For aspiring entrepreneurs, businesses looking to expand or first-time business owners establishing the viability of a product or service in a specific environment or demographic is vital.
The best way to gauge the long term potential of a business idea is a comprehensive feasibility study. Understanding who will pay for your product, what competition is already in the area and what service niche your business will fill are only a few of the many intrinsic parts of ensuring a business thrives. Too often, people invest money in a business only to find out later that there is insufficient demand for the product or that it’s not the type of product that customers want to buy.
To reduce the risk of failure and losing money, potential business owners should carefully review the different aspects of running their business with a business or financial adviser long before they commit funds or try to obtain a loan.
This initial research process is known as a feasibility study. When completed, if the results of the feasibility study are favourable, it is used as a template and resource to draft the first-stage business plan.
One of the fundamental components of a feasibility study is an evaluation of all relative revenue streams, as well as a financial projection estimating all funds that will go into and come out of a potential business.
In order to create a detailed relative revenue report, there are 3 key figures that need to be calculated.
Sohum Mehta: Key Figures for Calculating Relative Revenue Streams
1. Lead to Customer Conversion
Of all the figures associated with a feasibility study, this one is the hardest to gauge. But, why?
The rate of lead to customer conversion is hard to calculate because it relies solely on a business’s ability to turn potential customers into long term and frequent customers.
“For every other number there is data that you can find, but your conversion rate is so unique to your specific situation,” notes the Projection Hub website. “In order to make your initial estimate it might be best to go do some firsthand research.”
2. Repeat Customer Percentage
Frequently returning customers are the lifeblood of all businesses. Assessing how many customers are likely to become repeat customers will require looking at statistics for businesses and revenues in your area, as well as some more observation.
Often paired with a figure called the Lifetime Value of a Customer, these numbers are key in helping to plan future expenditures and growth forecasts.
3. Number of Purchases per Customer and Value of Purchase
To properly forecast expected revenue, a potential business owner also needs to estimate the number of times a customer is likely to purchase or visit their business each month.
Of course, the frequency customers visit will depend on the particular business. For example, grocery stores can expect customers to visit once or twice a week, while clothing retailers may plan on customers visiting once every one to three months.
That is where the value of purchase figures comes into play. While a grocery store’s repeat customers may visit more often than a clothing store, the clothing store may expect each customer to spend at least $120 each visit, while a grocer may only expect $25 a visit.
Once these rough figures have been tabulated, business owners can gain a better understanding of the overall feasibility and long-term viability of any potential business idea. The more detailed and exact a potential business owner is when drafting their feasibility study, the more likely they are to get factual estimates of expected revenues.