BU 111

Estimation

Copyright Sofy Caryannopoulos

 Learning Objectives
• Identify variables that might be estimated when determining the
impact of a solution or proposal
• Learn to break down problems using population, household,
individual or proxy
• Recognize where assumptions can be refined to improve accuracy
• Learn techniques for estimating values for revenues, profits and
market size
• Apply knowledge to some common estimation questions

Ref: Lab manual

Copyright Sofy Caryannopoulos

 Estimation brain teaser

How many years would it take you to move a mountain one kilometer if you have
only one shovel and wheelbarrow?

Step 1: How would you break the problem down?

What’s going to drive the amount of time it takes?

- # of trips x time it takes

Copyright Sofy Caryannopoulos

 Breaking it down visually

Time to move
mountain

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 Estimation brain teaser

ASSUMPTIONS & INFORMATION

Mountain is shaped like a cone; 200 metres high, 1 km wide

How far am I moving it – 1 kilometre
Wheelbarrow size: 1 m. x 1 m. x 1 m
I walk 6 km per hour
It takes me 13 min. to fill and 2 min. to empty the wheelbarrow

Additional assumption:

Might want to know how many hours per day you are working. 24 hours per day is
unrealistic assumption!

Working 8 hours per day – no days off

Answer is about 12,000 years

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 Applications & Process

● Market size and share

● Revenue potential/impact
● Profitability potential/impact

Process
-Clarify information and details
-Break down the problem and solve in pieces then aggregate
- Think: What factors correlate with what I’m estimating?
- Go top down whenever possible – create a framework
-What information would I like to have?
-Make defensible assumptions
-Identify assumption imperfections and refine (segment your numbers)
-Sense check your numbers
Protip: Find and build common knowledge so you have a starting point – observe
company revenues and profits of companies, behaviour of people

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 Common knowledge to have

▪ Canadian population 40 mil.

▪ Life expectancy 83 years; Median age 40.8 years
▪ People per household 2.5 Age Cohort size Age Cohort size

▪ Median household income $61,400

<15 16% 25-40 21%
15-19 6% 40-65 33%
▪ Smartphone penetration: 86%
20-25 7% >65 17%
▪ Online shopping 28.1 mil. people
▪ Urban: 81% ; Toronto, Montreal, Calgary, Ottawa, Edmonton, Vancouver
▪ See Demographic reading in lab manual for more statistics

▪ Protip: Markets are often segmented as a standard deviation – about 15-

20% are low-end; 60-65% average; 15-20% high end

Copyright Sofy Caryannopoulos

 Estimation tips and tricks

Think: Should I use population, household, individual or a different proxy

Proxy = biggest driver of estimate or easiest variable to observe

Guidelines on when to use each:

Insights Applications
Answer driven by pop’n in Market size/share, revenue,
Population area ie stores profitability, supply needed,
saturation, competition
calculate group
Individual or Market size/share, revenue,
consumables/demand ie
Household hoses
profitability

Company revenue/profitability,
Proxy: ie. stores, # of stores in an area;
market size , profitability, supply,
gas pumps Population/store
saturation of market

For individual and household questions:

▪ Could use a focus group of ten if you need to take a guess at probability or
percentage of population if you can’t otherwise figure it out
Other possible proxies: Could be number of units, could be a similar situation
in another industry or context
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 Estimation question

How many piano tuners are needed in Toronto?

What do I need to figure out? Demand for tuning

Think: What kind of a question is this? Household

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 Estimation exercise

How many people in class are wearing something pink

today?

Is this a population, household or individual question?

What common knowledge can I draw on?

What assumptions can I make or information do I want?
What refinements can I make to my assumptions?
What tools can I use?

Video example: https://www.youtube.com/watch?v=v5eKAmZuQzs

https://www.craftingcases.com/market-sizing-examples/

Copyright Sofy Caryannopoulos

 Stores in a geographic region

Why: Starting point for determining supply, saturation of

market, revenues for a store chain, market sizing (sometimes)

How: Population approach easiest

Number of locations in an area

Estimated population
OR
Population divided by residents per location

Example:
How many BMW dealerships in Canada?
Think: dealerships in Toronto: 4; Population: 3 million =
750,000
40 Sofy
Copyright million in Canada ➗ 750,000 ~ 53
Caryannopoulos
 Market sizing

