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So let's talk about revenue projections.

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Um, the height this is the most complicated I'm going to get to in terms of mathematics.

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So I think you should define revenues equals price times volume.

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The issue is figuring out what prices and figuring out what volume is.

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That's what a revenue projection is going to be like.

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So let's start with neither price nor volume, but in order to measure volume, we're going to have to figure out what it is that we're measuring.

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This is obvious in some circumstances, but it's not totally obvious in other circumstances.

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Some businesses are very simple in the sense that every customer looks roughly the same.

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Some customers, some businesses. Every customer looks very different.

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And we're going to start having to define something like an average customer.

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We can be more sophisticated, but just defining what an average customer is is a good starting point.

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So how would we do this? I just threw up a few examples.

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Where we have to think, how are we going to count our customers?

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Well, in a museum, it's pretty easy. People often don't come back to a museum.

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So at least in a simple world. So we're just going to count the number of visitors in our museum on a particular day, week or year.

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Well, we're going to go to a restaurant and a museum. Everybody pays the same.

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So maybe we're going to account for the fact that at some discounted prices and some and regular ticket prices.

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Now, if we're going to a restaurant, we're also going to count.

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Well, how many customers do we eat? Come. It's a bit more complicated because some customers eat three courses, either eat one course.

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So and they've all pay different prices.

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So we're going to have to work harder and saying the typical customer in my restaurant is going to pay £15 or £25 or £5 or whatever it is.

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So we have to think a little more about it. Now, this is great, but let's go to a different world, an online newspaper.

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Oh, well, that's very different,

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because I can't just count the number of people coming into my restaurant because it's a completely different business model.

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So you probably have to think about the number of annual subscriptions, plus the fact that half of the people want to have the content for free.

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And so our unit in which we're going to count our revenue is very different.

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Online video game. It sounds like the same like online newspaper.

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No, it's not, because in our online video game, there are all these additional revenues that players get from buying additional features and,

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you know, special hats and costumes and swords and so on.

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So we're going to again, struggle with just defining it.

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What is the unit that we're selling? Because we're selling more than one product.

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A nuclear power station now gets really interested.

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How are we going to do that?

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Well, first is we're going to have an incredibly long horizon, obviously, but we're going to have to sell what's the unit that we're selling.

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And then you have incredibly varying prices in the energy market.

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So, you know, you're obviously selling kilowatt hours or something like that, but at very different prices.

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Fashion consultant. Now, here's an interesting one.

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What is how are we going to build a revenue model with prices and quantities for a fashion consultant?

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Because a fashion consultant might just have three or four clients.

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And so we really have to think of the unit as a contract.

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But some contracts are going to be relatively short engagements.

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Some of them are going to be long term engagements where I'm going to work a lot with one particular client.

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So we're going to challenge it's going to challenge us to think really hard about our business,

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to even think, how do I think about different customers,

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military subcontractors, kind of actually similar, except that in that case, in the case of military subcontractor, you typically have one client.

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So there's really no meaningful often it's just one contract and you're trying to figure out what's that contract worth.

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The point I'm trying to make is you look at these industries, there's huge differences in how we defined a unit of analysis.

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Now, once we defined a unit of analysis, we can use relatively similar techniques across all industries.

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We're going to start by estimating prices. This is basically the question What can I charge to my typical customer?

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This could be the person coming through the museum, through the restaurant. It could be the online subscription price.

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How do I do that? Well, the different methods for coming up with an assumption of what we think is a price that our typical customer is going to pay.

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By the way, if you want to get more sophisticated, you recognise the fact that different customers have different willingness to pay.

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And you can you don't have to do the average customer. You can do a set of different customer profiles.

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But I'm trying to keep it simple for now.

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One customer, I can basically have a very customer centric view that says what value add my bringing to this customer?

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What is his or her willingness to pay? This could be in if you're selling to businesses in order to assess their willingness to pay,

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you might do a slightly more complicated calculation where you're going to prove them.

