Interview Math LEWIS C. LINALSO BY LEWIS C. LIN Case Interview Questions for Tec Companies Decode and Conquer Five Minutes to a Better Salary PM Interview Questions Rise Above the Noise Secrets of the Product Manager InterviewSome mathematician...said that true pleasure lies not in the discovery of truth, but isthe search for it Ly Toistoy Copyright © 2017 by Lewis C. Lin. All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any electronic or mechanical means including information storage and retrieval systems without the prior written permission from the publisher. Published by Impact Interview, 677 120" Ave NE, Suite 2A-241, Bellevue, WA 98105, Several fictitious examples have been used in this book; these examples involve names of real people, places and ‘organizations, Any slights of people, places, or organizations are unintentional ‘The author and publisher have made every effort to ensure the accuracy and completeness of information contained in this book. However, we assume no responsibility for errors, inaccuracies, omissions, or any inconsistency herein. Corporations, organizations and educational institutions: bulk quantity pricing is available. For information, contact lewis@impactinterview.com, FIRST EDITION / Sixth Printing Lin, Lewis C. Interview Math: Over 50 Problems and Solutions for Quant Case Interview Questions / Lewis C. Lin,Table of Contents INTRODUCTION... CHAPTER 1 THE QUANTITATIVE INTERVIEW .... Introduction.. 9 CHAPTER 2 ABBREVIATIONS, TERMS, AND EQUATIONS ..11 Abbreviations in the Book. i ‘Terms, Concepts, and Equations old CHAPTER 3 ASSUMPTIONS osu Introduction. Practice Questions BMW Dealerships. Airports CHAPTER 4 ESTIMATION... Introduction. Practice Questions, Market Sizin ‘Chinese Diaper Market. ‘Women’s Rain Boot Market : ‘i . et US. Toothbrush Market... “ " eae US. Christmas Tree Market. New York City Haircut Market. US. Dress Sock Market. Smartphone Case Market Lipstick Market ss Cars in Los Angeles TV Ads. Practice Questions, Revenue Estimation, Starbucks’ Sales ee a aie nen A Suubway's Sales 7 56 Disneyland’s Ticket Sales senses : a . ron NBL Ticket Sales nso se F 60 Pillow Pet Sales : ose — vinaesen6Answer: Pillow Pet Sales 6 ‘Netix Subscription Sales 64 Answer: Netflix Subscription Sales, 65 Answer: Target Store Sales . . 7 Football Video Game 68 CHAPTER 5 PROFITABILITY. erie Introduction a Practice Questions... 7 Running Shoes Profits. ecni 7 ce Light Bulb Profits 76 Garden Hose Profits. 78 ‘Textbook Profits. .80 Denim Profit... 82 Packing Peanut Profits ot Hat Profits Pillowcase Profits... ‘Water Bottle Profits. ‘Towel Profits. CHAPTER 6 BREAKEVEN. Introduction Practice Questions. Running Shoes Breakeven. Light Bulbs Breakeven... Garden Hoses Breakeven. Textbooks Breakeven Denim Breakeven.... Packing Peanuts Breakeven... Hats Breakeven... Pillowcases Breakeven sn. ‘Water Bottles Breakeven, ‘Towel Breakeven Domino's Pizza 1. Domino's Pizza II CHAPTER 7 PRICE ELASTICITY Introduction. Practice Questions,Google Nexts Phone an 126 Star Wars 7 Ticket Price 128 Marlboro Price I 130 Marlboro Price I... 132 Starbucks Coffee Latte 135 JetBlue 138 ‘Sam Adams Beer Prices i ret CHAPTER 8 LIFETIME VALUE.. 143 Introduction.. 143 Practice Questions ... Starbucks’ Lifetime Value. 145 AT&T New iPhone Promotion. 3 jsassetet cnn swe d? American Express | 149 ‘American Express I. v2 Crest Toothpaste. 155 New York Times Website CHAPTER 9 APPENDIX... ‘Common Fractions, Percents, and Decimals, Rule of 72. ‘Additional Readings.. WHAT'S NEXT.. ACKNOWLEDGMENTS... 163Introduction If you are reading this book, these questions probably sound familiar © How many TV ads are shown in the US each day? * Estimate annual sales for Starbucks’ retail stores in the United States. * running shoe manufacturer sells shoes for $100 a pair. To produce each pair, the company spends $10 in materials and $5 in labor, They have $1 million dollars in monthly operating costs. If they sell 30,000 pairs a month, what is their monthly profit? Yes, it is those dreaded quantitative case interview questions, I call them “interview math” questions. You will find this category of questions at consulting, finance, and programming job interviews. And given our increasingly data-driven world, you will also find interview math questions at the most unlikely of places, such as marketing, operations and support job interviews, After hearing a dreaded interview math question, the following thoughts might be shivering their way down your spine: * Isthis question for real? © What are they looking for? © How dol start? © Did Iget the right answer? If you are looking for answers, you have found the right place, Interview Math will tell you what the interviewer is looking for and how