Realistic Growth Targets: Why Bottom-Up Planning Is More Reliable

Where do most growth targets come from?

In many businesses, next year’s growth target is born in a brief moment. The owner looks at this year’s revenue, thinks of the higher costs, of the competitor who is supposedly growing fast, and of what the bank would like to see. Then he says: “Twenty percent more.” The number is set. Then the search for a justification begins.

I call this way of setting targets top-down planning. It is not wrong because it is ambitious. It is risky because it skips the question of where the growth is actually supposed to come from. Which customers will buy more? Which new customers will be added? Who has the time to win them? If no answers follow, the target remains a hope with a percent sign.

Put simply, the question is: how do you arrive at a growth target that is ambitious and still justified? To answer it, we first look at why top-down targets so often miss and what bottom-up planning means, then use the Two-Way Test to put the wish and the calculation side by side, and finally examine the objection that a bottom-up target is too comfortable.

A target for which nobody can name the actions is not a target but a wish with a date.

Why top-down targets are so often off

Planning top-down relies on judgment. The problem is not that owners judge badly. The problem is that human judgment about the future is systematically biased, among laypeople and experts alike.

Fildes, Goodwin, and De Baets (2023) examined what happens when planners adjust their software’s sales forecasts by hand. They analyzed six data sets from 16 companies and business units in manufacturing, pharmaceuticals, consumer goods, food, and retail, more than 146,000 forecasts in total. Overall, human intervention made the forecast more accurate and less biased for only about half of the items. Often the improvement was barely better than chance. Downward adjustments helped more often than upward ones.

The authors also name reasons forecasts get bent that have nothing to do with the market. Forecasts are inflated to please senior management or attract resources. Or they are deflated so that a department shines at the end when it beats the number. Their study concerns short-term sales forecasts for individual items, not the annual targets of a small business. The finding still transfers: a judgment that does not rest on a traceable basis is hardly better than a coin toss, and it leans toward what one wishes for.

That experience does not protect against this is suggested by a study by De Baets and Vanderheyden (2021). They tested novices and experienced forecasters for typical biases, including optimism. All the biases occurred, and the two groups did not differ significantly. The authors’ good news: if everyone is similarly susceptible, the same remedies help everyone. One of them is a fixed calculation method.

What does bottom-up planning mean?

Bottom-up planning does not start with the number you would like to reach, but with the building blocks from which revenue actually arises. For a small or mid-sized business there are four.

Each building block rests on figures the business already has or can collect in a few hours. The weighted pipeline is described in the guide pipeline management for mid-sized companies, the repeat purchase rate in the article growing existing customers. The capacity of sales, meaning the time that really remains for conversations and quotes, is the fifth decision of a sales strategy.

The Two-Way Test: wish and calculation side by side

Bottom-up planning does not mean giving up ambition. The Two-Way Test, the mental model of this essay, combines both directions. First you write down the target you wish for. Then you calculate bottom-up what results from existing customers, pipeline, capacity, and price. The difference between the two numbers is the real subject of planning.

In the example, there is a gap of 190,000 euros between wish and calculation. Now the real work begins. Every part of the gap needs a named action with an assumption: the repeat purchase rate is to rise through fixed existing-customer appointments, and prices are to be adjusted by four percent. Together, the two actions close about half the gap in the example. For the rest there are two honest routes: name further actions, such as additional sales time, or lower the target.

Isn’t a bottom-up target too comfortable?

The obvious objection is: if you plan bottom-up, you only extrapolate what would happen anyway. A target has to challenge. That is half true. A target should challenge, but it should not discourage. The research on sales quotas, described in detail in the guide planning sales targets, shows exactly this limit. Chowdhury (1993) found in an experiment that effort initially increased as the quota rose and could fall again beyond a certain level.

Morelli and Braganza (2012) found eleven obstacles to workable sales quotas at a pharmaceutical company with 250 field sales reps. One was an unrealistic overall forecast, another the lack of involvement of the salespeople. Where data was missing, the revenue target was simply divided by the number of salespeople. That is top-down planning in its purest form. The authors point out that a single case is hard to generalize. The pattern will nevertheless sound familiar to many owners.

Bottom-up planning does not make a target small. It makes visible what it costs. If you want to grow 20 percent and find only 1 percent bottom-up, you do not have to give up. You have to decide whether to hire an additional salesperson, open up a new target group, or adjust prices. Those are real business decisions. “We’ll try harder” is not.

How growth becomes a question of structure

The Two-Way Test has a side effect that is often more valuable than the target itself. It shows where growth can come from and where it cannot. If the largest building block is existing customers, work on retention pays off. If capacity is the bottleneck, more inquiries are useless. If the pipeline is thin, the problem lies at the start of sales.

This turns growth from a question of will into a question of structure. That fits the difference between growing and scaling described in the article Scaling or just growing?. If you want more revenue without process, offer, and capacity growing with it, you buy revenue with complexity. A bottom-up calculation makes this danger visible early, because it asks who is supposed to do the additional work.

Uncertainty remains. No calculation predicts the future. A large customer can leave, a market can collapse. But the bottom-up calculation makes these risks nameable. You can ask: what happens if the largest customer orders 30 percent less? How to deal with uncertainty without freezing up is described in the essay deciding under uncertainty.

What you can take into your next planning round

The Two-Way Test fits on one page and takes an afternoon. These steps are enough to start.

1. Note the wish: Write down the target you wish for next year and the reason for it.
2. Calculate existing customers: Last year’s customers times repeat purchase rate times average revenue per customer.
3. Weight the pipeline: Sum of all open quotes, each multiplied by its close probability.
4. Calculate capacity: Sales hours per year divided by hours per order, times order value.
5. Name the gap: Subtract the total from the wish and write down an action with an assumption for each part of the gap. Whatever remains without an action, you strike from the target.

The result is a target you can explain to the team and that can be checked each quarter. If you want to translate it into quarterly goals and weekly activities, the target staircase mentioned above and the method from OKR for mid-sized companies will help. The target staircase calculates from the top down. It works best when the number it starts with is itself justified from the bottom up.

The question posed at the start can be answered as follows: a growth target is realistic when every part of it has an origin, in existing customers, in the weighted pipeline, or in a named action, and when sales capacity is sufficient for it. The top-down wish remains legitimate. It becomes a target only once the bottom-up calculation supports it.

Realistic does not mean modest. Realistic means every euro in the target has an origin.