This is the first of three articles on how to plan the sales forecast aspects of a business plan for a start up company.
Let’s say you plan for your company to sell 5 different products. Fundamental to understanding whether your business has the possibility of achieving financial success is coming to an understanding on how many of each of those 5 products you will sell. This first article is a primer on the factors that drive unit sales; the second article will contain a survey of techniques you can use to create estimates of units you expect to sell; the third will describe the process you will follow after you start your company to refine these estimates.
Three factors drive customers to your business and thus create revenue:
1. You can spend money to create awareness within your target market about (a) your product offerings, (b) how they (and you) are different than competitors, (c) your prices, and (d) generally driving traffic to you (physically or virtually) where potential customers can learn more about you. McClure calls this “lead acquisition” in his AARRR model [MCC13]; others have called it “prospecting”.
Money can also be spent pushing potential customers through the sales funnel, a concept originally proposed by E. St. Elmo Lewis in the late 1890’s., e.g., converting 10,000 leads into 500 prospects into 100 revenue-producing customers. Bessemer Venture Partners [BES10] calls the ratio of leads to customers the “conversion rate”.
Typical expenditures are rent, conventional advertising, Google AdWords™, writing blogs, sending emails, buying mailing lists, creating a website, search engine optimization (SEO), and labor for sales and marketing personnel. In most cases, a linear relationship exists between the expense and the resulting revenue, although many techniques exist to improve the linear relationship and thus one’s performance.
2. Viral effect. You can create incentives for current customers to refer others to become customers. Although this activity also costs money, the relationship to results in unlikely to be linear. McClure calls this “referral” in his AARRR model [MCC13]. Ries [RIE11] calls this the “viral coefficient”. Typical programs include ones in which customer success depends on attracting new customers (e.g., Tupperware), explicit referral programs (e.g., where a customer receives an incentive for referring another customer), or simply providing a great customer experience, so happy customers tell their friends about you or post great reviews about you on the web.
3. Organic Growth. You can take actions to retain existing customers and increase their average order size. For (almost) all businesses, the easiest sale is a repeat sale from an existing customer because in most cases it requires no additional effort on your part. Some call this the stickiness of the business. Bessemer Venture Partners [BES10] call the inverse of stickiness “churn”; others call it “attrition”. Programs to increase organic growth include frequent buyer rewards programs (e.g., like those used by all airlines and hotel chains), upsales (i.e., convincing customers of lower priced products to purchase higher priced products), freemium pricing (deliberately offering free services as an incentive to encourage some customers to see how valuable the premium and paid services would be), increasing the average order size during any one visit, increasing the number of visits per time frame, or simply providing a great customer experience so that customers are reluctant to ever take their business elsewhere.
[RIE11] Ries, E., The Lean Startup, New York: Crown Business, 2011.
This article is extracted from my book published by Scrub Oak Press titled Will Your New Start Up Make Money?. Buy it at http://www.amazon.com/Will-Your-Start-Make-Money-ebook/dp/B00JOOZQNE.