Every startup that needs to create revenue projections will likely go through the same basic process to do so. I have outlined the process in a generic way below, and I have also created a General Revenue Projection Spreadsheet Template for you to use to create your own sales projections.
Step 1 – Total Addressable Market (TAM) – # of Potential Customers
The first step in creating revenue projections for a startup is to estimate the total addressable market. This is the entire global market for your product or service. Here some examples:
- If you are starting a coffee shop – your total addressable market would probably be the number of coffee drinkers around the world.
- If you are starting a software company that serves businesses – your total addressable market would be the number of businesses around the world.
- If you are starting a hair salon – your total addressable market would be the number of people with hair around the world.
Step 2 – Growth Rate % of TAM
Once you identify your starting point you might know that your total addressable market is growing by some rate each year. So maybe the number of coffee drinkers is increasing by 3% each year. If you are following along with the Excel template I have created, you will need to estimate a monthly growth rate for the Total Addressable Market.
Step 3 – What % of the Addressable Market Can you Actually Serve
Now step one begs the question. If I open a salon in Miami, Florida, I can’t actually serve every person in the world. You probably have a 30 mile radius of people that would be considered your “Serviceable Market” – these are the people you can actually serve.
If you are building software for businesses to help them manage employees, then your serviceable market is not all businesses, it is probably all businesses with employees.
Step 4 – What % of the Serviceable Market Will you Target
Next, we need to refine your market even more. If your serviceable market for your coffee shop is a 30 mile radius, maybe your target market is the workers in the office buildings within a 1 mile radius. Obviously there may be other competitors that would take some of the serviceable market, so you need to establish your target market.
If you are a salon, your target market might be women between the ages of 25 and 25 within a 5 mile radius.
Step 5 – What % of the Target Market Can you Convert to Leads
Now that you have narrowed down your market to a select target market, you will need to estimate the number of potential customers in your target market that you can convert into leads. For a business with a website, a lead might be someone that visits the website. If you have a retail location like a salon or a coffee shop a lead might be someone that walks into your store. So you need to estimate the number of people from the target market you can turn into leads.
Step 6 – Can you Improve your Conversion Rate
Now with any of these % rates within this model you might be able to improve your conversion rates, or increase the number of leads that turn into customers etc. So in the Excel spreadsheet you will notice that I add several lines that say “Growth Rate % of Conversion Rate.” This means that you can increase (or decrease) your conversion rates within the model over time.
Step 7 – What % of Leads will you Convert into Customers
Now this number can vary greatly from business to business. For example, a coffee shop might convert 99% of the leads that walk in the door into paying customers, because a lead probably wouldn’t visit without intending to purchase, but with a web based business, a good conversion rate from website visitor into customer might be 3% to 5%. You may need to do some research depending on your industry to get an idea of what you can expect in terms of conversion rates from leads to customers.
Step 8 – What % of Customers will you Lose Each Month
Some percentage of your new customers won’t ever come back again. For a salon, hopefully customers are happy and they come back on a regular basis for a haircut, but for a coffee shop, maybe a customer was just passing through the area and happened to stop by for coffee, or maybe they hated your coffee. You need to estimate what % of customers won’t come back.
Step 9 – What is the Average $ Amount of a Customer Purchase
The next estimate you need to make is the average purchase of a customer. The way I have the Excel file set up you should estimate the total purchase amount per purchase. For example, if someone buys a coffee for a $1 and a muffin for $2.50, the purchase amount should be $3.50.
Step 10 – What is the Growth Rate % of the Average Purchase $ Amount
Again this could increase over time. As a salon, what if you start offering hair coloring services or maybe perms, or some other service that could increase the average purchase amount per customer.
Step 11 – On Average How Many Purchases Per Customer Per Month
Lastly, we need to know how many purchases per customer per month on average. If you are a coffee shop and have a lot of “regulars” your average # of purchases per customer per month might be 10. If you are a salon on the other hand and the average customer gets a haircut every 4 months, then your average purchase per customer per month would be .25 purchases.
Step 12 – Total Purchases x Total Average $ per Purchase = Total Revenue
Finally, it is time to bring it all together. You just need take your Total purchases from all customers x the average purchase amount to = your total projected revenue.
Again, this process should work, or be easily adapted for just about any business. If you have any specific questions, please don’t hesitate to reach out via email at firstname.lastname@example.org
Also, please feel free to download our General Revenue Projection Template here.
Best of luck!