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This is how much money I'm saving you, and therefore you should be willing to pay me half of your savings.

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We call that our return on investment logic, where if you buy this, you guys as a corporation, you're going to get a return on investment.

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That's typically not how you would think in a business that's selling directly to consumers.

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But you still worry about the basic question What is their willingness to pay?

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And you definitely want to segment your customers because their willingness to pay is going to differ between the early adopters and a mass market,

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say. There are different logics, though, and I'm just giving you a way of thinking about them.

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And you're going to mix these ways in coming up with your best estimate.

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Another very different one is sort of a competitor based logic.

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Think of a spectrum of cost in all prices.

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I could have said here. Think of a spectrum of the prices people are willing to pay as a function of quality.

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Think of hotels. Well, so what you're going to do is you can say, well, people obviously want a place to stay overnight.

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So there's a willingness to pay.

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But the price I'm going to be able to charge are largely determined by the sort of price quality trade-off that's in the industry.

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So I'm going to have a real cheap motel. Well, there's no way I'm going to charge more than the Four Seasons.

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So my pricing is constrained by the sort of price quality spectrum that I'm finding in the industry, and that's a competitor based logic.

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And you want to think about the market dynamics.

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So for example, in technology markets, you often a hardware markets say you have market dynamics that says prices are falling over time,

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sometimes very rapidly, and you really want to think about where you are and in those price dynamics and then.

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Sort of the opposite picture is typically when you're coming into an industry.

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And by the way, I don't really recommend that as a strategy.

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You've got to be careful with it. But many people come in at a low price.

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I don't have any customers. I'm competing against everybody else.

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Let me come in at a low price, sometimes a terrible strategy because you're undervaluing yourself.

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You're sending the wrong signal to the market. In other cases, it's a reasonable strategy.

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But the point is you're basically figuring out the prices you're going to charge as a function of what the competition is.

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And then you say, Well, my introductory price is going to be at a 20, 30% discount to something like that.

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These are all competitive logics, and there is a sort of third logic that is worth being aware of,

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and that's sort of the constraints that are imposed by the values and value chain.

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So here I just sort of produced a simple value chain where we're thinking about whom are we selling to?

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Are we selling our product to a distributor? In which case, well, maybe this is, say,

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a $9 price or now we're actually selling our product straight to the retailer because we're going to do the distribution.

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We're talking about a different price range,

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and that's completely different price range you get from being the retailer yourself and selling directly to consumers and even there.

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Don't be fooled by the suggested retail price because only a small fraction of customers actually paid a suggested retail price.

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So in building our pricing expectations, we have to be aware of these industry dynamics and get familiar with them.

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These are a bunch of tools that we can use to generate the prices that we're going to use.

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By far the most times you're going to spend on trying to figure out estimate are estimating your quantities.

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How many units am I actually going to sell? And I'm going to give you four different techniques.

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And each of these techniques are reasonably practical.

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And in some businesses, some of them work better than others.

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In an ideal world, you're going to combine them all, but that doesn't always work.

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So the first before we do that, I think it's really useful to have this tiny little S-curve in mind.

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The S-curve, I think, is incredibly helpful for thinking about start ups,

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and it's incredibly helpful to think about new versus established industries.

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What is it? It's basically a curve that says over time the revenues of a, let's say, firm.

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You can do the same thing at the industry level, but, you know,

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at the firm level are going to increase, but they tend to increase in an S-curve like shape.

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Now, this is not a universal truth, but people have studied industries and firms have found that there's a lot of truth to that.

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And there's some good reasons that basically in the beginning.

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In the beginning, things are very slow and there's obviously a high uncertainty,

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which means a lot of companies just tanked down here and they don't go anywhere.

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But if the ones that continue, you then sort of see a rapid growth phase and then you see a slowing down growth phase in a mature market.

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So this is a start-up, this is a growth company and this is an established company.

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How are you going to do your financial projections is going to depend a lot on

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which of these three types of companies you are a start-up growth or mature.