to handle these questions. And best of all, you will have over 50 practice problems, along with answers to every single one of them. If you successfully complete every single practice problem in the book, you will be well on your way in handling these questions with aplomb and ease. How to Get the Most Out of this Book Many of you will appreciate that Interview Math has sample answers to quantitative interview questions. You will not find these answers anywhere else. However, do not get tempted into reading the answers as if you were reading a novell Instead, when you reach the practice questions I recommend that you: * Try solving the question(s) on your own * Then compare your response with the sample answer By doing so, you will get comfortable answering questions that most candidates find difficult. You will also absorb the concepts more deeply. And you will create an efficient feedback learning loop where you will deduce where your response came up short and where it surpassed the sample answer.Find Practice Partners Interview Math exercises are intended for self-study. Do note that interviewing is not a one-person activity and practicing with others will: «Give youa fresh perspective «Provide moral support © Keep you accountable ‘To make it easy to connect with others who are preparing for quant case interview questions and interviews in general, I've created a special Slack community for all of you, To get an invitation, enter the following in your Internet browser: bit.!y/InterviewPartner and follow the instructions to find an interview partner. Here's what people have said about our interview practice partner community: “Thanks for starting this community. It's pretty awesome.” ~ A.P, “Hey Lewis, you already know this, but you've built something amazing here. I've done a few practice interviews now and most folks have been welcoming and really helpful, You should be proud © Congrats.” -SG “Hey Lewis, awesome group you got going here! A few of us loved your presentation at Berkeley Haas this past weekend and will be using your resources to get « few study groups together to work on cases. Looking {forward to interacting with everyone here.” ~ 1.2. One More Thing 1 am always interested in hearing from readers, To send a note, ask a question or report typos just email lewisq@imy jerview. Lewis C. Lin June 2017Chapter 1 The Quantitative Interview Introduction What is the quantitative interview? ‘The quantitative case interview, or interview math for short, is an interview question which tests a candidate's mathematical and logical problem solving capabilities. Most candidates are more comfortable with traditional interview questions such as “Tell me about yourself,” “Why do you want to join our company” and “Tell me a time a when you disagreed with a co-worker.” But interview math problems: almost all candidates find these very difficult to solve. What are some examples of quant interviews? Interview math can vary in their subject matter and difficulty. However, the most common interview math questions include market sizing, revenue estimate and lifetime value analyses. I have included some sample questions below: Category Example Market Estimate the total industry wide sales of lipstick in the U.S, sizing Revenue Estimate annual sales for Starbucks’ retail stores in the United States. estimate Breakeven A running shoe manufacturer sells shoes for $100 a pair. To produce each pair, the company spends $10 in materials and $5 in labor. They have $1 million dollars in monthly operating costs. If they sell 30,000 pairs a month, what is their monthly profit? Price ‘The price of one-way ticket from Seattle to New York is $400. Should JetBlue raise the price to elasticity $4508 Lifetime ‘What is the customer lifetime value of an AMEX card holder over the next three years? value What companies and roles can | expect the quantitative interview? In the past, this kind of interview questions were reserved for folks in hard, quantitative disciplines like financial analysts and software engineers. However, I am now seeing these interview questions for jobs not known to be quantitative-heavy such as ‘marketing, general management, and customer support. Here is a list of representative companies and functions where interview math questions have been asked during the job interview process: Job Function Sample companies ‘Management Consultant McKinsey, Bain, Boston Consulting Group, Deloitte General Management Capital One, Taser Marketing, General Mills, Google, Hershey, Zoosk Software engineering Goldman Sachs,Financial Analyst American Airlines, Best Buy, JetBlue Operations and support Google, Yahoo Vendor relations Amazon, Google Why do interviewers ask quantitative