Market sizing is the process of determining the total market demand for a product or service. It involves analyzing data such as industry trends, market dynamics, and economic factors to estimate the size of a market and its potential for growth.
This information can be used to inform business strategy and investment decisions, as well as to identify opportunities for new products or services. Market sizing can also be used to compare different market segments, regions, or competitors. It is an important step in understanding the market potential and making strategic decisions for any organization.
At the core, market sizing questions are a subset of estimation questions, which are often part of a case interview. If you are interviewing with top consulting firms such as McKinsey, BCG, or Bain, you are almost guaranteed to come across one or two market sizing questions in the process of going through three to six interviews.
In this article, I want to dive deeper into the subject to talk about market sizing, estimation questions, and everything that helps you become better at it for your top-tier consulting interviews.
What are estimation questions?
Estimation questions in a case interview are questions that test a candidate’s ability to make rough, educated guesses about specific numerical values or quantities. These questions are commonly asked in case study interviews for management consulting, finance, or strategy positions, as they demonstrate a candidate’s problem-solving, analytical, and quantitative skills.
Estimation questions can cover a variety of topics, such as market size, but, also other things such as
- growth rates (e.g., “how will the job market grow over the next 5 years?”)
- cost structures (e.g., “how expensive is the production of one aircraft engine?”)
- resource requirements (e.g., “how many employees does a burger joint need?”)
The goal of estimation questions is to evaluate a candidate’s ability to think critically, communicate clearly, and make informed decisions based on limited information in the same way as in a market sizing question (just with a broader and/or different context).
The most important subset of these questions for a case interview is market sizing.
What are market sizing questions?
In short, market sizing questions are an essential part of market analysis and business strategy. They involve determining the size of a particular market or target audience and are often used to assess the potential of a new product or service.
In a case interview, you might have to size a market in an abbreviated task either as a standalone question or as part of a longer case.
What are market sizing example questions?
Before we dive into the mechanics of market sizing, let’s first look at typical questions you might be asked.
Some common examples include:
- “What is the size of the market for electric vehicles in Europe?”
- “What is the potential market size for a new smartphone app in the US?”
- “What is the size of the market for organic food in Asia?”
There is essentially an unlimited number of market sizing questions that you could be asked. Everything has a market.
Why are consulting firms using market sizing questions?
Consulting firms use market sizing questions in their case study assessments because the process and approach to market sizing that candidates take allow the firms to gather a lot of insights into different skills that are also important for the daily life of a consultant.
What are those skills?
- Problem-Solving: The ability to identify the market sizing problem correctly and develop a structured approach to solving it.
- Data Collection and Analysis: The ability to gather relevant market data by asking the right question and analyzing it to draw meaningful insights, all while working with imperfect information.
- Market Knowledge: An understanding of the market, industry trends, and key players is essential for accurate market sizing (in a case interview, you are not expected to have in-depth knowledge about a particular industry, unless you are hired for a specialized role)
- Quantitative Reasoning: The ability to comfortably create equations, manipulate numbers, and perform mental and pen-and-paper math
- Communication: The ability to effectively communicate your approach, findings, and insights to the interviewer.
- Creativity: The ability to think creatively and develop innovative solutions to complex market sizing problems (e.g., by considering different segments of the market than average candidates).
- Attention to Detail: Market sizing requires precision and attention to detail in order to ensure accurate and reliable results.
- Ability to Work Under Pressure: Solving complex market sizing questions puts a lot of stress on you as a candidate as you need to create an outcome in a short amount of time and combine a number of different skills and actions, all while being watched and evaluated by the interviewer.
Now that it is clear what you need to display, let us look more into the process
How should you approach market sizing questions?
The key to solving market sizing problems is to approach them with a strategic and thorough approach. Utilizing multiple market sizing techniques and strategies, as well as validating and verifying findings through cross-referencing and considering market trends, can help you get directionally correct results.
What interviewers are looking for are not accurate results but a coherent logic and approach, well-justified and qualified assumptions, and directionally correct outcomes.
To demonstrate this, I would recommend that you approach market sizing in five steps.
Let’s use a practical example.
How many pizzas are sold in the United States per year?A tasty question
Step 1: Understand the outcome variable
- Play back the question to the interviewer and any data that you have received until this point.
- Ask the interviewer to repeat or explain the information you were given to make sure you understand it correctly and clarify what they are expecting you to do. Make sure that you understand what outcome variable you need to calculate and what unit of measurement they are asking for (e.g., number of sales per day/week/month/quarter/year).
