“How many stars are there in the sky?” asks a young child. “As many hairs you have on your head!” the mother responds.
Guesstimate is a part and parcel of our lives. We make them on a regular basis—some intuitively, such as positioning ourselves to catch a ball thrown high in the air, and others explicitly, such as which coach of the metro train would have the least number of passengers, or how many people invited to a party may well show up. Even Krrish, the protagonist of a famous Bollywood movie, guesstimates the distance between two buildings before he jumps from one to the other. Over time, our ability to make such guesstimates improves and we don’t even need to think twice about arriving at a conclusion.
Business leaders and managers frequently guesstimate or make back-of-the-envelope calculations as part of their decision-making process to get a sense of the impact their decisions would have on their revenue, profits, costs, etc. This form of guesstimation is much more scientific, much more reliable. It takes into account known facts and relies on a structured approach toward deriving a conclusion that approximately mirrors the real value. In fact, it also needs to; there is a lot riding on it.
One thing is fairly certain—whatever the process is, the outcome of a guesstimate is mostly a number. In this article, we are going to discuss a few such guesstimates but first let’s take a look at a comprehensive approach toward solving them. We call it “RASCAL.”
Now, we shall discuss some guesstimates that would illustrate how to apply the method.
Interviewer: What is the total amount spent on gas cylinders in Kolkata per month?
Candidate: There are many types of gas cylinders—LPG, Oxygen, Nitrogen, CNG. Should I estimate for all of these?
(Here the candidate is asking questions for clarity to narrow it down to a specific problem. It also provides the interviewer a window into the mind of the candidate to understand their thought process.)
Interviewer: No, please focus on only the LPG cylinders for this one.
Candidate: Thanks, I would like to take a minute to structure my thoughts.
Interviewer: Sure, go ahead.
Candidate: Thanks. I would first look at both the applications of gas cylinders: domestic and commercial. In the commercial space, I will investigate the number of gas cylinders needed for restaurants, hotels, and bakeries while in the domestic space, I will investigate the amount of fuel needed.
Interviewer: Good observation. But limit the estimation to the use of gas cylinders only in the domestic space.
Candidate: In that case, I would like to first segment the population of Kolkata and then estimate the monthly usage for every segment. Once that is done, I would multiply by the cost of a cylinder to arrive at the total amount.
Interviewer: Go ahead.
Candidate: I am assuming that the population of Kolkata is 15 million and cost per LPG cylinder is ₹ 700.
Candidate: Now within the city, there are four segments: lower class (40%) ~ 6 million, lower middle class (25%) ~ 3.75 million, upper middle class (25%) ~ 3.75 million, and upper class (10%) ~1.5 million. I would further segregate lower class into Below Poverty Line (50%) ~ 3 million and Above Poverty Line (50%) ~ 3 million. I assume that the people falling under the category of Below Poverty Line do not use gas cylinders.
Candidate: I belong to the middle class and we use 1 cylinder per month. On the basis of that, for those above poverty line, but in lower class, I would assume they use half a cylinder a month. I would also assume that they have an average family size of 5. That means the total households would be 600,000 and the total cylinder consumption for this segment is 300,000 cylinders per month.
Interviewer: Okay, keep going.
Candidate: Now for the lower middle class, again they would be having a family size of 5 and would be needing 1 cylinder per month. We would get a total of 750,000 cylinders per month. For the upper middle class, we are generally seeing smaller families and I would like to take a family of 4. That means we have a total of 950,000 households (rounded from 937,500 households). Some (~50%) of them have moved to electronic equipment, such as induction cookers and microwave ovens, and now need half a cylinder per month while the rest need 1 cylinder per month. This leads to a total of 475,000 + 237,500 or 700,000 cylinders (rounded from 712,500).
Interviewer: Carry on.
Candidate: For the upper class, I will again take a family size of 4. That means a household count of 375,000. Here, all of them would be using electronic cookware and so we can estimate they need half a cylinder a month. This leads to a total of ~ 200,000 cylinders.
Candidate: Adding them all, we have a total of 1.2 million cylinders that are consumed per month. At the rate of ₹ 700 per cylinder it comes to ~ ₹ 840 million spent per month on LPG gas cylinders in Kolkata.
Interviewer: Well done.
