Top Down Revenue Forecasting.

Top down forecasting uses macro data such as market size and market share estimates to build revenue forecasts. One of the key challenges with this approach is building estimates of market size. That's a total revenue for a product in a given year, particularly if major players in the market are private companies that don't publish revenue information. In this situation the analyst could rely on estimates produced by market research companies, or the analyst could build their own market model. Market model typically starts in the same way as bottom-up revenue analysis. We need to consider what the forecast drivers are for market size. Let's assume that we want to estimate the market size for energy drinks in the US and we assume that this is best estimated using the number of customers and average revenues per customer. How can we estimate the number of customers for energy drinks? Well one way is to estimate the total potential number of end customers and the market penetration. That's the proportion of end customers which currently buy energy drinks then how can we estimate the average revenues per customer? Well one way is to identify the average selling price of the product and then to estimate the number of units sold to each customer in a year. Once this is done we have all the information needed to calculate current market size. However to forecast future revenues we'll need future market size estimates. For this we can consider the drivers which are relevant for each of our market size inputs. For example, total end customers will be dependent on population growth market penetration will be dependent on demographics and consumer preferences while units per customer and price per unit will be dependent on economic forecasts and consumer preferences. These drivers can then be used to build forecasts of Market size which are then in turn used to build revenue forecasts.