Forecasting Sales Advice
Posted by Trevor on 26 June 2012 | Post a Comment
Many of the people who do forecasting tell you that they’re good at what they do, even when their forecasts are wrong. These people are not lying. Over the years I have been responsible for determining the launch and annual forecast for more than ten products.
One time my CEO, Jack, and I disagreed about the forecast for sales of a new product. My job was to analyze the market, set the forecast, and build commercial teams to achieve that target. He spent most of his time trying to keep the share price up, and was under constant pressure from dissatisfied investors. Jack did not like my forecast for only $5 million in first-year sales. Although I had data to back up my number, I had to admit that I was going mostly on intuition after spending months listening to potential customers point out challenges we had not fully anticipated in the product design.
Jack was not a strong decision maker, a surprisingly common trait I have observed in traditional company structures, and he had a history of second guessing everyone, including himself. True to form, he hired a management consultant to perform an “independent” market analysis. I spent several hours with this consultant, who claimed to be an expert at market research. He had no experience in our industry, and grasped very little of what I explained to him, and refused to leave his office to speak to customers. His conclusion was a first-year market potential of $500 million… just what Jack wanted to hear.
I pleaded with Jack to reconsider the data, but he ignored me and issued a press release containing that damning number. The share price responded. It was like watching a truck rolling out of control down to the edge of a cliff. I handed in my notice and left under something of a cloud. Jack hired a replacement and together they spent millions to build a large sales force to handle the $500 million sales.
The product was launched, and first year sales came in at $4.5 million. The share price plunged, and after everyone was fired, a competitor acquired the company.
I offer three pieces of advice to anyone looking to do this for their company. Firstly, there is no such thing in the world as an accurate forecast. It is all degrees of inaccuracy, and the best approach is to minimize inaccuracy. A little bit under but not over is good enough to survive in most businesses.
My second piece of advice is to remember that human nature makes it very difficult to not over-forecast. There is a constant urge to impress your boss with numbers that will allow him or her to impress the person higher up, and so on. Everybody hopes for a happy day in the sunshine. I can recall the days when my forecast reached the CEO’s desk, and the message that came back was that I needed to make it higher because the board of directors would be disappointed. Obviously, I would refuse to do that, and it would get changed anyway. Then I would be held responsible for achieving it… a number I didn’t believe in. The tendency in any company is to over-forecast. Because everyone’s job depends on success, we can fall into the trap of being too optimistic.
My third piece of advice is the most important, and it is to speak to as many potential customers as possible, and then trust your intuition. No matter how much money you spend to provide an accurate forecast, it will always come down to 20% scientific and 80% gut feel. The best way to improve the power of that intuition is by talking to customers. I know I say this often, but it’s important. Go out and start talking. You begin to hear things that may make you question whether or not a product is home run you might otherwise think it is.