You show your proposed framework to your friend, and she really likes it! She’s especially interested in figuring out how big the market is to best estimate how much coffee she can sell. She knows the market probably includes commuters, visitors, etc., but for now, she wants you to focus on Cambridge residents alone.
How do you estimate the size of the market?
Two potential approaches come to mind when estimating market size:
- "Top-down" approach: Start with a large number (e.g. total relevant population) and progressively narrow down.
- "Bottom-up" approach: Start with a small number (e.g. average cups of coffee consumed per day) and progressively scale up.
After you show her the potential options for estimating market size, she wants you to approximate the market size using your framework. Assume that Cambridge has a population of 100,000 people and, on average, each drinks 1 cup of coffee per day.
*Note: When making assumptions about market size, there is no “right” or “wrong” answer. Base your estimations on your reasonable assumptions about the market.
Now that you have the market size, your friend wants to gain a better understanding of how much coffee she would need to sell to break even in her first year.
How much coffee does she need to sell to break even in the first year?
Here is some additional information:
- Price per coffee = £3
- Cost to open shop = £245,610
- Cost to run shop each year = £163,740
- Cost per cup of coffee = £1
(Price * Quantity) - (Fixed costs + variable costs) = £0
Profit = £0
Revenue - Cost = £0
(3*Q) – (163,740 +245,610+ [1*Q]) = 0
2Q - 409,350 = 0
Q = 204,675 cups to breakeven