In order to forecast how much money you can make from your business, you’ll need to calculate how many potential customers you have and how many of them you’ll be able to capture or lure away from your competitors. You also have to know what the growth rate is for your target market, since it’s rarely wise to invest in a stagnant or shrinking market. This can be one of the most challenging, but also one of the most critical, components of the business plan.
Determine who your customers are. Your product or service must fill a need that customers have. For instance, a dog walking service fills a dog owner’s need to have their pet taken care of when they’re unable to do so due to work or travel. Once you know what problem you’re solving and for whom, invest time and energy into determining the characteristics of your customers. You may have multiple customer groups, such as vacationing seniors and dual-income families.
Categorize your customers. Describe them according to demographics such as age, gender and income, and psychographics such as technology awareness, fashion consciousness or political views.
Research your customers. Read articles about your target customers and the problems they encounter which your business can solve. Demographic data is available from the US Census Bureau and other reliable government and private sources. Trade publications and industry-focused websites can also be good sources of information about year-to-year trends, customer spending habits and forecasts. Often the most thorough and up-to-date information is for sale in industry market forecasts, and may cost from dozens to many thousands of dollars. Official population statistics will often include projections for up to 10 years in the future.
Understand your competitors and their market share. If you work in a highly fragmented industry such as soap, there may be hundreds of competitors each with a quarter of a percent of market share. In that case, assume that .25% is the most you’ll ever get of the market, and that you’ll start out at a much smaller portion. Hit-based industries such as movies and video games may have three or four major corporations taking 60% or more of the market, with a dozen more vying for the remaining 40%. In that case, assume you’ll have a very small share of the market—1% or less—but that the sky is the limit and wise business decisions could pay huge dividends.
Calculate your market size. Identify the total number of customers available to you and multiply that by your market share percentage. Then take the growth rate projected in your research and calculate the increase in your customer base if the market share percentage is held constant. For instance, out of a million potential customers, assume you can capture one-tenth of a percent in the first year, two-tenths in the second, and up to three-tenths in the third year. Over that same period, assume your target demographic is growing by 10% annually. You’ll therefore have 1,000 customers the first year (1,000,000 x 0.1%), 2,200 the second year (1,100,000 x 0.2%) and 3,630 the third year (1,210,000 x 0.3%).
This article focuses on customers, because most people write business plans before their business starts. Once your business is underway and you know what your sales and revenues are, you can begin to make market share comparisons based on dollars rather than on customers.
Evangeline Marzec is a management consultant to small high-tech companies, and has been in the video games industry since 2004. As a published writer since 1998, she has contributed articles and short stories to web and print media, including eHow and Timewinder. She holds a Master of Business Adminstration from Thunderbird School of Global Management.