interview questions? Interview math tests your ability to: Solve problems. Today's business world has all sorts of new and ambiguous problems. Asa professional, you will be tasked to solve problems that you may not have encountered in the past Influence. These days, work gets done in teams. To get all the team members marching to the same beat, a successful team member convinces others with logical, objective arguments backed by numbers. Decision-making. The business world moves at a rapid pace, which requies individuals to take action. Few can make decisions based on gut instinct like Steve Jobs. For the rest of us, we rely on data for decision-making. Numerical dexterity. Surrounded by computers, we are accustomed to doing math with calculators and 1g numbers by hand. Interview math spreadsheets. As a result, we do not have as much practice calcul tests your comfort when asked to manually manipulate numbers, Poise under pressure. Good team members and leaders are poised under pressure, Poised individuals communicate, convince and lead teams with a communication approach that is balanced, not emotional. More often than not, that balanced communication approach is based on a strategy of sound logic and hard numbers, What does the interviewer look for in an ideal response? [An ideal interview math answer has a few components: 10 Plan of action. Does the candidate have a clear plan of action when solving these problems? Communication skills. Is the candidate’s plan of action easy to follow? Numerical dexterity. Does the can; Numerical interpretation. Can the candidate use the calculations to make conclusions, and if needed, late calculate numbers confidently, quickly, and accurately? decisions?Chapter 2 Abbreviations, Terms, and Equations Abbreviations in the Book ‘This book will deal with large numbers in the thousands, millions, and billions. To save space, I will use the following abbreviations: ¢ K= thousands 2M millions © B=billions For instance, 10K refers to 10,000. 10M is equivalent to 10,000,000, and 108 is equivalent to 10,000,000,000. Iwill also use these shorthand abbreviations: © Q= quantity Also, I will refer to Q) as the initial quantity and Py as the initial price. Terms, Concepts, and Equations Breakeven Analysis Breakeven analysis determines the point where incoming revenue equals the outgoing costs. The breakeven ‘equation is as follows: Total Fixed Costs Breakeven = ——— ou ed Cones __ sear" = Contribution Margin Per Unit Capital Expenditures Refers to a business expense intended to create a future business benefit. Also known as capital expense or CAPEX, CAPEX is contrasted with operational expenditures, which are ongoing costs to run a business or product. Churn Rate ‘The annual percentage rate at which existing customers stop having a relationship with a company. For example, if a mobile telecommunications operator loses 10% of its customers to a competitor each year, their churn rate is 10%. Contribution Margin ($) ‘This is the product's selling price minus its variable costs, In equation form, this is represented as follows: Contribution ($) = Price Variable Cost uke Contribution margin is different from gross margin, which includes allocated overhead, Contribution Margin (%) This is contribution margin represented asa percentage. In equation form, this is defined as: Contribution Margin ($) Contribution Margin (%) Wise Costs Costs refers to the cost of running a business, defined in two components: fixed and variable costs. In equation form, total cost is defined as follows: Costs = Fixed Costs + Variable Costs Cost of Goods Sold This is the cost of producing goods sold by a company. It could include cost of materials and labor to produce the good. Cost of goods sold can also include allocated overhead. Customer Lifetime ‘This is the duration for which a customer has a relationship with an employee, where the company presumably generates revenue from that customer relationship. Customer lifetime can be calculated using the following equation: 1 Customer lifetime = —————____— Customer churn rate Examples: «If monthly customer churn rate is 5%, then customer lifetime is 1/59% = 20 months. .67 years. ‘¢ Ifannual customer churn rate is 15%, then customer lifetime is 1/15% = Customer Lifetime Value ‘Total profit a company generates from a single customer’ lifetime. The equation for calculating lifetime value is as follows: Lifetime value Iverage customer contribution margin (S) per year * Customer lifetime Examples: ‘© Ifa customer’s average contribution margin ($) is $100 annually and customer lifetime = 5 years, then lifetime value = $500. ‘+ Ifan average customer purchase is $100 annually and the contribution margin is 20%, then the average