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3 просмотров11 страницIntro to Guestimate

Sep 30, 2017

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Intro to Guestimate

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3 просмотров11 страницIntro to Guestimate

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Article Series

Article on

By

Tejal Jadhav and Ashish Dugar

PG A

GUESSTIMATES/MARKET SIZING

BASICS

Imagine, you are at an interview and the interviewer asks you a question How many weddings

are performed each day in India? or you are asked how many petrol pumps are there in your

city or you are told to state the number of apple phone user in your college. You might wonder

what kind of questions are these? How can anyone have knowledge about it?

Well, there is nothing wrong with neither the question nor the interviewer. These questions are

called as Guestimates and called as market sizing if the question is related to market size.

1. First and foremost, there is no wrong or right answer to such kind of questions.

2. The goal is to make reasonable, logical assumptions and if you are wrong on your

assumptions, that is totally fine.

3. These kinds of questions are asked to test analytical ability of the candidate.

Yes, there are certain steps to be followed for solving these questions.

Suppose question given to you is, find out number of people from who go to gym on Saturday.

For getting clear idea, ask questions like, do we need to count people who go only on Saturday

or Saturday and some other day. You can also ask if a person goes to gym twice then how many

entries will be counted. Etc.

2. DECIDE APPROACH

Deciding approach is not a difficult task, you will surely come to know about correct approach

when you read the problem. But to have a clear structure, sticking to the approach is important.

CLARIFY THE

QUESTION

DECIDE

APPROACH

BREAK DOWN

THE PROBLEM

SOLVE EACH

PIECE

CONSOLIDATE

For these questions, rather than starting from the top with a high-level figure such as

population, the best approach is to start from the bottomsome low-level statistic, such as

Revenue per customer, and build your way up to the answer. For example, consider the

question pertaining to the monthly revenue of a hair salon. In this case, wed recommend you

work out the revenue for a week and then multiply that by four. You could start with an

assumption regarding the average price per client visit, and then estimate weekly volume by

assuming the number of chairs in the salon, the number of hours it is open per week, and the

average number of clients chair per hour.

Top-Down Questions:

Questions that involve starting with an entire population (in other words, the top level) and

then breaking it down until you arrive at an answer. For example, consider the question about

the number of schoolteachers in Chicago. A simple way to approach it would be to start with

the population of Chicago, then estimate what percentage of the population is of student

age, and then estimate the number of students per class. Using this, you would arrive at an

estimate of the number of school teachers, because at any given time there is (generally)

exactly one teacher per class.

3. BREAK DOWN THE PROBLEM

This is an important step as it helps in identifying factors deciding the market size or

guesstimate. Consider the question, find out number of people from who go to gym on

Saturday.

Once you break down the problem, you get rough map of your solution, now with help of

assumptions (percentage of people going to gym once or twice a week etc.) solve each piece.

For example,

5. CONSOLIDATE INTO FINAL RESULTS

Have a lot of pieces estimation and data to consolidate. Complete the calculation by

substituting numbers (example, population of Mumbai) & try to represent data in systematic

way.

GUESSTIMATES/MARKET SIZING

EXAMPLES

GUESSTIMATE CASE EXAMPLE #1

How many cups of coffee were consumed in the United States in the past week?

Start by clarifying the question, then identify the variables to apply to this problem.

Number of cups in the past week: This equals number of cups per day 7 (for 7 days

per week). Mention to the interviewer that your assumption treats each day equally,

although you would get points for mentioning that there are likely fewer cups consumed

on the weekend, as people are not in the office and in general might feel less of a need

to drink coffee.

Percent of the population that drinks coffee: this would be an educated guess.

Assuming 300 million people in the U.S., we could further assume that 20% are children

that (we hope) do not drink coffee. We could also guess that another 20% of the

population does not drink coffee at all (perhaps they prefer tea or other beverages, or

just water).

Number of cups per day: here our guess is that of the remaining 60% of people, half of

them drink 2 cups per day, a quarter of them drink 4 cups per day, and rest of the quarter

drink 1 cup per day. This averages out to 2 0.5 + 4 0.25 + 1 0.25 = 2.25 cups per

coffee drinker per day.

