How to approach market sizing case questions

How to approach market sizing case questions

For decades, consulting firms like McKinsey & Co., The Boston Consulting Group, Bain & Co. and peers like Accenture and Deloitte have grilled interviewees with tough quantitative questions.

At first, firms asked hypothetical questions which exclusively tested a candidate's estimation skills. It didn't matter if the situation was whimsical or had zero practical business implications! For example, a candidate might get the question: "Please estimate how many golf balls could you fit inside a 747 plane."

How many golf balls could fit in a 747?

It's an interesting intellectual exercise. However, as an interview question, it has a crucial flaw: it doesn't test skills beyond pure quantitative ability.

Why ask market sizing questions?

Today, firms focus on a more sophisticated style of estimation question: the market sizing question.

These are estimation questions with added depth that tests the candidates ability to pull in relevant knowledge and make reasonable assumptions about consumers, businesses and markets.

From the firm's perspective, this is a higher leverage type of question to ask because it simultaneously tests 1) quantitative skills 2) logical reasoning and 3) business acumen.

Enter the market sizing question (a sample question)

Let's look at a sample market sizing question for the rest of this discussion.

Your client, a leading pharmaceutical company, is planning to introduce a product to compete with Botox, which currently holds a near monopoly in its market. You would like to estimate the current size of the market in the US, which derives about half its revenues from cosmetic uses and half from therapeutic uses.

Three steps to approaching a market sizing question

For any market sizing question you face, whether the whole case is one giant market sizing question or you find a mini-market sizing exercise embedded within a large case, we recommend taking three steps:

  1. Structure your approach
  2. Assume and round numbers frequently
  3. Sanity check answers

#1: Structure your approach

Before jumping into any given market sizing question, it's important to lay out how you'll approach the drill.

You can take any market sizing task and break it down into a few key component parts. Then, you can work through each component independently and put all the parts together for the final answer.

For our sample question, sizing the US Botox market, we can start by organizing the key info. We know from the question that the cosmetic market is 50% of the total, thus if we can estimate the cosmetic market, we can easily scale up by 2X to estimate the full market size.

Next, if we zoom in on the US cosmetic market, we can define it as equal to the number of cosmetic customers multiplied by annual spend per customer.

Example of how to structure a market sizing question about the US Botox market

#2: Assume and round your numbers frequently

Now that you've got a structure in place, you'll need to make assumptions and calculations to get to your total estimate.

Here, the key is to assume often and always round your numbers to make them easier to work with. Additionally, after you do any calculation, if the result is a messy number, you should round that number before you use it in a subsequent calculation.

Caution! Don't chase the false precision gods of market sizing

At times, candidates avoid rounding because they think it will be impressive if they do incredibly precise math and get it right. A word of advice: don't fall into this trap!

It's a double whammy trap because:

  • You're more likely to get calculations with messy digits incorrect
  • Interviewers don't give you credit for making the problem harder than it should be

Consultants are masters of simplifying problems! Thus, needlessly complicating a problem with messy numbers isn't going to win you points. In fact, it's counter productive.

Returning to our example, if we want to first calculate the number of US cosmetic customers, let's start by making some assumptions and rounding as needed:

  • Assume the US population is 300M
  • Assume that 50% of population is women
  • Assume the population is evenly distributed between ages 0 and 80
  • Assume that the population aged between 40 and 80 is the relevant population
  • Assume that 20% of relevant aged women might be able to afford and interested in using Botox cosmetically

With these nicely rounded assumptions, calculating the number of women in the relevant population is nice and clean: 300M people * 50% women * 50% relevant age * 20% use = 15M women.

#3: Sanity checking

Finally, after any series of calculations, it's helpful to sanity check your estimate and make sure it passes the smell test. While it's not necessary after every single calculation, sanity checking numbers after series of calculations, and of course, at the end of the exercise, is helpful.

For example, consider the calculation we just did above. If we were “off by a zero” which is a common error to make in a series of calculations, we might have ended up with 150M women. Given that 150M women would be all the women in the US (given a 300M population and 50% of the population is women), that would be a crazy result. It implies that *all* women in the US use Botox cosmetically. Smell test fail.

However, the current number of 15M is 5% of the overall population. While it might seem a little high, it feels plausible that some single digit percentage of the population might use Botox cosmetically.

Putting it all together

As you go through a whole market sizing exercise, you'll essentially be repeating the steps above to work toward an overall estimate.

For the US Botox market, here is the step by step calculation one of our RocketBlocks Experts used to estimate the market. As you go through, pay special attention to the structured approach and the use of round numbers to simplify calculations. In addition, try to test yourself by periodically sanity checking a few numbers as well.

TypeDescriptionValue(s)
AssumptionPopulation of US300M
AssumptionCosmetic use is almost exclusively women50% women
AssumptionPopulation is evenly distributed between agesAges 0 to 80
AssumptionRelevant population is ages betweenAges 40 to 80
CalculationNumber of women in target market: 300M * 50% women * ((80 - 40) / 80) 75M
AssumptionOnly used by the top X% of earners20%
Segmentation
  • Never use Botox (%)
  • Try Botox occasionally (%)
  • Use Botox regularly
  • 90%
  • 5%
  • 5%
Assumption
  • Occasional users treatments per year
  • Regular users treatments per year
  • 0.5
  • 2
Calculation
  • Occasional, annual treatments: 75M women * 20% top earners * 5% users * 0.5 treatments / year
  • Regular, annual treatments: 75M women * 20% top earners * 5% users * 2 treatments / year
  • 375K
  • 1.5M
CalculationTotal annual cosmetic treatments for women: 1.5M + 375K 1.875M
AssumptionAverage cost of a treatment$200.00
CalculationSize of cosmetic market for women: 1.875M * $200$375M
AssumptionThere is some small percentage of cosmetic market which is men (%)5%
CalculationCosmetic Botox market for men and women: $375M / 95% of the marketRoughly 400M
CalculationTotal Botox market (cosmetic + therapeutic): $400M / 50% of market is cosmetic$800M

Thus, the final estimate is $800M.

source data here). Not bad!

Looking for more market sizing drills?

If you're looking for additional market sizing drills, RocketBlocks can help with that. Our market sizing drills each come with a detailed answer like we walked through above, as well follow-up questions to further test your knowledge. You can sign up for a free trial today and give them a try.