customer contribution is $20 annually. If the churn rate is 109%, then the average customer lifetime is 10 years. The lifetime value is then $20 * 10, or $200. Here's another way to calculate customer lifetime value: 12Retention Rate ime value = Average customer contributton margin ($) » ———_wetention Rate _ ne et gin ($) 1 + Discount Rate — Retention Rate ‘This version factors in the time value of money by using a discount rate. Most interviewers will not expect you to calculate lifetime value with a discount rate since itis time consuming. Depreciation When a capital asset has been consumed or expired, the capital’s asset's diminished value is considered an expense, Fixed Costs Fixed costs are costs that does not change with the quantity of goods or services produced. Examples include: ‘© Some utilities, such as telephone and Internet Labor, such as manager's salaries or janitorial wages, which do not increase with the production of additional goods + Advertising and marketing © Insurance © Interest © Rent ‘© Depreciation Gross Profit ($) This is a company’s remaining profit after selling a product and subtracting the cost associated with production and sale. Gross Profit ($) = Revenue — Cost of Goods Sold Gross profit is different from contribution margin. Gross profit includes allocated overhead while contribution margin does not. Gross Profit Margin (%) This is gross profit represented as a percentage. In equation form, this is defined as: Gross Profit ($) Gross Profit Margin (%) = Gross profit (%) is also known as “gross margin” or “gross profit margin.” Marginal Cost ‘The added cost of producing one extra unit ofa product. Market Penetration Number of current customers relative to total potential customers. In equation form: Current customers Market penetration = =——— OTS _ Total potential customersFor example, if there are 320M people in the United States, and 300M people have televisions, then the penetration rate is approximately 94%. Market Share A product's share of all sales in that product category. For example, Coca-Cola's market share of non-alcoholic beverages has been roughly 40% in the last ten years. Mixed Costs Costs that have a fixed and variable cost component. For example, electricity costs vary with the amount of goods produced in aluminum and ceramics. Net Profit ($) Net profit is calculated by subtracting all costs from revenue. Costs include cost of sales, overhead, taxes, and depreciation. In equation form, net profit is formally defined as follows: Net Profit ($) = Gross Profit — Depreciation — Amortization ~ Other Expenses ~ Interest — Tax ‘The shorthand equation for net profit can also be defined as: Net Profit ($) = Sales revenue — Total costs Also known as net income or the bottom line. Net Profit (%) ‘This is net profit (S) represented as a percentage. The equation is defined as follows: Net Profit ($) Net Profit Margin (%) = Also known as profit margin or net profit margin. Operating Expenditures Refers to the ongoing cost of running a product or business. This could include fixed and variable costs. Also known as operating expense or OPEX, OPEX is contrasted with capital expenditures, which is a business tended to create a future benefit. expense Operating Income Operating income is defined as follows: Operating income = Revenue — operating expense Operating Margin Operating margin is the ratio of operating income over total revenues. In equation form: Operating income Total revenue Operating margin 4Overhead Refers to ongoing expenses of operating a business, Examples could include fixed costs such as rent, gas, and electricity. Price Elasticity Price elasticity is a measure of how demand or supply changes when price changes. I will discuss price elasticity in more detail later on in the book. Profit Profit is the business’ gain after subtracting its costs from revenue. Its represented in equation form as follows: Profit = Revenue ~ Costs Alternatively, profit can be calculated as follows: Profit = Revenue * Margin % Margin is a ratio that indicates how much revenue is actually profit. For example, Starbucks has a roughly 80% margin. That is, for every $5 latte they sell, 80% of that $5 is pure profit. The $1 that is not profit goes towards producing the good, whether it is the coffee beans, water, coffee cup, or labor to produce the latte, ‘To be more specific, there are two types of profit: Gross Profit = Revenue * Gross Margin % Net Profit = Revenue » Net Margin % Retention Rate This is a measure of current customers Kept at the end of a period relative to customers available at the beginning of the period, In equation form: Customers kept at the end of a period tent 7 Retentlon'vate = + roT customers available ar the