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And the same is true whether you are in a new market, a growing market or a mature market.

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Your financial projections are going to look different. And we're going to see this S-curve coming back in a moment because it's really a useful tool.

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So top down, how we're going to do top down revenue projections.

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Well. The idea. I'm going to give you an example in a moment, but I'll just give you quickly a sort of a description of the method.

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Is you basically going to look. Not at your own business, but at the market.

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And you're going to try to say this is something you have to do in your business plan anyway.

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Every investor that you're going to present to is going to say, how big is the market?

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And so you want to have an intelligent answer for that anyway.

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Well, that intelligent answer can then also be used for informing your financial projections.

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And in an existing market, if you can use secondary market data and say the market for fashion ties is x millions of pounds.

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I because I looked it up online, it's generally available information.

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That's the business I'm in. And if you're in an emerging market, you can't really do that.

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That's where you're using the S-curve in order to sort of think about it and give a theoretical

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reasoning of why you think this thing that nobody's buying today will be a big hit in a few years.

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And now, classic mistakes. Everybody in China will buy my product.

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That's simply never true. And the other thing.

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Please, please, please never make that sentence. I only want 1% of the computer industry.

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It's meaningless. If you say that I only want this tiny little fraction of this market.

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Well, 1% of the computer industry is ginormous.

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So it's not small. Just because it's 1% doesn't mean it's small.

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But it also means that if you're only one 1% of the market, it means you don't understand your market.

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You have not segmented and categorised your market properly because if you had,

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then you should be dominating or playing more significant role in your niche.

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That's a classic mistake. Now, let me actually give you an example.

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This is actually comes out of a Harvard case study where we have a company that's

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trying to give retail care treatment to patients in a sort of clinic fashion.

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And they want to do this. And it's a very interesting business idea as the real business behind this.

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It's now some years ago, and they want to introduce this concept into China and they want to introduce this concept into Taiwan.

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And I just want to show you how people figure out the market sizes and on the basis of this example.

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The beauty of this is Taiwan is a mature market that's at the top of the S-curve.

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China at this time is at the bottom of the S-curve, not established market.

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So here is a couple of statistics that you can find.

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Population is now out of date is probably growing, you know, by a million every year, several millions and millions every year.

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But at the time, basically, China had 1.2 billion people compared to 21 million in Taiwan.

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And now this is the incidence rate of kidney failure, which is the symptom that we're treating.

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And we're basically going to assume that people in Taiwan and China have similar health.

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We could debate that, but we actually have data on the incidence rate in Taiwan.

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And so we're going to apply that to China. Classic trick.

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We understand one market. We're going to import the assumptions from one market into the market that we're interested in, say, China.

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So now we're going to get the number of people who have early stage renal disease, which is basically the symptom that we want to treat.

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And we're going to say, well, here is really interesting. We're not in Taiwan.

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Taiwan is a very a market, a very advanced health care system.

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We can treat everybody more or less so 100% coverage.

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That's never going to happen in China. So, you know, the way we're going to offer these clinics, our target market is not all of China.

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It's not rural China. It's urban China. And this estimate was 30% of people live in urban China, depending on how you define it.

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So now we've narrowed down already the number of people that we're going to be able to treat.

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And then we're going to say, oh, my God, not everybody can afford this. Well, Taiwan has complete health coverage, so everybody gets it.

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China, it's private health insurance. Only 30% of the people can actually afford it.

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So now we're going to be down to much lower numbers.

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We can charge hundred 56 for a typical treatment session in Taiwan.

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We can charge a third of that in China. And then we figure out how often does our customer come in a year and we can estimate the market.

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So now the annual revenue we're going to get per patient is calculated here.

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And based on this, we're actually calculating a market size.

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By the way, this is a great exercise to do because what you're doing is you're starting with

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a very large market and you're trying to figure out what is my relevant market.

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The mistake you should not do is to take the number that we have up here,

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which was basically 750,000 people and say we're going to have a market of 750,000 people and treating them,

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I'd say $53 because the relevant market really shrank down to something much smaller, 67,000.

