In this post, you will learn how to answer estimation questions in a product management interview. If you haven’t already, please read my previous post on general product management interview preparation.
We will cover what is an estimation question, useful frameworks, types of estimation, interview examples, and helpful tips. Let’s get started.
What is an estimation question?
An estimation question is a fermi problem which can be solved with a simple back of the envelope calculation. It doesn’t need any complex math such as calculus or trigonometry. They are useful in making justified guesstimates on quantities, variance, or bounds.
A few examples of PM estimation questions include how big is the pet industry? How much energy is spent on street lights in US?
The ability to estimate using basic arithmetic comes handy when trying to estimate market opportunities, technology costs, and future projections for product ideas.
Frameworks
A useful framework for answering PM estimation question is Clarify, Approach, and Validate. Let’s examine each of these steps.
Clarify
Before even answering the question, try to understand the question. Clarify every noun that is ambiguous in the question and state your assumptions to the interviewer. For example, if the question is market size of Airbnb, clarify that market size is total number of users, and Airbnb is the company that provides a home sharing app.
Then list all the constraints to scope the problem down using the TLS methodology, where T is time, L is location, and S is segment. Time here could be annual or monthly, location could be entire world or just a specific country, and segment could be business or consumer.
Approach
The approach step includes the following sub steps:
Mathematical formula: High level mathematical equation to be used for computing the answer.
Breakdown: Break the formula down into multiple variables and compute them separately.
Substitution: Plug in numbers into the formula.
Calculate: Do the math to compute the final answer.
Validate
Once you have the final answer, sanity check your answer using a different mathematical approach or compare to known industry assumptions. If the answer is not in the same order of magnitude, then go back to your calculations, check the math, and confirm your answer.
Types of Estimation
There are many estimation questions, but in my experience they can be divided into two broad types.
Sizing
These are questions of the type market size of cars or storage cost of Google photos etc. The general approach for these questions is: Size (X) = Number of units (A) * Price per unit (B). If the question is annual revenue of cars, then an example approach would be: Market size (X) = US households that buy a car in a year (A) * Average car price (B).
If the question is about storage cost, then the approach would be: Number of users (A) * storage usage in GBs per year (B) * cost per GB (C).
Volume
These questions usually have the form: number of X in Y, for example, number of restaurants in a city. The general guideline is to use demand supply method, i.e. Volume (X) = Demand units (A) / Supply units (B). An example approach for the question: number of restaurants in a city would be; number of meals consumed at restaurants in a day (A) / number of meals one restaurant can serve in a day (B).
You could also solve this question, by using the area of the city, and estimating the number of restaurants that can fit in that area. You can use demand supply as the primary method and use the area method to sanity check your answer.
Example Interview Questions
Question 1 – Sizing: What is the market size of refrigeration industry?
Let’s apply our framework to this question, starting with clarify step.
Clarify
Understand and state your assumptions that market size here means total available revenue and refrigeration means an electrical appliance that keeps things cold. Now use the TLS method to clarify that time period is annual, location is US, and segment is homes. So now, the question becomes, annual revenue of home fridges within US homes.
Approach
Using the formula guideline, Market size (X) = Number of units (A) * Price per unit (B), the high level formula here is: Number of households that buy fridges in a year (A) * Average price per fridge (B).
Breaking it down further into components: A = US households * % with fridges * replacement rate, and B = Number of fridges per household * average fridge price.
Let’s substitute numbers now:
- US households = 100MM (~300MM population with 3 per household)
- % with fridges = 90% (assuming 10% live in hostels or households with no fridges)
- Replacement rate = 10% in a year (assuming people change fridges once in 10 years)
- Also not accounting for new households built every year
Now plugging in these numbers: A = 100 MM (US households) * 90% (% with fridges) * 10% (replacement rate) = 9MM (ignoring growth).
B = 1 (fridges per household) * $500 (average fridge price)
Final answer: Market Size (X) = A*B = $4.5B
Validate
In order to sanity check this answer, we can assume that top fridge companies LG, Whirlpool, etc should all combine to create a market in the billions. Another approach is dividing the revenue by US population: $4.5B/~300MM = $15 per person.
If this seems right to you, you can provide this as your final answer, otherwise you can go back and verify the assumptions and math.
Question 2 – Volume: How many kayaks do you need for your startup in Seattle?
Clarify
Understand and state your assumptions that Kayak here means single seater boat on a lake, and the startup here is a kayak rental in one location within Seattle. Now use the TLS method to clarify that time period is number of kayaks you need in a year, location is Seattle city, and segment is consumer.
Approach
Using the formula guideline, Volume (X) = Demand units (A) / Supply units (B), the high level formula here is: Volume (X) = No.of trips in a day (A) / no.of trips per kayak per day (B).
Breaking it down further into components: A = Seattle population * % Kayakers * market share * avg kayak trips per day per person, and B = Open hours * avg trip duration per kayak.
Let’s substitute numbers now:
- Seattle population = 600K
- % kayakers = 80% (excluding kids and elders) * 50% (people interested) * 50% (affordance and time) = 20%
- Market share = 5% (assuming heavy competition in this area)
- Average trips in a day = 2 days / ~300 operating days in a year (rounding for simplifying math)
Now plugging in these numbers: A = 600K (Seattle pop) * 20% (% kayakers) * 5% (market share) * 2/300 (average trip per day) = 40 trips
B = 10 hrs (open hours) * 1 hr (trip duration) = 10 trips per Kayak
Final answer: Volume (X) = A/B = 40/10 = 4 + 1 extra (in case of repairs) = 5 Kayaks
Validate
In order to sanity check this answer, we can assume that Kayak cost for startup: $1000 * 5 = $5000. Another approach is estimating annual revenue for startup: $25 per trip * 40 trips per day * 300 days a year = $300K. That seems ok to me, so I can conclude that 5 kayaks is my final answer.
Tips
- Clarify anything ambiguous: Underline any ambiguous nouns in the question and clearly state your assumptions.
- More than one solution: Come up with more than one way of solving the problem, you can use the second one for sanity check.
- Round numbers: Use rounded numbers to make the math easy.
- Keep units: Have units next to every number.
- Use symbols: Use symbols such as A, B, etc to keep track of components.
- Expand MM, B: Instead of using millions, use 000,000,000 to eyeball your calculations.
- Double check: Always sanity check and verify your math before finalizing your answer.
Conclusion
I hope this post was helpful to you to answer estimation questions with confidence. To recap, use CAV (clarify, approach, validate) framework, following the guidelines for sizing and volume based questions, and keeping in mind the useful tips above.
In the next post, I’ll go over success metrics questions, questions of the type: How do you measure success of Facebook. See ya later, please leave comments if you have any questions or suggestions.