beginning of tha period Retention rate can also be calculated as follows: Retention rate Churn rate Revenue Revenue is sales generated for a particular product. For interview math questions, it is defined as: Revenue = Price + Quantity Price refers to a product’s price, and quantity refers to quantity sold for that product, Return on Investment Also known as ROI, return on investment measures benefit a business receives when making an investment. In equation form: 15Gain from an investment Cost of investment RO! vf Cost of Investment ROL is typically represented as a percentage. Return on Sales Return on sales, also known as ROS, is profit as a percentage of revenue. Similar to ROT, ROS is another profitability metric. Net income 80s Sales revenue Time Value of Money ‘The idea that money in the present is worth more than money in the future. For example, money in the present can be deposited into a savings account now, where it can earn interest, whereas money in the future cannot. Variable Cost Variable costs is a cost that does change with the quantity of goods and services produced. Examples include: © Materials © Direct Labor * Sales Commission © Packaging © Shipping © Depreciation, such as machine depreciation, based on machine hours used to produce each good or service 16Chapter 3 Assumptions Introduction What are assumptions, and why Assumptions refer to a piece of information that you accept as true, without proof, it important for interview math questions? An interview math question may ask you to estimate various values including revenue, customer demand, and production capacity. Your response to an estimation question will be more credible when you derive your final answer from intermediate building blocks. For example, when estimating demand for real Christmas trees, your final answer may depend on the following: ‘© Number of people that celebrate Christmas * Breakdown of real vs. artificial Christmas tree purchases During the interview, you may or may not have knowledge about Christmas tree purchases. At that point, you can try asking the interviewer. However, the interviewer may not have those values available, or he may choose ot to disclose them to you. And unfortunately, most interviewers do not want you to Google search an answer on your smartphone. Isn't it ridiculous if | cannot ask or research the assumptions? jon makers often make decisions or An estimation question is meant to simulate the real world, That is, d Tecommendations based on imperfect or missing information. Faced with imperfect information, most professionals do not quit. Instead, they estimate imperfect information, Based on their best estimates, professionals will take action accordingly. Part of estimating well is having sound judgment to propose reasonable assumptions. I have typically found that those who are well read and intellectually curious are most likely to propose reasonable assumptions. Going into the interview, it helps to read extensively, especially in the industry you are interviewing for. How do! come up with assumptions? ‘There are three main ways: 1. Research ical assumptions before the interview 2. Ask the interviewer 3. Come up with your own Research critical assumptions before the interview The best way to come up with assumptions is researching the assumptions you need before the interview. For example, for most management consulting interviews, knowing population and life expectancy numbers for your home country would be helpful. In this book, you will find default assumptions for my home country, the United States.Ifyou are interviewing for a more specific role or industry, research the role or industry-specific stats before the interview. For instance, if you are interviewing for a digital marketing role, it would be helpful to know the following: © CPMs (CPM = cost per thousand ad impressions) © Pes (c t per click) st per acquisition) © Click through rates © Conversion rates Later on in the chapter, I recommend a list of common assumptions to memorize before your quantitative interview. Ask the interviewer {A job interview is a dialogue, not a one-way conversation. Keeping this in mind, as a candidate, you have the liberty to ask the interviewer for a particular assumption. Interviewers from particular companies, such as ‘management consulting firms, expect candidates to ask for assumptions, and they are often ready to answer your question or provide a hint. Interviewers from other companies may not expect you to ask, and if you try, they ‘may not answer. Instead, they expect you to come up with your own assumption. Either way, it does not hurt to ask. Even ifthe interviewer rejected your request, you would have had to provide your own assumption anyway. Come up with your own In most situations, coming up with your own assumptions is the default scenario. Later on in this section, I will provide tips on coming up with credible and convincing assumptions. For assumptions or calculations, can | round numbers up or down? With estimation questions, interviewers expect you to do your calculations by hand. No calculators or computers. When calculating numbers by hand, rounding numbers up or down makes it far easier. However, be judicious in how you round numbers. Rounding the number of people in the United States from 319M to 320M is sensible, However, rounding 142M to 100M could be perceived as being sloppy and inattentive to detail. 