There are a bunch of other topics I want to cover, that we will cover going forward, but I hear the entrepreneurs who love math out there! I can feel you. I can hear their hands clicking buttons on mice looking up research. I can hear them double-clicking on excel to launch a new cash flow model. I can hear them saying, “What if I change this variable in my ROI model.” It’s all out there. So the data nerd in me must acquiesce with the math folks.
To those of you who are not math folks, I say stick around. Yes, we’re going to do some math here. I’ll break it down into itty-bitty bits. I’ll walk you through it. But understand, those who like math are going to get bothered later when I explain why they need some art and not everything can be data-driven. Most entrepreneurs start in one of the two camps – science or art. In the end, to be successful, you need both.
So sciencey people this will set you a bit more at ease. Artsy people this will be a bit outside of your wheelhouse. But later we’ll swap roles and everyone feeling comfortable now will feel uncomfortable later and everyone currently feeling uncomfortable will soon feel comfortable.
OK, now I’m feeling uncomfortable because never have I ever read, that to start a blog, I should make everyone uncomfortable.
But this is an entrepreneurial blog, so if you’re not feeling uncomfortable now and then you’re not doing it right. So I guess if my blog never makes you feel uncomfortable, then I’m not doing it right. So let’s get into some math now and we’ll get into some art later. Is entrepreneurship like long division in finger paints? I like that.
Finding your market can depend on a lot of things: specificity of your product, transportability of your product, substitutes for your product, the ability for your product to be replicated (sorry, I know we had a pattern going but I thought it better to be clear than keep the pattern going), and other factors. And knowing these factors, as well as being honest with yourself about these factors, will help you understand where you need to start your market sizing.
Let’s say I want to make gourmet side dishes. I believe this is a good market because no one else is making carrots with honey and garlic or green beans with almond slices. So the market is wide open. So where do I start my market sizing? My market sizing is infinite because no one else is doing this.
Oh, no wait, let’s back up. I can start in many places. Let’s go with the total size of the food market. We’re selling a food that must be good, right? But is any consumer going to pick your product over sugar-wonder breakfast cereal? No. So that doesn’t work.
These are gourmet sides, which means people don’t need them, so are you now a luxury brand? Well, is anyone going to skip their fancy watch to buy your sides? No, sorry, but no.
They are vegetables, so maybe they are a health item, right? Do you substitute for vitamins? I’d say yes, that pith can be made but it might be a tough sell to vitamin buyers, especially high-end vitamin buyers, who often tend to get most of their vitamins through the food they eat and still buy over-priced vitamins. My frustration with 90% of the vitamin seller/buyer community I guess has been shown now but I stand by it. I’m happy to explain it later.
So back to our sides, what do we do with them?
Well, let’s get off of other products and decide what we are selling. Are these sides frozen or fresh? That leads us to decide whether are we local or looking to transport things farther with a longer shelf life, but might remove some of our exclusivity. That I can’t say for you, but our decision can be based on our earlier thoughts in this post and previous ones. What do we want to do? What is our brand? What are the substitutes? Are you willing to change your product to find more of a market?
If I am selling my grandmother’s famous collard greens with beans recipe, maybe I know that can’t be frozen, so that gives me one path to market. If I want to help the world understand that you can have good food that is fast and from the freezer, and one of the recipes I want to distribute is my grandmother’s collard greens and beans recipe, then great. If I believe my key to success is locally sourced foods being consumed locally, and we have beans and collard greens to make my grandmother’s recipe, that’s a different audience.
So how do you start your market sizing? Going back to earlier posts, find out your brand. What are the important things to your business? If your brand is fresh then think about where you will be selling your product. Imagine a consumer buying your product, where are they? What do they look like? If you see them buying your product in their local market, then your market includes ready-to-eat food from the grocery store.
From there you can start to research. How much ready-to-eat food do grocery stores sell on avergage? You’ll most likely get a percentage, something like 15% of a grocery store’s revenue is from ready-to-eat foods. Then research how many grocery stores are in your serviceable region. Use corporate websites to investigate average per store sales and then apply your ready-to-eat percentage to that.
For example:
I live in Charlottesville, Virginia. If I want to sell fresh collard greens in grocery stores, I know that my serviceable area is limited to Charlottesville and the surrounding cities. A quick Google search for “Grocery Stores” will show me all the grocery stores in Charlottesville and surrounding cities. I can zoom in or out depending on what I feel my area entails and Google will do the rest.
So with that done, I can count 6 Krogers, 4 Food Lions, 1 Giant, 2 Whole Foods, and 1 Wegmans. Using Kroger’s number, it shows their average store makes a gross revenue of about $14M per store. These aren’t the largest stores so let’s round down to $12M a year, or $1M per month. Normally I’d then go research the other chains but I don’t know if we need to be more precise. Let’s just take our $12M per store and multiply it by the 14 stores we have, giving us total grocery revenue of $168M. Once we apply our percentage of sales that are ready-to-eat meals (15%) we get a total ready-to-eat market of $25.2M.
So that means we can sell $25M of collard greens, right? That might be aggressive, but that’d mean all the ready-to-eat meals would be our collard greens, and while they are good, let’s not be that optimistic. So let’s pause here for a moment and look at our business. What do we need to sell to make money, to have this make sense? Would $1M a year be enough? (Don’t worry, we’ll get into how you come up with that number later.) If so, we need to capture 1/25th of all ready-to-eat meals. That seems aggressive. Think of all the ready-to-eat meals they sell from the deli, to pizzas, to cakes. But let’s keep going.