Therefore the calculation is:

o 60% 2.25 300,000,000 = 405 million cups each day

o 405 million cups 7 days per week = 2.84 billion cups per week (you could round

it to approximately 2.8 billion cups)

Note: the interviewer could then ask questions around how many cups are drunk at home or the

office versus bought from a store, or other similar variations. The interviewer might also ask

your thoughts on coffee trends and also how much revenue this would mean, etc.

What was the revenue for flat screen televisions sold in Australia in the past 12 months?

Your first thought might be, Why Australia? I am not applying for the Sydney Office of

McKinsey! Interestingly, more and more questions have a global component as

Consulting becomes more global in nature (for example, advising firms on entering or

performance in foreign markets, or working directly with foreign clients). While you will

not be expected to know Australias population, your estimate will say something about

your ability to think and your logic.

Start by clarifying the question, then identify the variables to apply to this problem.

Population of Australia: Approximately 23 million people. (Editors note: I once received

a Case Study question involving this figure and my estimate was far too high, but I still

did well on the case because my thought process was transparent and otherwise

accurate.)

Assume that the average household is 3 people. It is worth noting that families probably

have more than 3 people, but this is balanced out by people living alone, such as

students and young professionals. Here is a good example of rounding: you can say 8

million households (which is a little more than 23 million 3).

Assume households replace their televisions every 4 years. The interviewer might say

that seems reasonable or you should try a higher/lower number. You might also note

that you believe there was nothing special about last year in terms of television sales

no major product innovations, sluggish but growing economy, etc.

Assume an average of 1 flat screen television per household. Some households might

not have any, but others may have 2 or even 3.

Therefore, (8 million households) (1 TV per household) (4 years/purchase) = 2 million

televisions purchased in the past year.

Assume an average sale price of $600. Again, the interviewer might say that seems

reasonable or you should try a higher/lower number. He or she may even ask you to

break this down into groups, such as high-end flat screens and smaller flat screens

with different average prices. However, $600 seems like a reasonable average across

higher-end TVs, which might cost more than $1,000, and smaller flat screen TVs, which

can sell for $200 or even lower.

Therefore, 2 million $600 = $1.2 billion annual Revenue for television sales in

Australia.

To show your creativity and business thinking you could have also discussed the market

for resold used televisions and the Revenue that comes from that (this might reduce

your estimate of the market size by reducing the average sale price; if the interviewer

insists that the question should only include new televisions, then keep the average sale

price constant but reduce the number of purchasing households each year).

The interviewer might then ask you a follow-up question, such as discuss your thoughts

about trends in television sales, just to see how you think on the spot.

Start by clarifying the question. In this case you might want to confirm whether the

question is how many iPhones are in operation, or how many are being used at that this

current moment. (The interviewer would probably explain that he or she means in

operation.) Once the question is clarified, identify the variables to apply to this problem.

Population of China: Approximately 1.4 billion people.

There are several different approaches from this point; one approach is to make

assumptions around the number of people that can afford iPhones rather than

considering the number of households.

Based on very basic knowledge of China, even though the country is experiencing

extraordinary economic growth, you might assume that the majority of the population is

still very low-income and cannot afford an iPhone. Thus, you might estimate that 20% of

the population could afford an iPhone.

Therefore, the total potential market size is 20% 1.4 billion = 280 million iPhones.

What percent of this total market size is penetrated? There are many competing

products that are cheaper, but perhaps youve read that the Chinese are very brand-

focused and that Apple has an extremely trusted and desirable brand in China. Therefore

you estimate that 20% of this segment is currently using an iPhone.

Using these estimates, 20% 280 million = 56 million iPhones are currently being used

in China.

A follow-up question might be something along the lines of Are there are more iPhones

in operation in the U.S. or in China? Well leave you to try and figure that one out

yourself.

Another follow-up question might be how you would check the accuracy of your

assumptions and response (in this case, perhaps by reviewing the Apple annual report or

telecom industry reports).