18Common assumptions to know and memorize Here are some common assumptions that would be helpful to know and memorize before the interview. Population: United States United States New York City Los Angeles Chicago San Francisco Seattle 319M 84M 39M 27M 806K 687K Population: Outside the United States World Europe Asia South America Africa China India Japan UK 7AB 739M 44B 423M 1.2B 14B 13B 126M 65M Other Useful Assumptions for the United States Life Expectancy People per Household ‘Median Household Income GDP GDP Growth Rate Corporate Tax Rate Smartphone Penetration Percent with Bachelor's Degree Percent Married Adults Percent Under the Age of 18 Percent Over the Age of 65 80 years 25 people $53K $168 T 2% 35% 70% 30% 52% 23% 13% 19Advice on coming up with your own assumptions Here are tips on how to come up with assumptions for market share, stores in a geographic region, and pricing. Market share or adoption When estimating adoption or market share for a particular store, product or service, my favorite method is using what I call the Focus Group of 10. Here is how it works: 1. Determine the assumption you need. For example, you need to know the percent of Americans that drive a Ford, Consider that assumption with a focus group of 10 friends. Among ten of my closest friends, only one person drives a Ford. 3. Adjust accordingly. Most of my friends live in the Pacific Time zone. I believe Americans living closer to Detroit, where Fords are made, are more likely to drive a Ford. To compensate for my biased sample, 1 will adjust my 10% estimate to 15%. Here is another example using the Focus Group of 10 method. From personal experience, out of my 10 friends, 6 of them have iPhones. However, most of us are in the tech industry, so lam guessing actual iPhone market share is lower, perhaps closer to 45%. Stores in a geographic region If you need an assumption for the number of stores in a geographic region, I would recommend the following: 1. Clarify the needed assumption. For example, we need the number of Starbucks stores in the United States, 2. Find a ratio of residents per store, Fo! people in New York City and 300 Starbucks stores. Divide 8.5M people by 300 stores to get our desired 8,300 people per store, 3. Calculate the number of stores for the geographic region. Continuing with the example, the United States region has approximately 320M people. Divide that number by 28,300 per store to get the desired tance, based on prior research, there are approximately 8.5M rati value: 11,258 Starbucks stores in the United States. 4. Adjust accordingly. For example, our calculation is based on a store ratio for New York City, where customer demand for Starbucks coffee is higher and the customers’ willingness to wait is lower. It is reasonable that other parts of the United States would differ from New York City. Thus, we can adjust our estimate downward from 11,258 to approximately 8,000 stores. After searching the Internet, we find that the actual number of Starbucks stores in 2014 is 7,303. Pricing ‘When estimating revenue, candidates often need to know and use a product's price. However, products may sell for different prices, For example, Starbucks has over 60 items on their menu. It would be tedious to utilize the ‘exact price for every single one of those 60 items, Just use the average selling price instead. For example, I would assume Starbucks’ average sales price to be $6. I believe this is realistic given that: Starbucks’ coffees can range from $1.75 to $4.95 20* Customers may also add a non-coffee item, such as a breakfast sandwich, to their purchase * Customers often purchase multiple items for friends, family, and co-workers Practice Questions 1, How many BMW dealerships are in the United States? 