▪ Refers to total addressable market (TAM) = 100% share

▪ Usually stated in revenues; units sometimes

Total Addressable Market

TAM
Entire market for your product

SAM Serviceable Available Market

Size of your segment (target)
SOM Serviceable Obtainable Market
Your share: how much of segment you can win

Ref: TAM, SAM, SOM. https://www.process.st/tam-sam-som/

Market sizing examples with walk-throughs: https://www.craftingcases.com/market-sizing-examples/

Copyright Sofy Caryannopoulos

 Market sizing approach

Usually easiest to start with individuals/households and break problem down

consider
replacement
frequency

Calculate size of the disposable diaper market

Are there any clarifications you want?

Think metric of final value
Think are the diaper users all the same?
Is there a particular group or type we want to focus on?
Are we looking at the world or at some specific geographic market?

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 Market size example

6 365
4%

38 mil
$0.20

Can we think of ways to refine our numbers?

Estimate:
$631 million

Actual:
$640 million

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 Market Sizing – Cell Phones

Canadians 40M
x % owning phones (86%) = 34.4M
/ replacement frequency (/2) = 17.2M
+ some own 2 phones (5%) + 34M x 5% / 2 = 0.85M

= (17.2 + 0.85) = 18.05M

X avg price ($900) $16.2B vs

actual over 17B

If you are asked to project size for next year, apply a growth
multiple ie 2%
Market size of cell phones next year would be $16.2B x 1.02
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 Lightbulbs sold in Canada annually

What kind of question is this? Household, population, individual?

Canadians
40M
Households (2.5 people per) = 16M homes
+ 16M X 1.1 (10% own 2 homes) = 17.6M homes
X # of lightbulbs/household:
# of rooms (9) x # lightbulbs (4) = 36

Total bulbs
= 633.6M
Replacement adjustment (/2 yrs) = 316.8M
Cost ($5)
= $1.584B
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 Revenues

Use average selling price or bundle into two or three groups – too tedious to
break down too much

Sometimes easier to start at the store or unit level and work up

Tip: Start by thinking about what drives revenue

When asked for projected revenues, need growth; find similar industry, life
stage and competition and use that as a proxy

Netflix sales in Canada

Starbucks revenue in Canada

Average revenue of a gas station

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 Starbucks revenues

To figure out store revenues, break it down further

What drives store revenues? Customers

Figure out customers

Break it down: Customers/hour
What hours? Does it change?
Busy times: 5 hours x 20 per hour x 3 barristas = 300
Slower times: 10 hours x 15 per hour = 150

Average order? $8 (could add food or buy for friends)

= 450 customers x $8 = $3,600 per day x 365 days = $1.3 mil.

How many stores? 1 per 15,000 in Canada = 2,400 stores

2,400 x $1.3 mil. = $3.5 bn
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 Profitability

Use the profit framework to organize your work

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 Profitability example

A running shoe manufacturer sells shoes for $100 per pair.

To produce each pair the company spends $10 in material
and $5 in labour. The company has $1 mil in operating
costs. If they sell 30,000 pairs per month how much is
their annual profit?

- $36 mil

$30 mil + 360,000

X
$6.4 mil
$5,4 mil

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 Defending your numbers

Be able to defend your assumptions – why do they make

sense?

Sensitize your major assumptions, i.e. show outcome if

assumption was over/under by 15%

Show that even if assumption was wildly off (or how wildly
off assumption would have to be), before implication of
answer changes

Show examples of others in the same position

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 Using guidelines

Research critical assumptions for the issue you before the

interview
-Average marketing spend of B2C to maintain market -10%
of revenues
-Replacement cost of an employee
-Financial impact of customer loyalty – costs 5x more to
attract a new customer; reduce churn 5%, increase profits
75%
-Assumed organic sales growth rates (in a growing market)

Copyright Sofy Caryannopoulos

 Questions to think about

1. Under what conditions would you use households

rather than individuals in your calculation? Identify
three products or services that you would calculate
with each proxy.
2. When would replacement frequency be a refinement
you should consider?
3. What are the various approaches you can use to
calculate market size?
4. How might you determine if there are too many stores
of a particular type in a given area?
5. Identify some refinements you might use to calculate
the demand for a food item, a clothing item, a
household item, a service, the number of stores in an
area, the profitability of a company
Copyright Sofy Caryannopoulos