GUESSTIMATE EXAMPLE #4

Start by clarifying the question, then identify the variables to apply to this problem.

Population of France: Approximately 60 million people.

Assume an average household is 3 people. This leads to 20 million households (60

million 3).

Assume 20% of households have no car, as they are in urban cities such as Paris or

Lyon.

Of the remaining households, assume an average of 1.5 cars per household.

Therefore, there are approximately 80% 1.5 20 million households = 24 million cars in

France.

Assuming a replacement rate of every 6 years, there will be (24 6) = 4 million cars

replaced per year.

Of these 4 million, how many are Peugeot brand? You could suggest that the French are

quite patriotic, so perhaps 20% of the 4 million cars purchased each year are Peugeot.

Therefore, you estimate that (20 4 million) = 800,000 Peugeot cars are purchased in

France per year.

Of the 800,000, assume 70% are new cars and 30% are used cars.

Assume that the average price is $30,000 for new cars, and used is $10,000 for used

cars (this is assuming similar pricing, currency-adjusted, to that of U.S. cars).

Using these assumptions, (560,000 $30,000) + (240,000 $10,000) = $16.8 Billion +

$2.4 Billion = $19.2 Billion.

Therefore, total Revenue of Peugeot cars sold in France per year is approximately $20

Billion.

What is Air Frances weekly revenue for the Paris-to-New York leg?

What volume of beer is sold at an average LA Lakers basketball game?

What is the monthly revenue of your hair salon?

How many school teachers are there in Chicago?

What is the monthly profit of your favorite restaurant?

How many flat screen televisions have been sold in Australia in the past 12 months?

How many iPhones are currently being used in China?

Are there more iPhones in operation in the U.S. or in China?

How many trees are there in New York City?

How many avocados are used to make guacamole per day in Mexico?

What is the Revenue for the smartphone market in India?

1. Numbers that you assume should bring ease in calculation, thus use numbers like 2000,

40000, 100 etc.

2. Clarify the question even if its clear to you

3. Final value should hold sanctity

Example, if population of a colony is 1000 then it cannot have 1200 android phone user

4. Present data in structured way with help of neat diagrams

5. Keep some numbers on fingertips (example: population of India, population of Mumbai

etc.)

FEW NUMBERS WHICH MIGHT HELP SOLVE A

GUESSTIMATE QUESTION

Below are few numbers which might be helpful in doing the calculations or going through the

solve step of solving a guesstimate question. (Approximate values for easy calculation)

Population

Population of India 1.5 billion (exact no is 1.35 billion according to 2017 census data)

Sex ratio Female : Male :: 9.5 : 10 (Actual 945 females per 1000 males)

5%

15%

0 14 years

35%

15 19 years

20 44 years

45 65 years

10%

Income Status wise breakup

>10,00,000

Salary Range of Population

5,00,000 to 10,00,000

2,50,000 to 5,00,000

1,00,000 to 2,50,000

<1,00,000

0 10 20 30 40 50 60

Population in Crores

States Population

UP 20 crores

Maharashtra / Bihar / West Bengal 10 crores

MP / Tamil Nadu / Rajasthan 7 crores

Karnataka / Gujarat 6 crores

Andhra Pradesh 5 crores

Telangana / Kerela / Jharkhand /

3 crores

Assam

Punjab /Chhatisgarh / Haryana 2 crores

J&k , Uttarakhand 1 crores

All other sates < 1 crores

City Category wise population breakup

Percentage

Population of People of total

Category residing Population

Metro >50 lakh 10%

Tier 1 >10 lakh 5%

Tier 2 >5,00,000 5%

Tier 3 <5,00,000 15%

Rural 65%

Automobile

Type Number

Buses 2 million

Cars 30 million

Two Wheelers 150 million

Note: The process which is described above in the article is one of the methods of handling

guesstimate as we have understood from various online sources. The data provided are an

approximate value of the parameters as the main aim of the guesstimate article is to check the

thought process and accuracy of the numbers.

SO NOW

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