All language subtitles for 4 - L2 04 Top Down Approach 1 V1 - lang_en

Forecasting model requires careful thinking

about which approach you want to take to create the models.

One approach to modeling is top-down.

It takes a macro approach to forecasting.

Here, you start with the best estimate of the larger size of

the market narrowing down to identify

the portion of the market that the company is serving,

and then estimate what it will take to capture that portion of the market.

Top-down is a macro approach,

but it is less credible and typically adopted when there's limited historical data.

We'll next look at an example that shows why this is less credible.

Let's go to the weaker example.

We start with the online grocery delivery market,

which is about $20 billion,

and then we start getting into the specifics,

such as which market segments the company wants to focus on.

Say the executive team at WeCart wants to retain the focus on the urban market,

which is about $17 million.

Now, the assumption is that WeCart will aim to capture five percent of this market,

and with that we arrive at $850,000.

Finally, based on our product pricing,

say $4.95 per delivery,

we can now arrive at our sale quantity estimates of about a 170,000 customer orders.

As you can see, this is a less credible way to forecast because

you're talking in guesses and estimates based on macro figures.

It's harder to convince potential investors you

can realistically achieve this forecasted revenue.