Estimating Demand...

 

Starting & Operating a New Small Business
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Forecasting Market Potential and Demand.

Estimating Demand

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:

  1. Non-users becoming Users
  2. Current users switching from a competitor to you
  3. 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.

 

Get some figures. Do this in several ways and compare your answers produced by each method. Click here for Excel/Printable Version

Average Sales in $ per Customer Visit?

  daily weekly monthly
# of customers _______ _______ _______
# of units _______ _______ _______
$ value/revenue _______ _______ _______

High and Low Ranges

High _______; Low _______

Expenses:

Living wage or profit goal: _________________