Category: Valuation Tools

Scenario: a startup comes to you with a turnkey solution for auto mechanics to manage their email, website, service bookings, advertising, and customer relationship.  After talking to their customer they claim that the shop owners are interested in paying $40 a month for this service. How many customers are there for this service in Ontario?

Starting off we’d look at the value offered by the start-up.  At $40 a month, that’s about the spend on office coffee so this value entry point doesn’t limit the market much and we can discard this information as limiting market access.  If the service cost $4000 a month, that tier would limit the number of buyers and we’d need to understand more of the auto mechanic vertical and their revenues and costs in depth.

The second question we ask is how mature is the understanding of the buyer?  Does a buyer know the value they get with the purchase? Or do they see it as a necessary evil?  Are their early adopters in the field? Does it give mechanics a competitive advantage? Do mechanics already have this service and will they switch?  These questions matter when doing a market size assessment because they put all the buyers in segments (a ready to buy segment, a ready to switch segment, a segment willing to learn, and an avoid segment).  Clearly the avoid and the willing to learn don’t really count as the market right now. So we build up a profile of the two segments next: the willingness to buy segment has reviewed the costs and the value and are convinced they want to do this, and a ready to switch segment already has this functionality but the value is better and they will switch.  We make a guess: small firms with 4 or 5 employees will likely switch or buy once every two years, bigger firms may want some education but their cycle may take longer as they unwind things with their current provider.

The last question is how much of this big number can our startup address.  How will it reach out to these owners and make the pitch, what incentives will they offer?  How effectively will they convert the segments into actual sales? This is not as tough as it seems.  If the startup has one sales representative and takes one week to get 50 leads, send out emails, make phone calls or personal visits, then by the end of the week they have 4 customers agreeing to a sales pitch, and 1 of those ends up buying.  So a simple value is that out of 50 prospects 1 will buy every week.

Now let’s put this all together.

Market SIze Steps	Market Size
We go to Industry Canada and identify all the registered businesses in the 8111 industry group code for Automotive Repair and Maintenance in Ontario.  This number is usually smaller than the actual number of operating businesses, but that’s what you want for a conservative estimate. https://www.ic.gc.ca/app/scr/app/cis/businesses-entreprises/8111	8537
Employers in Ontario with 1-4 employees	5321
Likely buyers (50%)	2660
Charging each one $40 a month makes the market size	$1,276,800.00

 

3-Year Revenue Ramp Steps	Revenue Penetration
Reachable with one sales representative (4 x 1 a week)	4 per month
Total buyers with one sales representative after one year (12 x 4 a month)	48 buyers
Monthly Revenue after one year (48 buyers x $40 per month)	$1,920 / month
End of year revenue considering 48 weeks of sales (first month 4 customers, second month 8 customers, then 12, etc.)	$12,480 / 1st Year
End of year revenue by adding 4 customers a month second year	$35,520 / 2nd Year
End of year revenue by adding 4 customers a month third year	$58,560 / 3rd Year

 

So at the end of the 3rd year, the startup is addressing 4.6% of the market and has about $59,000 in revenue.  After you go through this exercise you can compare to your own business experience and give guidance or conditional financing to the startup to improve the results of the bottom up 3-Year Revenue Ramp.  In this specific example, I would want them to either close more deals in one week or increase the price of a closed deal so that a sales rep will be producing enough to cover their own salary and the salary of the other team members producing the product.  There might be some sense in hiring more salespeople, but the business model seems weak enough that it needs to be improved before hiring more people to sell using it.

By doubling the price of the service, and doubling the weekly number of closed deals you get to $50K, $142K, $243K for the next three year ends respectively.  And giving you about 9% of the market after 3 years. This kind of business model could then be multiplied by adding more sales people and ramping sooner.