It happens way too often: entrepreneurs proud of some huge completely unattainable market numbers. They show us billions of dollars. They think that’s a good thing, like it’s important. I hate it.
As an investor, as a business plan contest judge, or as a teacher, I don’t really care how many billions of dollars are spent on this or that or the next thing when I’m reading a business plan. That number is too big. It tells me nothing. Startups don’t reach multi-billion dollar markets.
If it makes you feel better to give me that number in passing, okay, go ahead, but don’t put any emphasis on it. Instead, give me the details on how you’re going to make your sales, and to whom, on the first day, the first quarter, and the first year. Give me granularity.
If you’re a Web-based startup, for example, show me how many unique visitors you think you can get in the beginning, and what you’re using for an estimated conversion rate (buyers to browsers). Show me how much each unique visitor is going to cost you in search engine optimization and pay-per-click search engine expense.
If you’re a restaurant, for example, show me how many chairs and tables lead to what assumptions for first-day, first-month, and first-year meals served, drinks served, and at what average price. Show me how you’re going to bring those people in the door.
I guess what this means is that I like forecasts that build from the details up to the larger numbers.
And I know that I’m in the majority, among people who read business plans, in really disliking the top-down, billions and billions kind of forecasts. When they start talking about getting only a very small percentage of an enormous market, they lose me. Those huge markets don’t split down into millions of pieces.
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Thanks for asking. Yes, you are welcome to post this article to linkedIn as long as you make it clear that I’m the author and you link to the URL that it appears. I’m very glad you want to. That’s flattering. Tim
Great article and how true. Business is about numbers and if you don’t know yours making significant progress can be difficult. Know your average dollar sale and you can put a strategy in place to increase it.
Tim, thanks for the interesting blog. This goes back to how we educate ourselves and what we value as a business society:
a) Several VCs, I have heard speak or met, have been wanting to change the world by impacting the lives of many people (think billions).
b) Most consultants – especially from the ‘top’ consulting firms – tend to approach market entry with a top-down market sizing exercise.
c) Quantity is unfortunately made the defacto law of life.
All of these factors amidst several others tend to make entrepreneurs focus on impressing the VC instead of spending their energies on the operating plan. Can’t really fault them for that after all this ‘training’!
Could you please elaborate your suggested focus on granularity? However small or conservative the number, doesn’t it still remain a projection?
In my experience, I have a) created the sales plan bottom-up and used the top-down for a sanity check and b) built my sales plan dynamically along the way as a I took in feedback from clients.
Kindly illuminate. Thanks!
Josh, re your request that I elaborate on granularity, it doesn’t mean simply smaller numbers, but rather projections based on credible details — still guesses. still projections, but built on a more grounded reality. We hope. You might look at my reply to Tumaini in the previous comments for an example. I hope that helps. Tim.
Tim, I just discovered your blog. Fantastic stuff. I completely agree with you on the big numbers. When you sit down and really figure out how you are going to make money and from where, the numbers become real. No more % of this market. I learned this the hard way. I had a startup SEO firm and we started with our plan to capture a % of the local market. Things actually went well for the first year but when we discovered we didn’t have a contingency plan for when our clients fell victim to the economy it was too late. We didn’t have a solid plan for how we were going to attain leads, how many of those leads would become clients, and how we would cover our bases to build stability. Working on it the second time around now and things are already looking better.
Thanks for that Tim, being a young entrepreneur with a startup, I truly now know what to focus on.
Wow, common sense and realism. What a refreshing change.
You are spot on with the article. Did the government start the “B” thing or did the internet move off the “M” first?
Just wondering. Thanks, Jon at Edgemaster Mobile Sharpening
Tim, thanks for the excellent advice. As a entrepreneur in the midst of completing our business plan for a new product line, we will definitely incorporate your suggestions into our plan and investor pitch. We are actually addressing a niche in a very large market so we haven’t been too concerned about the relative tenths of a percent we could achieve, but have concentrated the plan around how we will achieve revenue and cash-flow projections focused on targeted customer base while taking into account operational capacity and material constraints in the short-term. Thanks again. Darren
Hello Tim,
I’ve been following your blogs for quite some time now and find them to be very helpful. Thank you for sharing with us. I used to live in Ashland, Oregon (was there for the Oregon Shakespeare Festival). I’m now back in Los Angeles working on a business plan for an online furniture retail shop that will have a few twists and turns. One of the things I find very frustrating in my research is that the numbers are in the BILLIONS. I know I won’t reach that (for quite some time) so finding the “right numbers” is a bit of a challenge. However, I’ll keep researching because the last thing I want to be is that unprepared entrepreneur that you’re always talking about.
I look forward to more of your posts.
Tumaini, one thing you can do about those numbers in the billions is focus on your unique visitors and page views and conversions on your online furniture website. There is a limit to how many unique visitors of page views you can reasonably expect to get; it’s about organic search engine placements and pay-per-click spending. From there, make some assumptions for conversions to sale, and at least you’ll be more granular, with smaller numbers. Tim
Tim, great point. Too often entrepreneurs think “the law of large numbers” is what people gravitate toward, versus more of the economic or business model approach you talk about. Sometimes people show market share figures that have them at 125% market penetration to hit their year three revenue. A bit of a shameless plug here, but I cover this kind of stuff in a book on market validation, “If You Build It Will They Come? Three Steps to Test and Validate Any Market Opportunity” Wiley, 2010. Details at http://www.drrobadams.com. See you in May! Rob.
Hi Rob, thanks for the comment, and I’ll add to what you’re calling a “shameless plug” by me adding my own recommendation. It’s a good fit with this post too. I’ve seen the advance on your new book and very much looking forward to ordering it as soon as it comes out. Yup, see you in May. Tim.
Excellent post! It’s so true — the details matter most. Here is a post I wrote on the same subject, The Most Important Number You Present in a Revenue Plan: http://www.jslogan.com/blog/40-blog/238-the-most-important-revenue-number-you-present-in-a-business-plan
If a company can’t explain how they’ll make their “number”, the odds of making it are close to zero.
Well said.
It is so true – getting to those “billions” of dollars seems so easy. We will get X% of Y market just because we’re “US”.
The trick is, making that 1st sale….. Just 1