This was a market-sizing guesstimate. It is a layered one where there are a lot of possible avenues you can go along to get the required answer; and that is why asking questions for clarity was very important for the candidate to narrow down to the objective. They set up the discussion by providing a structure to how they would proceed in answering this particular question. Furthermore, the candidate kept rounding the figures to make the calculations easier. They also made assumptions which they communicated very clearly to the interviewer. Finally, they kept ensuring that the numbers were labelled properly—whether they meant the number to represent a household, the family size, the population, the number of cylinders, or the total amount.
Interviewer: How many footballs can you fit in an Egyptian pyramid?
Candidate: I have a question. By football, do you mean European football or soccer, or the American football?
Interviewer: I mean the European football or soccer as they call it.
Candidate: Thanks for that. Let me take a minute to formulate my thoughts.
Candidate: I would first estimate the volume of the pyramid. Then I would estimate the volume of a soccer ball and finally I would divide the volume of pyramid by volume of a soccer ball to arrive at an estimate.
Interviewer: Sounds fine.
Candidate: The volume of a pyramid is (length*width*height)/3. Do we know anything about these dimensions?
Interviewer: The base of an Egyptian pyramid is square and height is 3/5th of length of the base. You can take that into consideration. The length of the base is 100 m.
Candidate: Okay. Then, the volume will be (side^3)/5 or 200,000 cu. m. Now, I estimate that a soccer ball will be a sphere having a radius of ~0.2m. Given that the volume of the sphere is 4/3*pi*r^3 (approximating pi as 3), it will become 4*0.2^3 or, 0.032 cu. m. This would lead to 625,000 soccer balls inside the pyramid.
Interviewer: Okay. Do you think the soccer balls will fill the pyramid?
Candidate: There will be some empty space when the balls are arranged.
Interviewer: Right. How would you find that?
Candidate: I can arrange the balls at the base of the pyramid and get the volume from the base of the pyramid to the pyramid above the layer of soccer balls. From that, I can get the estimated empty space percentage and extrapolate for the entire pyramid. Then I can reduce the number of soccer balls accordingly.
Interviewer: Hmm, that would do. Thanks.
This is another type of guesstimate. It would not have much real-world significance but is an important window into your logical mind for the interviewer. The candidate here asks clarifying questions, puts their thoughts into a structure, communicates, rounds off, assumes, and labels; but they have missed an important point about the solution—that is the empty space. This could have been corrected earlier but they did a decent job of saving it later.
Interviewer: How would you approach an estimation to get the value of Taj Mahal?
Candidate: I would like to take a minute to gather my thoughts.
Candidate: Thanks. There are two key things on the basis of which we can calculate the brand value of Taj Mahal. The first one is the estimated gate receipts over the lifetime. We may calculate this using discounted cash flow method. For the gate receipts, we would first estimate the total receipts in a normal year by estimating the foreign and domestic visitors and taking into account different entry fees.
Interviewer: Okay, and what would the other component be?
Candidate: Taj Mahal and its surrounding area would be prime real estate. So, you could also add the value arising from selling the property, or the fair value of the land and the building. Combining these two, we can get the estimated value for Taj Mahal.
Interviewer: Well done.
This guesstimate, or mini-guesstimate, is one of such cases where the idea of the interviewer is not to actually get the calculation but to look at the approach you would take and sometimes test your knowledge in specific disciplines; here, the discipline is Finance.
“How many stones did Lord Ram need to build Ram Setu?”, “How many kilometers does your favorite footballer run in football matches in a year?”, “Estimate the value of the Koh-i-Noor diamond.” These are some thought-provoking guesstimates that one may face in consulting interviews.
As evidenced, guesstimates are some of the most fun and challenging questions to answer in an interview, as well as in general life.
Nitin Chandak is a graduate from the Indian Institute of Management Calcutta, where he majored in Finance. He has been a consistent academic performer throughout. Post completion of his MBA, he has worked as an analytics consultant for three years. Prior to his MBA, he worked with Backspace (as Breakspace was then known) where he was instrumental in strengthening the Communications and Education Consulting divisions. Nitin is an ardent Manchester United fan and a chocoholic. He wishes to travel the world.
In the Consulting Decaffeinated module, we work closely with the consulting aspirants on mentoring them on case cracking and also improving their client communication. It is probably the most comprehensive and perhaps one-of-its-kind consulting preparation package available for B-school students