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Real Sales Forecasts Have Curves

Real Sales Forecasts Have Curves

By Tim Berry, Guest Blogger
Published: November 23, 2014

Are you forecasting sales of a startup or a new product? Avoid straight lines. They aren’t realistic. Projections that draw good-looking curves are better than straight lines. That’s because sales are the result of human behavior, and human behavior is a natural phenomenon. Natural phenomena come much more often in sweeping curves than in straight lines. Look at the spiral of a snail’s shell, or the curve of a giraffe’s neck.

That’s true in nature and also in business and commerce. Business phenomena—sales, users, growth and such ­– are natural phenomena. Cycles sweep up and curve over in big S curves or bell curves, graceful waves­ ­– not straight lines.

Last week I reviewed two different business plans that got this wrong. It really cut into credibility. Put nice curves into your sales forecast and it will also look more realistic. 

Specifically, make a line chart of your projections. Put the value (dollars or units) on the vertical, and the months or years on the horizontal. What I want to see is an S-curve like this one:

image of s-curve

I’m not suggesting that there is some magic reason that the S-curve is more likely to be realistic. The S-curve is not better for any mathematical reason, nor for anything they teach in business schools. It just ends up more likely reflecting the natural course of events. In one case, it’s the way web traffic ramps up naturally. In another, it’s the way physical product is accepted by a distributor and stocked on retail shelves. Maybe sales growth happens in this pattern because it is the product of a variety of natural phenomena. It has to do with practical problems, acceptance, convincing people and so on. People, and the decisions they make, are also a natural phenomenon.

For further evidence, consider the classic bell curve of normal distribution that comes up so often in statistics. Or the standard technology adoption lifecycle, which shows a ramp-up as a curve flattening at the top and then curving back downward.

The first of the two forecasts I complain about looked like the chart here below when plotted on a line.

image of the straight line

Sales started at zero, in this forecast, and jumped to $4.3 million in the first month. Then they went flat, remaining at $4.3 million per month for the rest of the first year.

I think the problem with that is obvious. It is completely unrealistic. Regardless of the product, the channel, and the market (the plan was confidential so I’m not specifying here), sales won’t jump to maximum in one month and then stick there. Sure, if you use your imagination, you can come up with a story that might match the chart above. But for any normal context, any normal reader of the business plan, this looks bad. This startup team doesn’t understand sales.

The second of the two unconvincing sales forecasts, from a second business plan, looked like this one:

image of straight line

 

There two, the straight line doesn’t look realistic to me. Real-life phenomena don’t happen like that.

There are mathematical functions and sophisticated equations that can draw a typical S-curve. That, however, is not what I use, and not what I look for. I do a lot of forecasts and my favorite technique is to use software – a spreadsheet or forecasting software – that lets me estimate numbers interactively with viewing the line chart that shows me the shape. And of course I’ll use educated guessing plus a review of the specifics to calculate – well no, draw, not calculate – how fast the sales increase.

Forecasts are no good unless they are credible. And curves are more credible than straight lines.   

About the Author:

Tim Berry
Tim Berry

Guest Blogger

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 46 years, father of 5. Author of business plan software Business Plan Pro and www.liveplan.com and books including his latest, 'Lean Business Planning,' 2015, Motivational Press. Contents of that book are available for web browsing free at leanplan.com .