Forecasting New Technology Products

Forecasting is a thankless job. It's a lot like being a referee or umpire in your favorite sport; the only time a game official is noticed is when they do something wrong! Similarly, a forecaster's primary aim is too stay out of the "news".

Make no mistake; forecasting is a very important function in any business. In the software business, your whole business plan could be riding on meeting the forecast to fund growth and product development. In a hardware business, it's even worse--you have to worry about creating too much or too little inventory--either of which can be a huge problem for your business.

HARD IN THE BEST OF CIRCUMSTANCES

It's bad enough when you are trying to forecast an existing, mature product, in a mature industry. This is a difficult and complex task, using well known techniques such as smoothing, trending and seasonality to fine tune the next month or annual forecast.

Early in my career, at Hewlett Packard, I spend 4 months in a special assignment dedicated solely to improving forecast accuracy. The marketing department was engaged in an ongoing argument with manufacturing over inventory levels. Not surprisingly, manufacturing wanted the inventory levels to be lean, while marketing favored a more robust number. This was because manufacturing was being graded on their costs and at that time "owned" the inventory; while Marketing was graded on revenue--and low inventory levels usually lead to missed sales opportunities.

I became a Lotus spreadsheet guru, and we used everything we could find to try to improve our forecast accuracy. Keep in mind that these were high tech products (computer printers), but successful product lines with significant historical data available. Try as we might, the best we could ever do was to get within 25% of the eventual unit sales number.

NEW TECHNOLOGY PRODUCT ARE THE WORST POSSIBLE SCENARIO FOR FORECASTERS

The main message here is that forecasting in any product in high tech industries is almost impossible, from an accuracy perspective. Forecasting accurately the performance of NEW PRODUCTS in technology markets is TRULY impossible to do accurately. With brutal competition, a tight market research budget, vague notions of market size, an early stage on the user acceptance curve, and often the reality of an unknown brand, forecasters of new technology products needs to make sure they don't end up in substance abuse clinics. But of course, even though it's hard-- it's still VERY important. So what's a forecaster to do?

There are two basic methodologies that I typically utilize when attempting to forecast sales for a new technology product:


TOP DOWN FORECASTING METHOD

The first approach that I usually engage is what I like to call the "top down" method. You might also call this the "Macro" approach. This is an exercise of defining the size of your total addressable market using market research or number of potential users, and also estimating what a reasonable share will be for your product, given the various attributes of your market position. Consider everything you can in your analysis: your marketing budget, brand strength, an unbiased view of how your product stacks up vs. the competition, etc. It may be helpful to put it all in a spreadsheet, and quantify the various important attributes of your company/product vs. your competition. Be careful about assigning too much precision to these numbers; remember that garbage in equals' garbage out. But if you go through this exercise thoughtfully, it can be very helpful in analyzing your relative market position. In this case, obtaining your top down forecast is then as easy as multiplying the share you think you can obtain, times the market size that you came up via research.


BOTTOM UP FORECASTING METHOD

After I've done the top down or Macro forecast, I like to use what I call a bottoms up or "Micro" approach as a sanity check. To do this, you want to gather information on what you think you can sell from individual stakeholders in the sales area: direct field sales reps, Online/Web store, dealers, international distributors, etc. It's helpful to gather info from any channel that will be a significant contributor to sales for this new product. Usually it's impractical to do a complete survey of everyone that may be involved in the sales effort. What's important is to obtain a representative sample that is both broad enough and deep enough that the data you gather has some significance. At that point, you can "normalize" the data. For example, say you were able to gather data from a broad cross-section of sales points, totaling approximately 10% of the total sales infrastructure. You would then multiply the total number of units/dollars you obtained from your sales entities times 10, to reach a bottoms up forecast totaling 100%.

DO YOU HAVE CONVERGENCE?

The key to this exercise is to discover whether your two views of the market are close enough that they appear to be focusing on the same topic! If they do, you may be in pretty good shape with your forecast. If they are off by an order of magnitude, it's probably time to reconsider some of your assumptions.


SUMMARY

So there's my advice on how to approach the unenviable task of forecasting a brand new technology product. It's a high risk, high return activity under the best of circumstances--and ideal conditions are seldom found in this activity in the technology space. But if you are able to construct both a top down and a bottoms up forecast, and the two numbers at least fall in the same ballpark, you're probably on the right track.

