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Before opening shop, study and forecast the Demand Potential of the market for your business. This is our expected monthly and yearly sales revenue. The three figures we use to measure demand are:
- Number of Customers
(# of DMU's in a given trade area)
- Unit sales volume (units
in a time period)
- Sales volume in
dollars ($'s: = P x Q)
Demand comes from three sources:
- Non-users becoming Users
- Current users switching from a competitor to you
- Currnet usres using more often (increase in the purchase cycle)
Revenue = SP x Quantity of Demand
- Use a Range
- Retail $30,000-$120,000 monthly
- Service performer 50hrs x 4 weeks x $50 per hr = $10,000 monthly
- Use three methods to estimate demand
We should make our
best estimate, identify a high and low range around that estimate and
then nail down our expenses and predict feasibility and profit potential
by comparing expenses to demand projections.
Market research can
also be conducted to help with this forecast (see session on market
research).
Most of us will be trying to project sales for a small, privately held
business, probably retail or service. Even with all the information available
on the Internet these days, this kind of sales data may be nearly impossible
to find without professional sources of data and specific industry sources
for insider information.
MYBx7 - Demand Forecasting and Brand Identity
I'd like to open a home and gift store. My business will
sell knick-knacks, accessories and home decorations. I need a good
brand name, domain name and logo for my business.
More importantly, I'm trying to figure out what sales
I can expect in my local market for a small store. Are there any
sources about revenue or sales per square foot? How many customer should
I expect and how much will they buy. How do I know if I'll I be profitable? |
Pottery
Barn Stores are a mall oriented version of what you are doing.
Pottery Barn® is a registered trademark
of Williams–Sonoma,
Inc., a publicly traded stock. They report that a typical mall
store does about $500 worth of annual sales per square foot. A 2000-square
foot store would yield $1,000,000 per year in sales revenue.
Helen
Bulwik, an industry analyst with New Market Solutions in Oakland
A smaller independent
store of less than 1800 square feet ranges about $115 to $140
of annual sales per square
foot.
Mike Russo, President, The Gift Association of America
Generally, $200 per square foot annually for stores ranging from
1,500 to 3,000 square feet can make a profitable living.
Rick Segel, "The Retail Business Kit for Dummies"
For your business
in your location, these numbers may give you a starting point
for estimating and comparison. However, your store in Aptos will
be different from a store in high-rent Marin County. Two home furnishing
stores on the same block will have different experiences depending
on their product mix and customer service. |
Pricing = Methods for Setting Price - Often you have a pretty good idea of the Price you will charge for your Products or services (aka SP for Selling Price). Turning it into a Sales Revenue projection is the next step.
| Million $ Business |
| |
|
|
| $1,000,000 |
Yearly |
|
| 83,333.33 |
Monthly |
|
| 20,834 |
Weekly |
|
| 4,200 |
5 Day work week |
|
| 3,000 |
7 day work week |
|
| |
|
|
| Estimate Price and Quantity Relationship |
| |
|
|
| Daily Sales |
Price |
Quantity |
| $3,000 divided by |
5 |
= 600 units |
| |
10 |
= 300 |
| |
20 |
= 150 |
| |
30 |
= 100 |
| |
40 |
= 75 |
| |
100 |
= 30 |
| |
| Estimate Job Labor |
| |
|
|
| $83,333.33 Monthly Goal |
Full time work
(Can do 1 job alone) |
= $9,600
(40 hrs x 4 wks x $60 per hr)
|
= $115,200 Yearly Sales |
| $83,333.33 divided by 9,600 job cost = |
8.67 jobs |
You plus a crew of 8 = sales of:
83,333.33 monthly
1,000,000 Yearly |
| |
|
|
Divide your Sales Goal by the expected Price and you will get the Quantity need to attain the Sales Goal. The Question then is: Can I sell that quantity or get that many jobs or have that many customers realistically/
Overall Process:
1. Start with
nailing down your typical expenses for a given month.
- CGS (cost of inventory
sold) sample data
- Rent (about 8%
of sales is a suggested goal)
- Marketing/Advertising
(1-8% of sales is typical)
- Employees (include compensation, payroll taxes and Worker's Comp
Ins.)
- Depreciation of Capital Assets
- Insurance
- Utilities
- Maintenance/Cleaning
- Supplies
- Legal Fees/Accounting/Bookkeeping Fees
- Others
Add it all up and see what you monthly expenses will be and see if it
seems possible to make a profit by:
- Estimating what you need to live on per month for your lifestyle
(total your profit goal)
- How much would you have to sell to cover your expenses and profit;
add up your total expenses (Profit goal + expense total =
Sales Revenue Goal)
2. Find industry sources of data on past sales and
demand forecasts. The square foot info above in the blue table is one
type of info you
can get. You can also get composite sales figures (daily, weekly, monthly,
yearly)
and expense
figures, sometimes in dollars, sometimes as percentages of revenue. Write
down the answers you get.
