Question

Topic: Research/Metrics

How To Project Market Size For Marketing Analysis

Posted by Anonymous on 9/24/2013 at 12:48 PM ET 250 Points
Hi,

Hi my name is Evan, an american and young entrepreneur starting a business in the Philippines. I stumbled across Marketing Pros. I'm hoping for some help. I am pursuing to start a cafe/restaurant and stuck on the marketing section of my business plan. Particularly, calculating my market size. I've studied tons on this subject but can't get an accurate number. I'd love it if you had the time to shoot me back an email or two.

May I give you the gist of what I've got? Hold onto your seat...

First of all, i've got a very accurate SAM (segmented addressable market) of 7,500 annual customers. This is not the question. I've also conducted a survey last week that gives me how many times each customer will buy from me. Where I am stuck is getting the SAM (served obtainable market) aka, how many I can really expect to walk through my doors. I've studied both the Top-Down and Bottom-Up approach to getting this, however i'm hung-up on one part. So.. let me show my what I have....
TOP-DOWN ANALYSIS
1 Sale = $6 or $2 per customer (customers are in groups of 3, so $2 each customer)

TAM: 7,500 (annual) Potential Customers

SAM: 3 visits/month per customer = 36 annual visits per customer.
100% market share (no competitors, first in marketplace) ????????????
Assume 50% Success Rate. 50% of 7,500 = 5,625 customers/visits or 18 annual visits per customer. 5,625 x 18 = 101,250 annual visits.

SOM: 101,250 x $2 per customer = $202,500.

1st Year, Projected Annual Revenue: $202,500

As you see it all looks straight forward until I get to the SOM. I have no clue how to find my success rate.. "success rate" isn't even the correct lingo because i'm selling a product from a cafe.
None the less! I don't know how to calculate my SAM. 3 visits a month per customer is very accurate data, from my survey. However, only in a perfect world will I get ALL the customers in my marketplace, even if I have huge competitive advantages. I really do! The product is in high demand, and my customers are in a tightly women community in which I plan to take advantage of with Advocacy Marketing. But, I investors won't be satisfied with my guesses or assumptions.

My big question is, how do I find my SAM? How can I really know how many people I can get to come to me? Obviously this is up to my marketing. But, how can I measure this???? I need number and digits to show my investors. Please help me! I'm happy to share my hard data with you if you need it.

Thanks so much. Please reply!!!

Sincerely,

Evan Weiland
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RESPONSES

  • Posted by Moriarty on 9/24/2013 at 3:18 PM Accepted
    I would like to ask you to do some reverse-engineering here. Work out what you need to exist as a business, and then work out how many customers you need to make it pay. Okay - now I'm no restaurateur, and know practically nothing about running a restaurant save that it's to do with cooking. So you ask why I'm answering - and I'll tell you.

    Now: I know of a new restaurant, set up within the last few years and it's called de Kleine Baron. It's in a suburb of Utrecht and is one of my lunching spots. They have done their homework - and I can go and ask them for details if you wish since they're friends and all. However they're in Holland and you're in the Philippines. Big difference.

    I would suggest you take a note from their book though - and start a twitter campaign. More importantly, a Facebook campaign. Paid advertising on Facebook is still remarkably cheap and is extremely targetable. That is to say, effective. Whilst it won't get you a SAM it will get you customers. My point is that you'll be able to have real customers who live in and around your area that will pay good money to enjoy what you do best.

    Because de Kleine Baron gets a good half of their custom directly through Facebook and Twitter. The rest is by word of mouth. It's a built up area and very neighborly. My guess is that you are in much the same position. Yes, the campaign on Facebook will cost - the cost of it will be minimal and the exposure good. If not amazing. You can see if you should try Facebook here: https://isfbforme.com - it's Perry Marshall's new Facebook site. You can see if Fb'll do you any good. If my experience is anything to go by, you won't have any worries once you get that running.

