As a follow-up to last week’s article about financial statements, this post is about the essential numbers investors look for. I decided to split up the articles to keep them short, simple and easy to understand. Hence,we focus on how to calculate market indicators for your business in this post.
As it is easier to understand, I use a fictional business case: Our company works on an online subscription beauty box in the US. It is targeted at women aged between 18-35. One box is USD 12 per month, and the minimum subscription is for 3 months.
No matter in which country you operate, I recommend preparing financial information for investors in USD, unless you know that it is required in your local currency. I usually prepare the numbers in my home currency and have the exchange rate in excel which gives me the USD equivalent. In general, the time horizon investors want to see is 5 years.
1. Market Size
It is essential to capture your market size and potential market share in numbers. In our subscription box case, we could do the following to calculate the market size:
As you see in the graph above, we need population data of the US: How many of those women in the US are aged between 18-35? You need to do some research for these numbers, e.g. in national statistics data, academic research or industry reports.
Then, we need to find out how many people in that group shop for beauty products online. (We keep it simple here. If you want even more detail, try to find a number of how many women use subscription box services.)
Multiply the number of women aged 18-35 in the US with the percentage of online beauty products shoppers to get the number of potential users.
Let’s simplify our assumptions and say that one customer buys one subscription. As the minimum subscription is 3 months, they spend USD 36. Multiply that with your potential users and you will get your market size.
2. Target Number of Customers
In our case, we need to estimate how many subscribers we will be able to attract and keep every year. Again, you will need to do some research about how your competitors (who you identified in your business plan) developed. Look into their published data (if any) about their growth in subscribers and/or revenue. Alternatively, analyse market and industry data. If it is a digital product, you can look into the reports by web/app analytics companies. (However, a lot of them have to be purchased and are really pricey.) Compare your project to the competition and make assumptions how you will grow your subscribers until year 5.
3. Target Revenues
If you have the number of subscribers, you can then multiply it by the price of your subscription box. Similar to above, let’s use a simple assumption of one three-month subscription per customer. It is always better to take a conservative approach and do not be too positive on your numbers. Multiply your number of subscribers each year by USD 36, the price of a three-month subscription to get your target revenues of each year.
4. Market Share
Your market share is your yearly revenues divided by the market size.
(Note: The market size of the current year will need to be adjusted for the following years. Similar to the customer and revenue, the market size will also evolve over the years. Based on industry reports, try to find out the market growth rate over the last five to ten years. Maybe you can even find projected growth data for the future.)
Divide the yearly revenues by the yearly market size to arrive at the market share. Investors want to see the development of your market share within the first five years of operation.
5. Assess the Competition
As mentioned in 2, it is essential to always keep an eye on your competition. How are they revenues evolving? Who controls how much market share? You need to do some digging here again: go into their published reports (if there are any) and check their revenues and subscribers and calculate their market share the same way as we did in 4.
Analyze when your competitors reached their market share and how long it took them. This indicates when it is realistic for you. Are your numbers realistic? Do you have to adjust them?
If there are no specific company data, you need to base your assumptions on industry reports. Alternatively, you can look into similar markets and try to find listed players.
6. Growth Rates
It is always useful to calculate the yearly growth rates for your data. The yearly growth of your customer base, revenues and market shares are valuable indicators for your investors. Therefore, point them out in your business plan or pitch deck.
This is a brief overview and example of how to calculate market data for your business plan. There are many ways to do it and for matters of simplification, I published the methods I personally used before. Every business and product is unique. So are the financials. Hence, there is no one-size-fits-all approach and the methods have to be adapted case by case. I recommend talking to your auditor/financial advisor about the details of your case.
Stay tuned for more posts about how to crack the numbers for your business!