2. How many airports are in the United States? aBMW Dealerships How many BMW dealerships are in the United States? Show your work below. Make any assumptions as necessary. Answer on the next page. 2Answer: BMW Dealerships Goal Number of BMW dealerships in the United States Knowledge We Know Prior to the Interview ‘Approximately 320M people in the United States ‘* Approximately 850K people in San Francisco (SF) One BMW dealership in SE Critical Ratio People per BMW dealership Calculations 850K people in SF People per BMW dealership = TBMW Dealership SF 320M people W Dealershi ISA = ON people _ EMVE Denleralips tothe USA ™ rere peonla ner anlar 376 dealerships in the USA Adjustments BMW dealerships are more popular in San Francisco, whose wealthy residents like to drive luxurious, performance vehicles. The rest of the United States do not share the same characteristics, so let us discount the number by 20% from 376 to 301. Actual number ‘There were 339 BMW dealerships in the United States in 2014. 23Airports How many airports are in the United States? Show your work below, Make any assumptions as necessary. Answer on the next page 24Answer: Airports Goal Number of airports in the United States, Knowledge We Know Prior to the Interview «Approximately 320M people in the United States ‘Approximately 83M people in New York City (NYC) 'YC area: John F, Kennedy, LaGuardia and Newark International Airports © Three airports in the Critical Ratio People per airport Calculations 8.3 M people in NYC Bairportsinnyc 78M People per airport 320M people ZEW people per airport ~ 114 airports in the USA Airports in the USA Adjustments Compared to airports in NYC, airports in the rest of the United States are much smaller. For example, JFK airport in NYC has 128 gates. Many airports in the United States that have less than ten gates. Let us assume the average US airport has 10 gates. Thus, JFK airport is about 12.8 times bigger than the average airport. As a result, let us adjust our number by 12.8 times. Multiplying 114 airports by 12.8, the result is 1,459 airports. Actual number According to the CIA World Factbook, there were 15,079 airports in the United States in 2014. Possible reasons why this estimate is much larger than our estimate: ‘© CIA defines airport as a location with a recognizable runway, paved or unpaved, from the air. * Airports that meet this definition include military bases, airparks, and glider ports, None of these were factored into our estimation, 25Chapter 4 Estimation Introduction What are estimation questions? Estimation questions test your ability to approximate a value, Here are some examples one might encounter in an interview: ‘© What is the market size of disposable diapers in China? ‘© Estimate annual sales for Starbucks’ retail stores in the United States ‘© Estimate summer sales of Disneyland tickets in the United States. Some candidates refer to estimation questions by its catchier portmanteau, guesstimates. Whatare the different types of estimation questions? There are different types of estimation questions; market sizing and revenue estimations are two of the most common, What is a market sizing question? In the phrase “market sizing questions,” “market size” refers to a total addressable market. That is, what would be a company’s revenue if it had 100% market share of a category? For example, an interviewer may ask you the following market sizing estimation question: “What is the market size of disposable diapers in China?” “Market size is usually stated in terms of revenue, but some interviewers may define it in terms of units sold. To minimize miscommunication, clarify with the interviewer. Examples of market sizing questions include: © What is the market size of women’s rain boots in Seattle? ¢ What is the market size of toothbrushes in the United States? ‘© What is the market size of real Christmas trees in the United States? What is a revenue estimation question? For revenue estimations, a candidate is expected to calculate company, product, or service revenues. Examples of revenue estimation questions include: © Estimate annual sales for Subway restaurants in the United States. ‘© Estimate annual sales of Target’s brick-and-mortar stores in the United States ‘© Estimate annual sales of Netflix online streaming subscriptions in the United States. Why do interviewers ask these questions? Interviewers use estimation questions to evaluate a candidate's 26«Problem solving skills. Can a candidate take an unfamiliar problem and develop a plan to solve it confidently? ¢ Communication skills. Can the candidate clearly communicate his or her action plan to the interviewer? Is it easy-to-follow? Or does the interviewer have to ask an excessive number of clarifying questions to unravel the candidate’s thoughts? + Analytical dexterity. Can the candidate confidently calculate numbers in real-time? Or is the candidate hesitant? Does the candidate rely on using a calculator or computer to crunch numbers? Or does the candidate