Product Forecasting: The Forgotten Plan
Utilize a variety of time-tested tools
Develop a most likely scenario based on the best information available
Learn to avoid “confirmation bias”
Take an honest look at Market Share
Forecasting Directions: The Forgotten Part of the Plan
I frequently read detailed multi-page start up business plans with pages of description and financial detail of every line including details such as paper supplies and print ink. However, one of the most important drivers of the plan–the product forecast–is often comprised frequently of a few paragraphs or less. In point of fact, forecasting is often relegated to a minor role in the business plan, and often key elements are overlooked.
The product plan is a critical component of your startup process . You need specs, quantities and timing to even start a conversation with sources. You need margin assumptions to prioritize products and develop marketing plans . You need product categories, sizes, styles and colors etc. to estimate inventory requirements and ways to avoid a markdowns and stock outs.
The process of developing the product plan forecast its deserved place is not easy. This is so for many reasons, including:
- Forecasting is difficult (if not impossible) to do accurately. Key assumptions required for good forecasting are not always evident, and key metrics are not always
- Forecasting is easy to over-simplify. The proverbial “Hockey Stick” graph of revenue growth is a classic example
- Forecasting is often not based in reality. Demand, competition, market size, pricing marketing expense etc. must all be considered, quantified and explained in developing a solid and credible
Avoiding the Pitfalls of Poor Forecasting
So how does one develop a good forecast with little market data, no history and a brand new product or service? My approach—developed over many years of experience–is to utilize a variety of time-tested tools and then to develop a most likely scenario based on the best information available.
Before starting this process you must learn to avoid what is generally called “confirmation bias”. Here’s where things can easily go wrong in most forecasts and market testing. It’s Human Nature: We usually test to prove our hunches right. We start our forecasting with a favored option and try to build a case around it. We may deny this tendency, but it is all too common among hopeful entrepreneurs. The result is that the less-favored alternatives usually get short shrift—and these are often the more probable scenarios. The more that there is at stake in the test, the more susceptible we are to Confirmation Bias.
Once you have addressed the pitfalls of your confirmation bias, it’s time to take an honest look at your market or markets. Some suggestions for mediating this dilemma are: market share.
Sales Forecasting by Product
Accurately predicting future sales is perhaps the most difficult aspect of the forecasting process. This is based on what management expects to happen to the company’s market share, coupled with the estimated demand for the company’s products or services at the proposed price points.
- Specific sales forecasts can be based on a integrating a variety of information and efforts:
- Actual customer buying results and attitudes. For example how do price changes , or promotions affect sales on a long and term basis?
- Marketing and brand efforts and long term impact
- Competitive and distribution changes. For example retail store sales are growing about 1 % a year and internet sales 15-20 %
- What customers have done in the past in the market
- Time series trends for the market and company
- Seasonal or cyclical factors. Sales are affected by swings in general economic activity (e.g. increases in the disposable income of consumers may lead to increase in sales for products in a particular industry). Seasonal and cyclical factors occur in a regular pattern;
- Erratic events; these include strikes, fashion fads, war scares and other disturbances to the market which need to be isolated from past sales data in order to be able to identify the more normal pattern of sales
Conclusion
While forecasting is never a precise science, there are numerous causes and efforts that can be used to mitigate the pitfalls and optimize the probability that your forecasting will support—not erode—your chances for successful financing:
- Recognize that the playing field is never level. For example, Owners of competing businesses may have more contacts in your industry, they may have access to more capital (deeper pockets), and they may even have a stronger support network of family, friends, and investors.
- Understand the various factors in your business and market to produce better quality, more accurate, and credible forecasts that support your plans to succeed and grow
- How do your product forecasts relate to your marketing strategy? For example, are you planning to promote any products?
- Understand pricing and pricing dynamics. Lower prices don’t necessarily mean more customers. Many customers are willing to buy more expensive items because of the greater quality or the added convenience. However many presumed benefits are neither real or relevant, and some intangible benefits are not easily communicated.
- Even if you have the latest, greatest, never-been-done-before approach to something, don’t assume that you have no competition. Competition is more than just the direct, obvious competitors. Competition is also all the available alternatives
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