New challenge: Fermi estimation
Introduction
During a case interview for a strategy consulting firm, I was asked to estimate a certain figure. Drawing on my usual competitive programming mindset, I mistakenly derived an upper bound and was satisfied with that result.
Realizing this was obviously not the right approach, I resolved to tackle new specialized fields with the appropriate mindset.
Fermi Estimation Practice - 01
I worked on the problem: “Estimate the annual market size of the domestic zipper industry.”
Although I had prepared in advance regarding methodology, when I actualy put it into practice, I found myself focusing too much on listing every possible factor without omission; I broke down the problem too strictly according to the domain, which led to a situation where I could no longer keep track of all the subdivided variables within the time limit - the critical problem I recognized. I expect that by anticipating the key variables in advance, I’ll be able to minimize the decomposition while still deriving a resonably convincing answer.
At the heart of Fermi estimation, it’s crucial to have a general sense of numerical values. Below is the metrics I gave up on decomposing simply because I wasn’t aware of them.
Population Distribution by Age Group in Japan as of the End of 2023
| Age Group | Figures as of End of 2023 | Percentage |
|---|---|---|
| 0–19yrs | 115,961 | 13.0% |
| 20–39yrs | 195,197 | 21.9% |
| 40–49yrs | 215,798 | 24.2% |
| 50–59yrs | 209,900 | 23.5% |
| 60yrs or older | 154,713 | 17.4% |
| Aggregation | 891,569 | 100.0% |
Expected solution
- Define the market size as the annual sales revenue generated by zipper manufactures.
- Sales revenue can be calculated as the price per zipper multiplied by the number of zippers sold.
- Clothes are likely to be the dominant application of zippers, so I will estimate the market primarily based on clothing and use other applications as a supplementary adjustment.
- Japan has a population of approximately 125 million, which can be used as the basis for estimating the number of clothing items purchased annually.
- Assume that each person purchases approximately 10 pieces of clothing per year on average. This gives up 1.25 billion pieces of clothing per year.
- Assume that approximately 20% of clothing items use zippers. Therefore the number of clothing items using zippers every year is approximately 250 millions pieces.
- Assume that each zipper-equipped clothing item contains an average of 1.2 zipper units and an average price of zipper to be 100 yens, the clothing-related zipper market is about 30 billions.
- Zippers are also used in bags, shoes, luggage, bedding, outdoor equipment, and other products. Assume these applications account for approximately 50% of the clothing-related demand, the estimated annual domestic zipper market to domestic consumption is 45 billions.
- Finally, Japanese zipper manufactures also sell their products to overseas customers. Assume that exports account for approximately 900% of domestic-demand-based sales.
- Therefore, the estimated annual sales of the Japanese zipper industry would be approximately 4.5 trillion yens.
Uncertainties
- other applications account for 50% of the zipper usage
- 20% of clothing items using zippers
- exports account for 900% of domestic-demand-based-sales