to unnecessary complexity and errors.
4. Ignoring Key Components: Neglecting to consider critical elements of the market, such as population size, adoption rates, or competitive factors, can result in incomplete estimations.
5. Failing to Make Reasonable Assumptions: Avoiding assumptions altogether or making unrealistic ones can lead to impractical or inaccurate estimates.
6. Rounding Errors: While rounding numbers is often necessary for simplicity, excessive rounding or incorrect rounding can lead to significant inaccuracies.
7. Lack of Sensitivity Analysis: Neglecting to consider how changes in key assumptions might impact the estimate can demonstrate a lack of understanding of uncertainty.
8. Not Verbalizing Your Thought Process: It's important to communicate your thought process aloud so the interviewer can follow your reasoning. Failing to do so can lead to misunderstandings.
9. Getting Stuck on Details: Spending too much time on specific details or calculations, especially early in the process, can result in a rushed and incomplete overall estimate.
10. Ignoring Feedback and Adjustments: If the interviewer provides feedback or asks for adjustments, failing to incorporate this can demonstrate a lack of adaptability.
Follow these eight market sizing and estimation tips to solve these types of questions more easily and impress your interviewer.
1. Develop an approach or structure before making any market sizing calculations: Do not begin doing math until the interviewer has not seen and approved of your approach.
2. Turn your paper to face the interviewer when walking them through your market sizing approach: This will make it easier for the interviewer to understand your market sizing framework and structure.
3. Segment your population for more precise estimates: The most common way to segment a population is by age. You can assume the average life expectancy is 80 years and divide your population into 0-20 year-olds, 21-40 year-olds, 41-60 year-olds, and 61-80 year-olds. A quarter of your population will fall into each category. The main idea behind segmentation is that each segment has different behaviors or characteristics.
4. Use round numbers to keep the math easy: Instead of using a United States population of 328 million, use 300 million or 320 million instead. Instead of using a global population of 7.7 billion, use 8 billion instead.
5. Do your calculations on a separate sheet of paper: One sheet of paper that has your approach or framework while another sheet will have your calculations. This ensures you will always be able to refer back to your framework and keeps your calculations more clean.
6. Sense check your numbers along the way: Missing zeroes or adding additional zeroes during your calculations is the most common math mistake. During each step, do a quick sense check to ensure that your calculation is the right order of magnitude. For example, if you are multiplying 150 million by 25, you should confirm that your answer is in the billions because 200 million * 20 = 4 billion.
7. Remember to take replacement cycles into account: Just because there are 280 million cars in the United States does not mean that 280 million cars are purchased each year. You’ll need to estimate that perhaps cars are replaced every 10 years.
8. Benchmark your final answer to another figure: If you calculated that the toothbrush market in the United States is $4 trillion, you’ll know your answer is off by many orders of magnitude because the gross domestic product of the United States is only $20 trillion.
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