- Trade Associations (for the example above: Gift
Association of America;
National
Retail Association) There is usually a membership fee for full
information but some info is available without paying.
- Contact Industry consultants and marketing agencies (Hutton & Sherer locally; New
Market Solutions in Oakland noted above)
- Trade Publications,
web sites and magazines: Home Furnishings
News; http://www.retailowner.com)
- Annual
Reports of publicly traded firms (Williams-Sonoma for
Pottery Barn) They often won't have the exact information but you
can do a little math based on what they do provide.
- School
and Public libraries. Talk to business reference librarians. They are experts
in information sources through books, journals, websites, Abstracts,
etc.)
- Find other business owners, especially out of your
trade are, and talk to them. Attend trade shows and talk. Attend chamber
of commerce
mixers.
- Talk to suppliers, manufacturers, agents/brokers and vendors.
They know what their customer are buying and how much the customers
are therefore selling. Politicians often have data for their voting
constituency.
- Internet
research for secondary data.
Finding
a Small Order Manufacturer | Census
data Then Type "Santa Cruz-Watsonville, CA Metropolitan"
in the View Data in Tables Metropolitan window
- Observe competitors directly. Count cars, visit
competitors and observe sales, foot traffic, sales versus lookers,
and totals rung up.
- Exploratory Research. Use
self as model, speculate & guess,
discuss with friends, suppliers, employees, customers, business associates,
competitors,
etc.
- Primary Research. Observation, survey, experiments, focus groups.
- Software - Business
plan writing templates
Look for:
- Revenue per square foot
- expenses per square foot
- sales revenue projections
- expense projections
3. Search your experience. If you have spent time in
the industry, you probably have a very good idea of what is realistic.
Break down your sales by units.
Price times
Quantity = Sales Revenue (P x Q=SR):
Multiply the units of demand by the price you can charge to project
sales.
Quantity in
units will be
based
upon
the # of customers and the amount of units they will buy (Demand)
The Price will be based upon what competitors charge, what the market will
bear and
what you need to charge to cover your monthly expenses. Multiply
price times units to calculate sales. You can go back to this
forecast to easily
modify what seems wrong.
How
will you measure your Sales potential as Units of Demand?
Dividing your
sales into units: Most
businesses do this even though they don't realize it. Licensed professionals
and service
businesses sell their time by hours or quarter hours. Consultants may
sell projects, days or hours. Restaurants sell meals. Taxis and transportation
companies sell rides, tickets, trips, quarter miles or miles traveled.
Packagers sells package size, weight, or miles to destination. Restaurants
sell meals and drinks; dessert or appetizers.
You can use overall measures such as square feet for sales or rent.
Restaurants or clubs may measure units by how many people they can fit
at tables, or by tables or by chairs. Amusement parks, dance clubs
measure capacity, sometimes limited by fire codes
and measure
sales
by
tickets
sold. Manufacturers measure factory capacity and shifts worked. Theatres
measure by seats and tickets. Sometimes you take differing buying habits
and measure units by average sale per customer. Other times you measure
average consumption per customer.
Adjust projections for:
- peak hours
- peak seasons
- weekend versus weekday
- five day weeks versus seven day weeks (22.5, 30 days)
- competitive efforts
- population numbers
- defined trade area
- hours of operation
Make your forecast:
- living wage projection or goal
- revenue projection based upon unit
sales
- expense
projection based upon fixed costs and unit sales for CGS
4.You can write a business
plan. This will help you focus on your market, resources,
scale of business, the opportunity,
the market, competitors and necessary investments to open and operate.
Forecasting demand, budgeting expenses and managing cash flow can present
roadblocks when planning, but you don't need to spend thousands of
dollars on marketing research, have an accounting degree, mathematical
prowess
or even powerful software to write a business plan.
5. Generally look
for valuable pieces of information and fit them together like a jigsaw
puzzle. Create a rationale for your forecasts. Be prepared to update and
alter the forecast. Keep in mind that forecasts are educated guesses
regarding things that have yet to happen but based upon things that
have happened, tempered by your judgment and experience. Get started. Be
prepared to catch errors and make changes as you implement your business
plans.
Carefully observe
how closely your forecasts are coming to reality. Expect to constantly
revise...that's, after all, management of your business. |
