Market & Sales Projections
How rapidly will your product be adopted in the marketplace?
Market Penetration Projections
Early discussions of your business opportunity will focus on the evidence you have accumulated regarding definition of customer needs and the viability of your proposed business model. Once convinced there is a reasonable opportunity, prospective investors will begin to focus on the projections of early market penetration, typically a five (5) year period commencing from the point at which you believe your product could realistically be available to the market. You should base your projections of unit purchases, and the percent market share that represents, on the collective customer benefits and overall competitive advantage that you believe your company will enjoy.
Note: Medical Product Considerations
Medical products require not only FDA authorization prior to marketing, but also must receive payment coding assignments in order for healthcare service providers to receive cost reimbursement from Medicare and private insurers.
No matter how attractive your product may be to a medical practitioner, you should not expect sales to occur until insurance reimbursement can be assured. This process can be lengthy, and should be taken into realistic consideration when forecasting initial market introduction dates and rates of penetration. For guidance in this area, see Medical Cost Reimbursement
Take into consideration whatever level of inertia or eagerness you reasonably believe may exist within your customer group...
Then decide what is a good balance between unrealistic (hockey stick-like) and uninteresting (relatively flat) projections of market share growth during this first period of time following product introduction.
What is a reasonable “peak penetration” projection?
There is no simple answer to this question; however, if you are convinced that you can develop a very competitive product, and that you could realistically afford to price your product aggressively, you probably can expect investor acceptance of 5yr peak penetration rates up to 20%. On the other hand, if you are claiming that you will have a product that will be a total “game-changer”, penetration rates significantly above that number could be defended, and, in fact questions might be raised if your sales projections are not aggressive enough.
In general, your market share projections should correlate with your overall product and market analysis.
Keep in mind that professional investors will always challenge your pricing and market penetration projections, no matter where you start...
However, you will get credit for a thorough analysis of the underlying assumptions behind your assessment of the Addressable Market Opportunity.
Assuming you have performed the analyses recommended in the earlier sections of this guide, you should now have solid underlying support to make five-year projections (reasonable estimates) of the unit and dollar sales you believe you could achieve upon introduction of your product to the market you have defined.
A sales forecast should include the size of the annual market opportunity, expressed in units. Since each competitor will have a different pricing structure, this is the best way to normalize the existing size and growth rate of a given market. If you have reliable information on the projected annual growth rate (also in units), this information should also be provided. Projecting your sales first in units, along with the percentage market share it represents, give your prospective investors a quick perspective on your projected market penetration rate.
Isolating your estimated selling price/unit is another indicator of your market knowledge. Breaking down your forecast to these underlying elements does give your audience more opportunity for challenge, but presuming you’ve done your homework and your estimates are “reasonable”, the completeness of this forecasting method will earn credibility for your overall revenue projections.
EXAMPLE: Initial five-year revenue projections
|Five-Year Revenue Projections||YR1||YR2||YR3||YR4||YR5|
|Market Size (units)||500,000||525,000||550,000||580,000||610,000|
|Avg. Annual Growth Rate||5%||5%||5%||5%||5%|
|Sales Projection (units)||10,000||26,000||50,000||87,000||110,000|
|Avg. Selling Price/Unit||$25||$25||$27||$27||$29|
|Total Projected Revenue ($000)||$250||$650||$1,350||$2,350||$3,200|
Later on, if a more complete Business Plan is required … You will add financial information to the table above to include the annual and cumulative product development and administrative costs (Total Operating Costs) that you estimate will be accrued prior to financial “breakeven” on product revenues. Breakeven is a financial term that refers to the time when your revenues are projected to equal, or offset, your total expenses − a significant milestone that indicates company self-sufficiency and an end to reliance on investor capital.
The operating losses that would accumulate up to the breakeven point reflect the total amount of investment capital that you project would be required. This projection will be used by professional investors, in conjunction with projected future sales and operating profits, to estimate the “present value”, or the current “valuation” of your company.
Each component of the valuation analysis will be open for discussion, challenge and negotiation, because an agreement on company valuation is the basis for determining the price per share investors will be willing to pay for a piece of your company. For more details, go to Startup Fundamentals.