Startups and early stage businesses are notorious for coming up with outlandish sales projections that they simply can’t execute. Typically the problem revolves around building top down projections rather than bottom up projections. What’s the difference?
Top Down Financial Projections
Top down projections take big numbers like industry sales figures, city populations, comparable business sales figures and simply guess that they can capture 1% of the market. There is no plan or data to backup the claim. The business owner simply thinks 1% of the market sounds easy enough, and uses the number as their sales projection. This is a great way to scare away every potential investor or lender.
Bottom Up Financial Projections
Bottom up projections are built around things like:
- Website Traffic
- Event Attendees
- Street Traffic
- Inbound Leads
Bottom up projections take real data from your specific situation as the base, and build upon that base.
Let’s take a coffee shop as an example. A top down sales projection for a coffee shop would look like this:
- There are 100,000 people in our city
- 15% drink coffee every day
- The average sales amount per visit is $3
- That means our annual market for coffee is 100,000 x 15% x $3 x 365 days = $16,425,000.
- If we can just capture 5% of that market we will have $821,000+ in annual sales!
This is great, but it doesn’t help you understand how you will capture your first customer, let alone, your 100th customer.
A bottom up approach for a coffee shop might look like this:
- Our coffee shop is at the intersection of the 2 busiest streets in town with daily traffic of approximately 15,000 vehicles.
- We know that only 15% of people purchase coffee at coffee shops
- All of them already purchase from a different coffee shop, so we will have to convert them as customers
- Because most customers are loyal to their coffee shop we estimate we might be able to convert 10% of the total number of coffee drinkers
- We will start by running local tv and radio commercials as well as placing c0upons in the local newspaper.
- We think these advertising efforts will convince (15,000 vehicles x 15% coffee drinkers x 10% potential customers) 225 customers to try our coffee during the first week.
- Because we are a local store with high quality coffee at a convenient location we believe we can convert 50% of those customers into returning customers.
- So our first month sales we estimate at (225 customers x 50% x $3 x 30 days) = $10,000 in sales month 1.
Notice the different methods and how the second method is more realistic. Good luck!