needlessly round up numbers to oversimplify calculations? ‘+ Judgment. Does the candidate choose reasonable assumptions, bac ed by logical thinking? Or is the candidate too casual and sloppy? Some may deride estimation skill that helps professionals do their jobs. For example, if you are store keeper, your responsibilities include figuring out how much inventory to order. If you are an equity analyst, you may estimate a firm's future ierview questions as not having real-world applicability. However, estimation is a enterprise value. Estimation can also help with decision-making, Here is an example: let us say we are evaluating a business decision; we want to open a new McDonald's in our city. To breakeven, we need to generate $500,000 in sales. ‘There are several McDonalds’ stores already, which means we are not going to get many customers. Given this constraint, let us say for the sake of argument, we deduced that each visitor needs to spend $150 to breakeven. Yikes! We just identified a flaw in the investment thesis. A typical McDonald’s customer spends $8; getting customers to spend $150 per visit is a big stretch. ‘To summarize, the estimation example showed how ‘our calculations identified a faulty sales per visitor assumption. What are they looking for in an ideal response? Here is what interviewers would consider as a top notch answer to an estimation question: * Logical plan of action that is easily understood. Interviewers want to feel confident (and you should feel confident too) that you have a clear plan when solving an ambiguous estimation problem. Good candidates communicate a plan that not only gets them to the right answer but also easy for the listener to follow along. ‘* Communication skills. Interviewers do not just want to hear the answer. They also want to hear the thinking too. So candidates who silently solve a problem on their own and resurface in five minutes will not do well. Communicating one’s thoughts is critical to sharing knowledge and gaining buy-in to one’s approach. ‘+ Choose reasonable assumptions with clear explanations. Interviewers would like you to use reasonable assumptions. Silly assumptions such as “there are 100 billion people in the world” show that a candidate is out-of-touch, which minimizes the individual's credibility with clients, executives, and co-workers. Furthermore, it would be polite to explain why you chose a particular assumption. * Accuracy. Some estimations are the basis for decision-making. Thus, accuracy is important. But clearly, accuracy will improve if there is more time to work on it. Given an interview scenario, most interviewers a7would like candidates to spend at most 15 minutes and as little as 5 minutes on an estimation question Candidates must tradeoff between accuracy and speed ~ and get the most accurate response possible in a 10 minute timeframe. I heard the answer is not important for estimation questions. Is that true? Opinions on this vary, Starting with the facts: © Interviewers want to understand “how you think” When interviewers utter this phrase, they are ‘usually referring to two things: n of action? 1. Do you havea pl 2. Can you communicate your problem solving process in a way that is effective, efficient, and easy to follow? «Interviewers want to see that you are numerically savvy and detail-oriented, Many candidates are afraid to compute and sometimes, even discuss numbers. They expect candidates to talk details, do ‘math, and do math quickly. When candidates say “the answer is not important,” I believe what they really mean is the answer does not have to be 100 percent accurate, My opinion is that yes, if @ candidate is asked to estimate the Chinese diaper market, the interviewer has the number $50 B in his head, it would be candidates do not have to say $49.9 B. Howeve unreasonable to arrive at $10M or $10 trillion as the final value. So the final takeaway is this: the precision of your final is not important. However, what is important is that your final answer be reasonably close, taking into consideration the time you have to answer the question. The more time you have, the more accurate your answer should be. How long should | spend on an estimation question? Most interviewers expect you to finish an estimation question in less than 10 minutes, while impatient interviewers may be frustrated if you spend more than five. If you are taking over 15 minutes, you are taking too much time. How should | approach estimation? Market Sizing Questions For a market sizing question, use a top-down approach, That is, start from the whole, usually population, and work your way down to the parts. Here are some questions you may want to consider as you work your way down from population: 28