4 Practical Ways to Forecast a New Product
by Tim Berry, Guest Blogger
- Created: June 7, 2011, 1:16 pm
- Updated: March 2, 2012, 3:28 pm
But how can I forecast a new product? I have no history? How would I know? I think I’ve received this question in email more than a hundred times. So I’d like to answer it here, where it might be useful for startups, entrepreneurs, and you. I’m going to start with two basic principals and then suggest three sample methodologies.
The first principle is that it’s not about guessing the future correctly. Nobody can. Instead, it is about laying out some assumptions so you can track results and make useful business decisions. And you’re not the first one to have the problem. Every new startup has that same problem.
The second principal is that you should always break a forecast into its components. Go granular. Never ever forecast sales by projecting a small piece of a very large market. That just doesn’t work. Instead, first make sure you understand what we call the unit economics, meaning how much you make for a single unit sold. Then look for assumptions you can use to build a forecast from the assumptions upwards – which is granular – rather than from the top down. Forecast units times price instead of just dollars. Be creative. Find components that affect sales, and use them to project sales.
And here are three common forecasting methods that might be useful to you and your forecasting problems:
1. Capacity-based forecasts
Start with your actual sales capacity. If you’re a restaurant, map the tables and chairs and figure out how many people you can serve at one time. If you’re a graphic designer, think about how many engagements you can handle in a month. If you make and sell handicrafts, how many can you make? Then start forecasting realistically based on percent of capacity for the early months. Take your marketing efforts into account.
2. Web-traffic-driven forecasts
If you’re selling on the web then you can forecast sales based on traffic, clicks, conversions, page views, visits, and other analytics-driven techniques. Your traffic is a function of searches, paid searches, and marketing efforts that drive traffic. Start from there to project something as concrete as visits, conversions, and sales per visitors.
Web visits don’t just happen. They are the result of organic search engine placement, pay-per-click, link exchanges, emails, and other marketing programs. Go from that to traffic to conversions to sales, and you’ll have something you can track and manage later.
3. Viral forecasts
Long before Seth Godin’s breakthrough work on viral marketing, forecasters were using math and logic related to disease and epidemics to project sales and penetration through a given population. The early research on the spread of ideas set forth the vocabulary of idea contagion, including the terminology of the opinion leaders, early adopters, laggards, and so forth. Try projecting how many new users each user brings into your business, and how much time it takes. Think it through as if it were really a virus. If the total population is a thousand people and each one infects one other every two days, all thousand are infected in 10 days. And what happens if you’re selling something on the web, with millions of possible users? It takes a long time for the growth rates to slow.
4. Sales pipeline forecast
If you have experience with a direct sales model, in which each salesperson manages leads, presentations, proposals, and closes, then you know about the sales pipeline. You can forecast your new product sales by focusing on the components: leads, presentations, and so on. People who know direct sales are familiar with this method. It too breaks the components down and helps organize the uncertainty.
Conclusion: be creative. These are just four of many different ways to break a sales forecast into meaningful pieces. The goal is to be able to track results and see how the factors actually work, or don’t, as you get into real sales situations.
Remember, no matter how hard that sales forecast seems to do, it’s a lot easier than trying to start a business, or run a business, without a forecast.
About the Author
Founder and Chairman of Palo Alto Software and bplans.com, on twitter as Timberry, blogging at timberry.bplans.com. His collected posts are at blog.timberry.com. Stanford MBA. Married 44 years, father of 5. Author of business plan software Business Plan Pro and www.liveplan.com and books including The Plan As You Go Business Plan, published by Entrepreneur Press, 2008.
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