Volume Estimation

This is going to be a brief article about estimating the number of customers you can get!

Business meeting

First there is the top down approach, which is probably the most commonly used method of estimation. You start from the whole market and breaking it down from there. For example, if you wanted to size the number of people who would visit your restaurant, you’d start by sizing the entire county that you live in, figuring out how often people wish to eat your food, then figure out how often they will travel to your restaurant. Easy enough?

Then there’s the bottom up approach. Slightly more complex, this just means you do things the other way around. You interview individual customers on their preferences, and take it to the next steps from there.

In practice, professionals use averages that is using a bottom up and top down approach, then dividing by the appropriate numbers to get a better estimate, much better than whatever you’ll arrive to on your own.

Revenue Estimation

Now, let’s continue our discussion on business plans. The next step in the process, is developing an intuitive sense of the financials behind your business. I’ll go through the revenue side and costs side separately to prevent random confusion.

Revenue is just basically how you’re going to make money as a business. Revenue is pretty much just a function of the products you sell, and how much you’re pricing them at. Figuring out the pricing is pretty easy – it’s very easy to determine if something is going to work or not based on nearby market trends, am I right? For instance, if you were going to start a brand new restaurant selling a particular type of cuisine, you can easily look up how much other restaurants are charging. The problem however, arises when you try to sell someone something that they have never heard of before, like Uber before it came out. What should you price it as? I have no idea, and neither do you. That’s okay.

There are many schools of thought on pricing. There is the ‘competitor approach’, which is figure out what the closest substitute to your product is, and charge at that price. Going back to Uber, they price their cars at pretty much the same price as taxis. This is much easier said than done sometimes though. For instance, if your product is a brand new razor that is 10 times better than anything on the market, should you price the product at 10 times the price of a normal razor? Hmm.

The next pricing approach is actually the ‘value approach’. This is basically figuring out what your product is worth to somebody, and base your decisions from there. Take the digital camera for example. Back in the day, if you needed to produce photos, you needed film and you needed to bring that film to the shop to be processed. Digital cameras solve that by allowing the photo to be seen almost instantly. How much is that worth to someone?

The last approach, is the ‘cost approach’. This is by far the worst method, yet still worth mentioning. It’s basically figuring out how much it will cost you to produce a single unit of the product, and slapping a margin on it. This obviously does NOT always work. To the great chagrin of the American car industry, the Japanese carmakers managed to undercut them by pricing based off what consumers would pay, and doing everything to get their costs down to a profitable price.

The next post, we’ll briefly touch on quantity estimations.

Business Plans

Welcome to ICCA! We are dedicated to bringing you the biggest and best tips on building a small business. In our first article here, we’re going to talk about writing your own business plan. Should you need one or not? That is the question.

Well, for starters, you don’t always NEED a business plan to be a successful business owner. You can pretty much get there on your own. There are plenty of things you can do without one. However, for absolutely maximum clarity on what you want to do, why you want to do it and how you are going to get there, having a plan is always a good idea.

Business plans also help investors know that you are on the right track to do the things you said you would do. Sadly, this is not always obvious. I want people to all write a business plan, no matter how brief and how terrible you might think it is, and honestly they probably are half the time, it gives you clarity on how to focus and do the right things.

Let’s start with the basic structure of one. First of all, you need a market analysis. Find out why it is actually a good idea to start your brand new restaurant or brand new shop. For example, if you are a brand new Asian food restaurant owner, you might want to figure out who on earth would be interested in buying your food to begin with. This is not necessarily an easy question to answer, there are lots of times you have no idea, but there are some ways you can find out quite easily. For instance, the best way to figure it out is to poll customers and do surveys. That’s really it – they will tell you for themselves if they think what you have to offer is a good idea or not.

Another tip I can give you before sinking thousands of dollars into a brand new business, is to figure out if your food is any good, am I right? Hence, things like beta testing would be important. If you’re a restaurant, maybe set up a food stall and see if people like your free samples. If you’re a shop, maybe figure out what do people actually want to buy first?

This post is getting a little long winded, so I’ll continue giving you tips and hints next time. See you soon.