If we decide $1M is a reasonable number we can further break this down into $71k per store per year. If our collard greens are $7 per package, that means we need to sell about 10,000 packages per store per year or about 850 packages per month per store. To continue this, this means we need to sell about 28 packages per store per day. So looking at this, it seems offhand that we do not have the market to make collard greens a full-time business.
But don’t pack up everything and call it a day and give up. We’re entrepreneurs. Adversity is our bread and butter, right? If it was easy, everyone would do it. No, we’re cut from a different cloth, and we understand that all this means is we need to review our options. Let’s go back and review our assumptions.
Our assumptions here were our consumers are going to buy our product at a grocery store. But what if we changed that assumption? There are lots of places to sell that are not grocery stores. Farmers’ markets, convenience stores, direct-to-consumer through the internet, and opening our own restaurant, are just a few options. And that is if we limit ourselves to the consumer market. Maybe we could sell to restaurants and food shops as well. Now we can go back and do a similar exercise with the other options we looked at before and see if we don’t come up with a more addressable market, one where we don’t need every consumer to buy collard greens for a week.
This is all top down, that is, the total size of the market, then what percentage do we need to capture or what percentage do we think we can capture? But now let’s sanity check this all by building from the bottom up. Let’s say by including farmers’ markets, convenience stores, and direct-to-consumer we now believe there is a large enough market that we only need to capture about 0.1% which seems right for a side dish.
But let’s get back to the total numbers. Let’s say that the market is now large enough, but the total number of outlets is now 300 outlets. If we divide this by 20 working days, we would need to deliver to 15 outlets a day. Is that reasonable? What if to get to our number it is 1000 outlets? What is a reasonable number of outlets for you to get to each day?
This is a time to be honest with yourself. Don’t be a hero. Twelve-hour days, 7 days a week, is not sustainable. For short bursts it is possible but it really can’t be done day in and day out. So figure out what does make sense and is completely maintainable. If your market and outlets is reasonable, great, get going. If it is not, then again, let’s not give up. Maybe we need to sell more than collard greens. Adding in other dishes might mean we can increase our sales per store, thus reducing the number of outlets we need. Maybe we need to consider making the collard greens a frozen dish and then we can increase the region, thus the number of stores we have, meaning we need fewer sales per store and the product has a longer shelf life. Maybe we can find a distributor or partner who already has a set distribution route and we can sell through them. There are often lots of options.
I wanted to start with a less-than-ideal scenario because all too often when learning about markets, or entrepreneurs are doing their own sizing, they use nice shiny numbers where everything works out easily. Grocery store revenue is about $850B country-wide. We would only need to capture 0.0000011% of that to have a million dollars in revenue. But by getting more specific we can see that our market is not $850B and that capturing some of the addressable market has logistical issues.
We’ll talk more about cash flow, break-even, and other financial issues later. I wanted to start here because sometimes life doesn’t always give us the answer we want. This doesn’t mean we have to stop, but we might need to change things up. Changing things early is usually easier than doing it later, especially if that change is dramatic. And an answer we didn’t want doesn’t mean we’re ruined but, to paraphrase the sheriff in Cool Hand Luke, we just need to get our minds right.
Speaking of finding answers, let’s talk about finding breakers. Personally, I’m a fan of USB outlets like this or outlets with motion-sensing night lights for walking down the hall at night, like this. Changing outlets for your home is a fairly easy process. Here is a good video on how to do so. Now in the beginning of this video Jerry highlights that before starting, you need to flip the switch on the breaker to kill power to the outlet. Jerry strolls down to his panel, and low and behold, it’s clearly labeled and an easy job. But like our market sizing from above, it is not always that easy. Most hallways are included in a room, and the panel often won’t say “kids bedroom and upstairs hallway”, it’ll just say” Kids Room” or something.
But does that stop us? No, we’re entrepreneurs, and we find solutions, not problems. So we just hot-swap the outlet, meaning we do it with the power on, right? Um, no. No, do not do that. Let me reiterate, do not work on any electrical when the power is on. So what is an intrepid entrepreneur to do? Same thing as we would when market sizing, find an answer. When I was a kid, this entailed my dad being at the breaker box, me at a table lamp plugged into the outlet, and a lot of shouting as he flipped breakers one at a time.
Fortunately, now there is an easier answer. Enter Klein Tools Digital Circuit Breaker Finder with GFCI Outlet Tester. A link to the tool is here. This fancy tool is magic. Well, it’s magic or I just don’t know the science behind it. If someone wants to leave a post in the comments about how this tool works please do, I love to learn new things. But until then, all you need to know is this. The tool comes in two pieces. One piece is plugged into the outlet that we want to change. We then take the wand part and head to our fuse box. Slowly we wave the wand over each circuit breaker. The tip of the wand will stay green over the circuits that do not have the Klein tool plugged into it. Once we get to the breaker that does contain the outlet with the Klein tool plugged into it, the tip goes red and the wand emits a tone. Now you know what breaker to flip and you didn’t go hoarse yelling up to your helper. This being said, please double-check the outlet is off before starting.
I feel like I’m left hanging at the end. What is the conclusion or takeaway or what can I expect to read in the next post?