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What we're getting at the end of the day, though, is an estimate of the market size.

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And I've given you a little bit of detail with an example of how to get there.

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Now we're going to use the second method.

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This is a top down method, and you can see why I'm calling it top down, because we're trying to understand the whole market, how much is out there.

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I have not talked about how much of the market I'm going to grab.

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So in these calculations, I'm not saying that I'm going to capture 268,000,

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and I'm just saying there's a market of 268,000 and somebody is going to grab it.

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Okay. Now, bottom up revenue projections is kind of the opposite logic top down for you, for those economists in the room is a demand driven logic.

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Bottom up is a supply driven logic. So I'm basically going to think about what am I going to be able to deliver?

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I'm going to define my unit. We've done that already.

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I'm going to estimate the number of customers multiplied by the average price estimate customer growth over time.

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And I'm basically focusing on what I think I am able to sell.

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So let me give you an example. This is some tasty fast switching.

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This is a business plan of one of my students from a few years ago who thought that it's a delicious South American dish,

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fresh fish with some some lemon. And they wanted to turn this into a fast food concept, basically.

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Great idea. It's a new restaurant concept. How would we figure out our revenues?

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Well, we start by saying what's our revenue from a typical customer?

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So I turn it into pounds here.

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So let's say they're going to eat as a side dish in a drink and we're going to offer that at £10, you know, probably, probably too cheap.

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But number of customers in our operations.

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Well, you know, we we may say at lunch, we can serve 50 people afternoon very operational numbers that are going to give me some idea oh,

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this is really something that we're going to do. The concept was to do it in your offices.

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This is sort of more appropriate for that business plan.

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So we're only open five days a week. That's going to have a huge impact on my revenue projection of whether I operate five or seven days a week.

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But anyway, what you doing is you just counting of numbers.

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And in this particular case, the estimate will come to just under £300,000 of revenue.

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Now, is this the right number? I have no idea.

198
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I just made some assumptions about people coming to my restaurant.

199
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So. But I know I can't deliver a lot more because I just don't have the capacity of holding more than 50 people for lunch or the evening.

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That's a bottom up logic. You want to be very careful here about how you ramp up revenue.

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So a classic mistake with a bottom up approach is to assume that you're at full capacity from the start.

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You're not going to be at full capacity from the start.

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These calculations, for example, assume that my restaurant is operating on full scale right away.

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If I was more careful then I would sort of build that up over time.

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Okay, so now I've given you two methods. I've given you a top down and have given you a bottom up.

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Um, so, um, we're going to try to combine them and the answer is basically the bottom up should be well below the top down.

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If the bottom up say what you can do is you can calculate the market,

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share the bottom up basically gives you what you think you're going to make the top down, gives you what there is in the market.

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You divide one by the other, you get a market share. And so, you know, if you somewhere say below 10%, then you're probably not aggressive enough.

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Maybe you should try to sell more of your product if you're getting more, you know, say between ten and a half,

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50% or something, maybe they're realistic, but you have to sort of have an argument.

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If you're getting above 50%, you have to say, am I really able to dominate this market?

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Am I going to be the biggest player in this market?

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If you're above 100%, you clearly have a problem because you projected that your revenues are more than what the market's actually able to bear.

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Okay, I'll go quickly through the other ones. Um. Copycats.

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Industry. What we can do in some businesses is we can compare ourselves to the industry and we can compare ourselves to our own past.

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This is mostly for more established businesses, so I'll sort of go quickly through.

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One important inside, you use the S-curve. If you're just going to use your own past or what everybody else in the industry is doing,

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you're going to underestimate the early growth because you're basically doing a linear projection of

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what's already happening and you're going to overestimate your growth in the rapid growth phase.

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And it's only in established businesses that you're going to come up with a reasonable estimate.

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Looking at your own past, the point here is established businesses.

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You can use your past growth rate and that's probably not a bad predictor. Start ups typically doesn't work.