This strategy of course does not only apply to online advertising or online businesses, but to all customer acquisitions strategies. It can be applied to a number of sales agents the businesses have, the number of leads that can be reached by them and by how many of these leads actually become customers.
The procedure for the coming years is similar, but with a new bottom line of working capital to be used in customer acquisition.
You could argue that this technique is not applicable to the word of mouth, social media, or viral marketing. However, the same metrics apply to these distribution techniques.
Virality has a coefficient, and especially has a timeline and a time slack that takes to the second level lead to become a customer after the referral from the first one. These coefficients can be used to calculate your financial projections for the coming years.
Which Approach Is Better?
In general, each of them has valuable points that could be more appropriate for different businesses or business models. A combination of the two is always the best solution.
For example, you could easily start with a top down approach and estimate a market share in one specific country of 5% in 5 years. Then you extrapolate the growth for the coming years.
Afterwards, you could apply a bottom up approach and answer questions like:
- Is this growth actually feasible?
- What is the viral coefficient that I would need to achieve 5% market share?
- How many people should I hire?
- What working capital is necessary and can I raise it from investors?
On the opposite side, starting with a bottom up approach and checking it with a top down approach will tell you what is the market share you are going to achieve in five years.
Next, you could take into consideration your reasoning on the product, competition, and competitive advantage and answer questions like:
- Would these numbers be feasible in this competitive market?
- How is the competition going to be in the future?
- Will I be able to maintain my conversion rates?
- Is this market share achievable?”
So, we could conclude that both of these approaches have strong and weak points. However, the combination of the two might give you maximum insights into how the company could evolve and also the strongest arguments to plan a better strategy and achieve those numbers in the future.
This article has been edited and condensed.
Daisy de Vries is the Marketing & Communication manager at Equidam, an online value management tool for small businesses. Her passions are startups, writing and technologies. Keep investors up-to-date in a consistent and efficient way with the Equidam valuation report. The report gives a clear overview of the performance of your company and enables you and your capital providers to understand and manage the value of your business. Connect with @equidamtweets on Twitter.
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