Step 2: Think about your approach
- Ask the interviewer for some time to gather your thoughts.
- Draft your approach either by going top-down and thinking about the big picture and the slice of that big picture (pun intended). For instance, you could think about the U.S. population, segment it, and then narrow it down to the pizza consumption within that population. Alternatively, you could go bottom-up looking at the details and then aggregating it up, for instance by considering your own pizza consumption and extending it to the total population.
- The method you choose depends on your own preferences and the type of question.
- For a quick approach, think about 3 to 4 key variables that influence the outcome variable and their relationship. In our case, I choose a bottom-up approach.
- Communicate your approach to the interviewer.
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Total number of pizzas sold per year: pizza per month x number of months in a year x population
Pizza eaten per month: 1 (e.g., basing this off your individual pizza consumption; you could argue that there are people who eat more than 1 and some that eat less than that, hence balancing out at around 1 pizza per person)
Number of months per year: 12
Population: 331 million (either you know this number and you should if you are from the U.S. or you ask the interviewer for it if you are a not a US citizen)Quick approach to market sizing (you end up in the right ballpark)
This approach gives you a quick indication of where the final number should be, yet it is not very accurate. You could now start thinking of refining it. How?
Step 3: Calculate and refine your analysis
- Plug in the numbers and calculate your outcome, which is roughly 4 billion pizzas per year.
- There are several ways to refine your analysis. Some interviewers are happy with a quick and dirty analysis, especially if the question came up as part of a longer case. Some might want to drill deeper.
- In the latter case, you could start segmenting the market to get more accurate and refined outcomes. These filters help you carve out irrelevant segments or finetune the consumption of each segment. Out of the 331 million people, not everyone eats 1 pizza per month. For a quick win, you could take out the age groups from 0 to 6 as they are likely not eating any pizza at all. Assuming a normal distribution of age and a life expectancy of 80 years, that would be around 25 million people less. If you want to go further you could argue that people between 6 and 12 and 70 and 80 only eat half a pizza per month on average. You end up with roughly 66 million people less or 33 million pizzas less per month. If you combine both assumptions and refine your initial analysis, you end up with roughly 3.2 billion pizzas per year.
Every number you have come up with in Steps 2 and 3 relies on assumptions. If interviewers do not provide any data, you need to come up with your own assumptions and justify them in front of the interviewer (e.g., “I would assume that babies and young children do not consume any pizza at all”).
Step 4: Sanity-check your answer
- Quickly sanity-check your approach and calculations, then think about if the final number is realistic and in the right ballpark.
- You could look at the outcome and relate it to another statistic or figure you know (e.g., you might have heard about burger or pasta consumption in the U.S. or pizza consumption in another population and could compare it).
- You could discuss the number in the context of the prompt (e.g., “the U.S. is big on fast food so 1 pizza per month does not sound like an exaggeration”).
- You can quickly go in the other direction, in our case top-down to see where you end up (if time permits).
- If the interviewer points out any obvious mistakes or flaws, go back and either check your approach and assumptions or the actual calculations.
Step 5: Interpret the result in the context of the case and/or prompt
- Communicate the outcome and your insights in the context of the case and/or brief (e.g., “3.2 billion pizzas are sold per year in the U.S., which initially sounds like a lot but given my assumptions and the type of market I think that is a. realistic and b. an attractive market for fast food overall”).
- Consider what adjustments could be made to your logic to make the number smaller or larger (e.g., “If I wanted to drive this further, I would potentially look more into the differences across segments, such as differences in geographical segments”).
- If you are working on a full-length case interview, discuss how you would move forward with this new information.
If you are curious to get the actual number of pizzas eaten per year in the U.S., continue reading. I’ll share this with you later in this article.
Quick note: If the interviewer only asks you about market sizing and has allocated 20 minutes or more for the interview, chances are that they want you to go much deeper into your analysis.
What this would mean for you is to create more segments and assumptions for each segment (e.g. split the population into age groups of 10 years and discuss consumption habits for each group individually). You might also want to think about regional differences in pizza consumption (e.g, cities vs. more rural areas, etc.). There are plenty of ways to refine your analysis. Usually, there is no single best way but multiple approaches. What is important is that your approach is logical and coherent.
If that is the case, the approach is the same that I discussed above, just more granular. Pay attention to keeping your approach logically coherent and avoid minor mistakes in your calculations.
Tips and tricks for market sizing questions
When working on market sizing and estimation questions, you should look for ways to make your life easier.
- Ask clarifying questions: Make sure you understand the scope and constraints of the question before proceeding with drafting your approach and logic.
