Forecasting for a Music Studio Business - What would be your approach?

[Matt Will]

Hello all,

First post to this forum ever. I don't know why I've been late in utilizing a business forum for my research.

Anyways I intend to open a new type of music studio and rehearsal space in a large US city. I have a great idea and am ready to move forward on it. Unfortunately I don't have the financing yet, so I'm writing a business plan to approach investors.

I can breeze through writing the bulk of the business plan, but I hit the road block when it comes to forecasting models. I can't seem to find any data on music studio businesses. I find it hard to put any numbers together that make sense. My studio will appeal to a much broader variety of musicians.

I'm a technical numbers guy and at this point I'm willing to do the following as a forecasting model.

1. Outline some key marketing strategies I intend to follow through on in the first few months.
2. Multiply the total expected exposure of these strategies by the average percentage of musicians in the US.
3. Multiply that number by the average rate of return on a marketing campaign. For example, a typical campaign might return 1-2% of consumers exposed to the campaign to purchase the product/service.
3. Research data on the average growth of a start up by month/quarter/year. So maybe startups average 25% growth per quarter on average.

The problem I'm having is that the local marketing strategies I've approached will expose me to a lot of people, 100,000+. Music studio's experience high upfront construction costs due to their extra sound isolating and treatment design and equipment needs. After that they have low overhead and don't require very much to break even.

My idea will experience the same model. The problem is that even if I get just .1% of 100,000, or 100 people, then my studio could potentially break even and be in profit starting at month one/two. That is my optimistic scenario that I don't think I can approach a bank or angel investor with.

What is a more realistic model that I can build off of to put into my forecasts?

I wish I could just say that we expect to market by using the following 5 levels of strategies. We're uncertain what the response will be like in terms of hard numbers, but let's build two models. One where I only start at 5 customers in the first month and grow at that stagnant rate of customers a month to a total of 60 repeat customers by the end of year one. I would still almost breakeven at that point.

The other model would be more optimistic, yet still not as much as how I honestly believe the company could go if I get my advertising agencies on board and on schedule. The other model could be I get a conservative response at national averages from the campaigns. I sign 10 customers at the end of month one. By using a referral incentive system along with continued advertising the studio signs new repeat customers each month that total 1.25 times the previous months total. So for the first month I would have 10 customers. The next month I bring on 12.5 new customers for a total of 22.5 customers.

The total number of customers forecast 12 months out would be as follows:

month 1 - 10
month 2 - 22.5
month 3 - 38.13
month 4 - 57.66
month 5 - 82.07
month 6 - 112.59
month 7 - 150.73
month 8 - 198.42
month 9 - 258.02
month 10 - 332.53
month 11 - 425.66
month 12 - 542.08

That would be real great to forecast, but it still has no real solid foundation of where I got those numbers, rates, etc..

What would you do? What research data would you be looking for to come up with some more hard forecasts?

[Matt Will]

Here's the best I could come up with. Let me know if you guys would adjust this in any manner.

I have a few advertisers who have channels for me to reach out to a potential audience of 200,000 local people. I then take a figure from the North American Music Merchants, NAMM, that says 58% of american households have one member that plays an instrument. 43% of american households say they have two or more members that play an instrument. NAMM then used these figures to estimate that 84 million people play an instrument in the US. So with a population of 330 million we can estimate 25% of americans play an instrument.

So I take 200,000 from my potential audience and multiply it by 25% = 50,000. If a typical marketing campaign gets a 2% response then I can say I'll get interest from 1000 people. Then I multiply this by a sales closing ratio of 50%. Thus, 500 customers. That could be my VERY optimistic forecast.

I think that static values would have to be the number of people marketed to, percentage of people who are musicians, and even the % of people who respond to an marketing campaign. The only variable might be the closing ratio such that for a more conservative model I could say I only close on 10% of the opportunities. Maybe I can adjust for a campaign that gets less than a 2% response?

Problem with that is that even with 100 customers I would be well on my past my breakeven point and perhaps in profit. That would be after just 1-2 months of operation. I can't take that analysis to a bank can I? My business model has very little to no overhead. No production costs. Little upkeep. I would be the only employee as the business would allow for minimal operations management.

What do you suggest I do for a forecast model? Is what I just presented sound enough for a bank to trust the business plan?

[akula]

ummm...no. you are way off the mark in terms of foundership and forecasting.
what you're doing is thinking up numbers out of thin air and that's a mistake (for a lot of reasons).
what you need to do is change how you think and do what i'm advising you

forecasting is done in this way:

a) you want to start a business that somehow solves some problem for your target market (i.e. recording artists)
b) in order to forecast what you need to do is to survey your target market (i.e. you contact 1000 artists you found on myspace)
c) in the survey you ask people if they'd be willing to pre purchase your services by agreeing to a letter of intent where they say "yes, i might buy from you if you can deliver)
d) these letters of intent serve as the basis of a forecast that you would present to a bank, or whatever financier you're pitching
i.e. you go to the bank with a box of filled out surveys saying "hey, give me money, I can make the sales because all of these people in the box are waiting to buy my stuff. call them if you don't believe me."

if you can't get these letter of intent, it means that you don't know who your target market is, what the market is willing to buy, how to market to your prospects and how to close sales. if you can't get these LOIs, it means you have no business starting your business.

get those surveys done and get those LOIs confirmed. that's forecasting in a nut shell.
that's real entrepreneurship as opposed to creative writing

[Matt Will]

To be honest I don't know what to think of your answer. A lot of the numbers I posted were not made out of thin air and in fact come from research done by reputable bodies. I posted four values to my forecasting equation.

