Market-sizing Case Example
In the Market-sizing & Guesstimate article, we talked about the two types of problems in general and the 4 overall steps to solve them. I did an end-to-end demonstration of that 4-step approach in a video, too. Now, since this is a HUGE topic with so much demand, how do I add even more insights to help you best prepare for it in case interviews?
Turns out that, most of the time, you will see market-sizing questions in consulting case interviews, not guesstimate ones. So let’s do another article that deep dive into just Market-sizing. I write this in the spirit that you already grasp the basic 4-step approach in the previous article. So if you haven’t done so, please go to that MS-Guesstimate article. There’s a very nice video there to enhance your learning.
Let’s do this with a Market Sizing Example
The question is: What’s the global market size for smartphones?
In general, the approach for market-sizing question still goes through 4 steps like guesstimate. But there are a few more tips & tricks along the way. Let’s dive into this.
Step 1: Clarify 2 things…
Usually in market-sizing questions, there are two things you have to make clear. Sometimes, the question is clear by itself. But expect that most of the time we will have to run through these clarifications. It may seem like taking away time from you, but this is a great and easy way to score points and buy some legal time for your subconscious brain to work on the problem (while the conscious part is doing the talking with the interviewer).
– We have to size the market, so what exactly is the market? What’s the product? Who are the customers? Are there any limitations or exceptions?
– Once we know the market, how is it measured? What’s the timeframe? Do we measure it by dollar value or by number of products? Etc.
Let’s plug these into the example. Here are a few clarification questions I would ask:
– What’s “smartphone” defined as? Is it any phone with a multi-touch screen?
– Does this apply extensively to every people on Earth?
– What’s the unit of measurement? Number of new phones per year? Or the total revenue of new smartphone sales in a year?
Step 2: Break down the problem
For the sake of this example, let’s assume that for those above clarification questions, smartphones are any phone with multi-application capability; the market includes every person on Earth; and it’s measured by annual revenue of new sales.
Now with step 2, the logic behind it is that: you can’t eat an elephant whole. But if you cut it into pieces and eat them one at a time, yes, you can eat an elephant.
Ideally, the best breaking down method gives you the bite-size pieces that everybody can easily estimate. Sometimes this is really hard and we still have to get through those “not-so-bitable” pieces. But if the whole structure is MECE and those “not-so-bitable” pieces are still easier to bite than the original big problem, you will be fine.
Now how do we break down market-sizing problems?
There are three most popular methods: (1) by demand, (2) by supply, and (3) by segment
Each question has its own best method and you need to choose. Let’s demonstrate them through this example. Let’s say I wanna tackle the global smartphone market size problem. Let’s run them through each and every of the three methods.
Step 2 – Method (1) by demand:
Market size in sales of new phone:
- Number of new phones sold
- Phones sold to first-time users
- Phones sold to people to replace old ones
- Average price per phone
Step 2 – Method (2) by supply:
Market size in sales of new phones:
- How many new phones Apple sells
- How many new phones Samsung sells
- How many new phones HTC …
- Sony …
- Asus …
- Other small producers
Step 2 – Method (3) by segment:
There are many ways to segment. But one of the most popular ones in the smartphone industry is high-end, mid-end, and low-end.
Market size in sales of new phones:
- How many new high-end smartphones are sold
- How many new mid-end smartphones are sold
- How many new low-end smartphones are sold
When all of these are written down, they seem long. But those can actually happen really fast in our head. We get the general idea about it, then quickly realize which method is the best. In this question, structuring by demand makes the most sense. Let’s demonstrate the details in the following Step 3 & 4.
Step 3 & 4: Go out and hunt down the answer
Branch (1): How many phones are sold each year
- Branch 1.1: Phones sold to first-time users
- There are 7 billion people in the world.
- Suppose people are evenly distributed through all ages.
- Suppose the average life expectancy is 70 years.
- So each year, there are 7 billion / 70 = 100 million people getting into the appropriate age to own a phone
- Suppose 40% of people in the world have a smartphone.
- All of those come down to 40 million new smartphones sold to first-time users.
- Branch 1.2: Phone sold to people to replace their old ones:
- Using the assumptions above, we know 40% of 7 billion people are currently using smartphones. That is 2.8 billion
- Suppose on average, each person uses a smartphone for 5 years.
- With all of those, we have 2.8 billion / 5 years = 560 million new smartphones sold to people to replace their old phones.
Consolidating branch 1.1 and 1.2, we have 600 million new smartphones sold each year.
Branch (2): Average price per phone
Suppose the average price per new smartphone is $400
Consolidate both branches, we can estimate the global market size for smartphones is 600 mil x $400 = $240 billion.
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