Do the math: An easy formula to forecast customer growth

Venture capitalists don't want to hear about value – at least not initially. Before you have a shot at a capital injection, you'll first have to provide firmly grounded revenue projections. And to do that, you need to know exactly how your customer base in going to grow.

The benefits extend beyond VC interests. Customer forecasting correlates closely with cash forecasting, so the better you are at predicting customer behavior, the better you'll be with cash management. You'll also better be able to identify the tasks that matter, leading to better resource management.

Depending on your business, it may be simple to forecast growth, based on search engine marketing, affiliate marketing, site traffic, conversion rates and repeat purchase rates. But an enterprise sales structure may prove more difficult - retention may be easy to forecast but acquisition is hard to estimate.

Don't try to boil the ocean.  Start with a simple model, and improve it as you learn.  What follows is an initial approach that you can tweak to your individual business.
Who will buy and why?

This needs to be crisply defined, even if you think it will change next week.  A good entrepreneur will be open to new markets if that's where there is uptake, but you have to start with some point of view.  Each vertical or customer segment requires a different language, so pick one to start and iterate.

There are fundamental differences between business customers and consumers, but you can start with a similar customer model for each.  Acquire, grow, retain.  That's it.  Have a strategy and a basic plan for each and you'll be able to build a believable growth model.

Customer acquisition is a numbers game

Every business has a different model for acquisition.

While marketing and sales are equated with branding in most people's minds, it's really a numbers game.  The key is to identify your customer sources and build basic processes and metrics around them.

If your marketing plan is "Post cool videos to YouTube and get 10,000 registrations per video," you'd better have a good reason why it's 10,000 and not 1,000.  And if videos make up 95% of your customer acquisition, you're unlikely to get much traction with investors until you have proof that your videos drive 10,000 registrations a pop.

There's no magic (except maybe a good PR agency).  Don't assume.  You have to feed the acquisition beast with whatever works, and put in the time and resources to meet your numbers.  Better to tweak your product or service to the needs of more prospects than vice versa.

Better yet, experiment with other approaches that lead to more prospects, better conversion or more revenue per customer.

This is part one of your forecast: For each lead source, [number of leads/visits/registrations * conversion/close rate] = new clients per month.

Multiply it by average deal size, and you have a "new revenue" forecast.  Draw the population flows on a whiteboard, photograph it, print it out and tape it to your monitor or the side of your laptop. This will be your life going forward.
Ignore existing customers at your own peril

Keep a real close eye on growth from existing customers, as it's your easiest source of revenue.  Monitor any revenue changes from them on a monthly basis and know why it has changed. If you're trending negative, your core customer value is eroding – and that bodes poorly for your revenue forecasts.  Have a couple beers with the team and think of ways to nudge this number up every month.

Focus also on your retention - the percentage of customers returning on a regular basis.  This should be a relatively stable number, with some seasonal influence and external economic influence.  Watch this closely, especially as your business grows.

This is part two of your forecast: [# of existing customers * activity/retention rate] = retained clients per month.  Multiply that by the revenue growth rate, and you have a "recurring revenue" forecast.

Keep a close eye on the activity/retention rate, since it can decline over time. Keeping this metric as high as possible will always deliver your highest ROI.

The world is a tough place, especially now.  Assume there are 10 other companies doing exactly what you do.  You may beat them with speed or neat features, but with a solid revenue plan and defensible growth forecasts, you'll have better access to capital, can spend less time worrying about payroll, will have more time to try new ideas and know where to look if and when you miss your numbers.

Image by Siege N. Gin via Flickr.

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