    I hope this helps ... when it comes to statistical projections and that kind of thing, I'm on thin ice ... and you've probably got a banker wanting all these details as evidence ... (help!).
  • Posted by Gary Bloomer on 9/24/2013 at 8:46 PM Accepted
    Er ... unless you have a time machine you can't know how many people will buy from you (or what they'll spend) until they've bought from you. You've got two definitions of SAM, which one is which?


  • Posted by koen.h.pauwels on 9/25/2013 at 1:08 AM Accepted
    Hi Evan,

    First off, congratulations on starting this exciting business! You are and should be enthusiastic about your product and success chances. But investors indeed want to hear reasonable realistic estimates:

    1) purchase intention versus behavior: even though customers say in a survey they would buy 3 times a year from you, chances are they won't. Based on experience and studies on the relation between intention and behavior, my best bet is 40%, i.e. an average buying rate of 14.4 a year. Of course this can be higher for very involved customers buying very important products to them

    2) 100% projected market share is a red flag. You may have a unique product, but
    a) which customer need is it addressing
    b) what are the current need solutions of potential customes
    c) how dissatisfied are they with their current need solution, how large is the comparative advantage of your product and how costly (in terms of money and behavior change) is it for them to switch?
    Your answers to a-c will likely lead you to discount by more than 50%. If customers indeed perceive your product as unique as you do, i believe a 20%-30% conversion number is more likely than 50%

    3) customer retention is key and very hard in the cafe/restaurant business. I have first hand experience with a fish restaurant in Ankara, Turkey. The product and location were superb and the price low and the restaurant got high satisfaction ratings. however, after 6 months, other restaurants opened and the 'newness' factor was gone. Satisfied customers simply forgot about it, did not return (often) and did not continue spreading positive word of mouth. Beyond getting first time customers to your restaurant (see Moriarty's suggestions), you need to set up a system to contact them for reminders, special events and word-of-mouth campaigns

    The very best - will look you up when i am in the neighborhood!

    prof Koen Pauwels
  • Posted by Moriarty on 9/25/2013 at 2:15 AM Member
    Thankyou, Professor Pauwels for expressing my doubts so clearly. I did not dare for lack of skill in this area.

    Take heart that the Kleine Baron is thriving. Their place isn't new, it does feel fresh and it's always bubbling even when it's not full. However it is the only one in the locality (or for around 300 metres or so ... ). You'll find them here https://www.facebook.com/Restaurantdekleinebaron

    To be honest with you, my advice given the above is to concentrate on getting people through your doors - and getting them through a second time. Because as Prof. Pauwels says, them just saying isn't them doing. Given that social media campaigns have been the bedrock of this restaurant's success, there's no reason why you shouldn't share in that.

  • Posted by saul.dobney on 9/25/2013 at 11:52 AM Accepted
    Take a look at your annual visits estimate (101,250). This works out to be an average of 277 customers a day. Assuming it actually peaks at weekends, you'd be looking at 500+ customers on peak days. With two hours for lunch and three for dinner that would be 100 customers an hour. With five serving staff, you'd be serving a customer every three minutes. Does that seem credible against your business plan?

    So for fine dining, these numbers would seem high. For fast-food it's possible, but you'd need staff and systems to cope with the volume. So personally, rather just relying on what people claim they would do, I'd go and sit outside potential competitors, or similiar types of establishment in the neighbouring town, and just do some daily customer counts. What volumes and throughput do they see? Then use this to guide the numbers you use.
  • Posted on 9/26/2013 at 7:33 AM Accepted
    The market analysis section of your business plan should illustrate your industry and there is a great need for proper understanding of the business market and consumer history.
  • Posted by koen.h.pauwels on 9/27/2013 at 4:18 AM Member
    thanks for the kind words, Gemma and Randall! will definitely check out de Kleine Baron next time in Utrecht.

    Saul's proposals are complementary and excellent, Evan: include your serving capacity as a constraint and observe the actual behavior and numbers of customers at competitors


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