- Choose a simple approach: Work on the 20% of the problem that gives you 80% of the solution. Avoid getting bogged down into details of the logic that might change your final number by 1-2% but take more time than getting the first 80% right.
- Simplify and round numbers: A common error that I see with many candidates is that they strive for excessive precision, which leads to complicated numbers that make calculations extremely time-consuming and increase the risk of errors along the way. When calculating, use round numbers and approximations to make your calculations easier. For instance, if you look at the population in Germany, use 90 million people instead of 86 million. When thinking about how many people in Germany own a car, think about 60% instead of 63% (also by rounding one number up and one down you balance out both simplifications). We are looking for directionally correct results that can be calculated quickly.
- Show your reasoning and assumptions: Explain your thought process, sources of information, and the assumptions made. Use your own experience and analogies to justify your assumptions.
- Be ready to defend your estimation: Be prepared to answer follow-up questions and be able to defend your estimate with supporting data or logical arguments.
How can you practice market sizing and estimation questions?
Mastering market sizing questions is an entirely learned skill that needs a lot of practice and targeted preparation. How should you go about it?
Familiarize yourself with the key techniques and approaches
Market sizing questions are always very similar. Familiarize yourself with the typical types of problems and the key drivers. Identify the important market drivers, such as the population size, GDP, and other pertinent economic indicators, in order to properly size different markets. As you practice estimating their impact on market size, try to identify the primary drivers for various markets. On top of that, being able to make informed assumptions or estimations is essential for market sizing. To practice estimating prices for various marketplaces, you can utilize tactics like the “rule of thumb” or “top-down/bottom-up” approaches.
Become comfortable with quant problems in general
Market sizing is just another type of the many different math problems you have to solve during a case interview. As a result, work on your quantitative muscles as this will also improve your performance for market sizing.
Learn about different industries and economies
Knowing the industry you are looking at or the country you are dealing with can be an advantage as it allows you to perform more informed analyses. The more you are familiar with different industries or countries, their drivers, and characteristics the better you are at identifying the key drivers, the more accurate will be your assumptions, and the more exhaustive will be your analysis.
Leverage case books and resources
Get exposure to a variety of different market sizing questions. You can review market sizing questions in the majority of case books to get a sense of the overall process and the different types. Whenever you encounter a new problem, you should first try to solve it on your own before checking the proposed solution.
Practice with peers
Similar to business case practice, you can also work on market sizing and estimation questions with a case practice partner. First, the other party acts as an interviewer and asks you a question, that you answer in the same way as I described earlier. Once you have finished your analysis and communicated the result, it is time to debrief your process, logic, and presentation with the interviewer. After that, switch roles and repeat the process with a different question. You will act as the interviewer now.
Create your own estimation questions
You can create an unlimited amount of market sizing cases for yourself. Look for actual examples of market sizing questions, then attempt to resolve them on your own. You could, for instance, try to determine the size of the market for a specific product or sector of the economy or calculate the potential profits of a startup.
- If you see a business while walking outside, ask yourself how much revenue they are making, how many customers they are serving, etc., or calculate these numbers for the total industry in your country, another country, etc.
- If you see a product, ask yourself how many are sold per year or what the total sales revenue is per year (e.g., a car).
- If you see an item, think about how many there are in your city or country (e.g., a window). This is for more abstract market sizing questions.
To compare your answer with the actual number, just google it.
So, how many pizzas are sold in the U.S.?
In case you were wondering, 3 billion pizzas are sold (and presumably) eaten in the U.S. per year (according to an article by the Washington Post).
If you look closer, that are 350 slices of pizza that are consumed every second, or the equivalent of 100 acres of pizza every day. If you divide that by the number of slices per person per year, each person in the USA receives 46 slices annually.
Does McKinsey ask market sizing questions?
Rarely. The McKinsey case format is different and the interviews are more structured and standardized to safeguard a certain level of objectivity across interviewers, offices, and countries.
However, it might still very well be that the partner you are interviewing with is interested in testing your market sizing and estimation questions. On top of that, you will definitely benefit from practicing market sizing and estimation questions as it helps you develop structure and rigor for any other quantitative analysis as well.
In sum, to be on the safe side it makes sense to prepare for this type of question if you are interviewing with McKinsey, in the same way as if you are interviewing with other top consulting firms such as BCG, Bain, Kearney, PwC, Deloitte, Oliver Wyman, L.E.K., Roland Berger, Strategy&, Accenture, and EY that ask estimation questions as part of their case interviews and case study assessments more often.
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