1. The number of people I would reach with my marketing efforts. This is a given number as after speaking with the advertisers I want to use this number is how large their subscriber base is.

2. The percentage of people who are musicians. NAMM has does extensive research on the music industry and has some up with some consistent findings over the years that allow them to estimate what percentage of the population plays an instrument.

3. The number of people that respond to the campaign. I posted 1-2 % because that has been expressed by many marketing research sources that a 1-2% response rate can be typical for things such as direct mail and email campaigns. I can't find statistics on other channels or marketing at the moment.

4. The last value is the closing ratio. This is the most unknown value for obvious reasons. In talking with musicians they express a lot of interest in my idea, but until I can actually sell the product I can't come up with a real closing ratio. That is why I said this could be the variable in the equation when coming up with conservative versus optimistic scenarios.

I have never heard of a company collecting letters of intent from potential customers and using that as their forecast in their business plan when presenting to a bank. It doesn't answer any questions going forward.

1. How many people will you be marketing to? How many will be converted to sales?
2. What are your 2nd year projections? Are you supposed to ask people in the survey that if they don't sign up in the first year that if they will sign up in the 2nd year of operation? What about a 3rd year projection? Many business plans project financials out 5 years. How does this survey help? It's not really forecasting. It's pre-opening marketing on the short term of which long term projections can't be cast.
3. How would the bank know you didn't just go find 1000 random people, or even fake people, to sign these surveys? Whereas if I can show a methodology of marketing to a market and then using marketing industry statistics to break down response rates then there is very little I can do to fake the numbers.

That's not to say I don't talk with my target market. I have and the response has been good, but bankers want to see numbers on sales projections along with repayment schedules. What do they care if I have 1000 letters of intent if my breakeven point takes 3000 customers and I can't reach that for 6 years when I'm showing myself as budgeting for only 3?

There are still too many questions left unanswered with your LOI method. It's also very time intensive. Is that how I am supposed to continue marketing the company when I open? Once customers start rolling in I won't have time to sit behind a computer going on myspace sending messages. Thus I have to start more traditional marketing techniques. Why would I not just use those techniques from the beginning then? Myspace marketing is very unprofessional. Do you think an angel investor cares about a letter of intent when you're trying to raise $500,000+ for a new business? They need something more substantial than a possibly faked letter to invest that kind of money. I think banks have the same opinion on that.

[akula]

Matt, I’ve read your reply.
Let me remove any uncertainties that you might have and set you on the right track.
Let me emphasise again; you need to change how you think and do what I'm advising you.
I will now explain why that is;

Your current forecast
There is nothing wrong with how you are forecasting and writing your business plan. You're doing everything right. It's all very logical (I don't have an issue with your assumptions), factual and no doubt, brilliantly worded. In all probabilities, your forecast and breakeven is a masterpiece in critical analysis and secondary market research. Unfortunately, if there is one certainty in life, it's that everything that's written in your plan and forecasts is fantasy. The interesting thing is that from a lender's perspective, this fantasy is a prerequisite for rubber stamping. It really makes no difference what numbers are written in your plan (as long as they are BIG). All of these numbers are going to change once operations start. None of the numbers in your forecast will have any resemblance to what's actually going to happen in the future...alas, the forecast has to exist anyways and stay on file with the bank. Of course, the entrepreneurs know that the forecasts are all bullshit, and the financiers know that the forecast are bullshit. Yet, we make them anyways because documentation is important for financing purposes.

What you need to do
Therefore, because the forecasts in your plan have nothing to do with reality, the actual lending decision will not be made on the basis of the wishful thinking you quantify in your expertly written fairytale. The decision to lend will be made based on the fact that there is evidence of the manager going out in to the market, soliciting customers and closing deals. It's the next best thing to the business having an actual historic track record. There is evidence that you can make the business work. That you can sell. Based on this evidence, it is possible to determine that you'll be able to make sales in the future (because you've been able to make them in the past).That's the important, informal evidence that the bank manager needs if they are going to enthusiastically write you a loan which you're gonna have to service. Likewise for angels. Angels are essentially betting their money on your innate ability to get shit done effectively and on time. In this context, there is no substitute for LOIs as a form of evidence to prove to financiers that you are a capable operator. For equity financing, no one cares at all about business plans. That's not what financiers bet their money on.

At any rate; if you don't have any of this customer related documentation, all you are is a guy sitting around writing fairytales, and you will be treated accordingly. Get the surveys done. Get the LOIs done and people will treat you differently. Right now you're just a guy with some fantasy in your head and you need to move forward from that to a reality.

Use primary market research for your forecast. Do not include secondary market research for any purpose other than to pad out your business plan. No one cares about how many customers you fantasise about. What we care about is how many customers you've contacted so far. This serves as the only rational basis that we can have to forecast privately for ourselves how many customers you'll contact in the future. And as financiers, it's our own forecasts that we make privately about your business that really matter. Not what you give us in your submissions.

Good luck. Keep it real.