Why 2% of China Won’t Be Your Customers – Bottom Up vs. Top Down Business Models

How many times have you seen (or written!) something like the following:

“Based on our revolutionary technology that offers five times the current industry standard performance at one tenth the average price, we predict that by Year 3, we will capture 20% of the $2 billion worldwide market.”

This is what I call the “If we only get 2% of China” fallacy. And it’s an obvious “tell” that your business plan assumptions are either naive or glossing over exactly how you’re going to get your customers.

Yes, if you have better technology at a better price – and have the ready access to distribution, you may well capture 20% or more of a given market. The point, though, is that this magic 20% is not just going to fall into your lap. You have to fight for each and every sale, and what’s more, the more of the market you capture, the harder your existing, and future competition, will fight to regain it. This is “top down” forecasting.

Far more effective are “bottom up” projections.

Describe how you’re going to get each sale, what your revenue is, and what your costs associated with each sale are. Then address issues of scaling – meaning as you ramp up to greater and greater volumes, will you have capacity issues of personnel, equipment, bandwidth, etc. That’s what a business model is.

Use overall market size to show how attractive your industry is, and what the potential ceiling for your revenues might be, then a granular business model analysis to show how you’ll get your customers.

Nobody really cares what percentage of the market you have, just how many profitable customers. So instead of focusing on a percentage of the market, focus instead on a percentage increases you’ll have in terms of sales, then convince investors that you’ll hit your targets. Start from the bottom and go up, and you’ll have a better chance of making your bottom line.

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