Give it a shot yourself next time you're faced with this forecasting daunting task. Feel free to shoot me an email with your questions, or leave a comment for discussion.

Phil Morettini
PJM Consulting
www.pjmconsult.com

Business Models in the SMB Market

The SMB market is typically a very popular topic for hardware and software companies. Every one wants to sell to the Enterprise market; as a result, competition is fierce and standards are very high. If you get to the Enterprise market early, with an innovation that creates a new category, you can find success if you are truly making a contribution to the market. But late entries into a market segment, as well as early stage companies competing with larger, established companies, often have a very tough go of it. In these situations, attention often turns to the Small and Medium-Size Business, or SMB, market.

And why not? At first blush, the SMB market appears to be huge, as well as underserved. It looks like a perfect haven for an early stage or turnaround company with a solid product, but not quite enough differentiation, brand name, or marketing muscle to push out the big boys in the Enterprise space. So the decision is made to focus on SMBs.


What's Wrong With This Decision?

There is nothing wrong with this decision, per se--if it's done with eyes open, for the right reasons. But too often, it is done to run away from a problem (the inability to penetrate enterprises), rather than run to a great opportunity. A lot of times, companies see the SMB market as easier turf; simply a larger, less competitive market than the Enterprise market. Major problems can result from this type of mentality, and I see it quite often in my consulting practice. Companies that enter the SMB market from this perspective usually aren't fully prepared to do what it takes to be successful, in what is a very different type of market than they may be familiar with. So where are the land mines in the SMB marketplace?


What's Not Obvious in Marketing to SMBs

The first thing to consider is that customer needs are often quite different. A lot of this depends upon what technology and market segment you are in, and whether your product is aimed more at the "S" (small) segment, or the "M" (medium) segment of the SMB space. For example, if you are selling a single user productivity tool which is useful staff accountants, you may not see much difference. If on the other hand you are marketing a company wide, networked application of some complexity, the differences may be huge. Like everything in technology marketing--the devil's in the details. Every situation needs to be evaluated closely, and treated differently on its individual merits. The most important thing is TO NOT ASSUME THAT THINGS ARE THE SAME BETWEEN SMBs AND ENTERPRISES IN YOUR CATEGORY. Do the work, evaluate the situation--don't assume. Assumptions, without verification, are what get you burned in this transition. Below is a list of some of the major differences in the SMB market:

IT Departments are small and less of a factor--if they exist at all.--In Enterprises you may be dealing with persnickety CIOs that want thing just so. In SMBs, if there is a CIO at all, he will be looking for an off the shelf SOLUTION that will "just get the job done". Or you may end up struggling to figure out how you can sell your complex solution, to a company that has NO IT DEPARTMENT AT ALL.

There is less money to spend--It's harder to make money with big ticket hardware and software, let alone customization and expensive services. Your products better have value - and margin - right out of the box.

Ease-of-use is even more critical--There probably is no training department or other corporate staff, and people are busier overall. If they can't figure out how to use it quickly, you're going to have a hard time selling it.

There is much less time available to purchase products--Even the sales process may be compressed, in terms of how much time the prospect spends reviewing your marketing literature, or talking to your sales people. The actual TIME ELAPSED during the sales cycle could be EVEN LONGER due to lack of time available to the prospect, but the INTENSITY of the purchasing engagement is often much less.

How Do You Need To Structure Your Business Model Differently?

Lower prices-- They just can't, and won't pay the same prices that you can get in the Enterprise space, in most cases. So you'd better come into this segment with a price and value proposition that makes sense to these price-sensitive customers.

Marketing vs. sales--The SMB market is more marketing intensive, with respect to marketing/sales ratios, than the Enterprise market. There are many more customers; the average sale amount is much lower, and much less face time available for direct sales. While in many respects Enterprises are the most demanding customers in the world, you've got to be a better marketer to succeed in the SMB space than you need to in the Enterprise world.

Low cost sales force-- With much lower average sales amounts, and much less time available on the customer side, it is usually impractical to have a large, high-cost field sales force. Inside sales forces are the general rule in this market. If you have a product that demands customization and hands-on support, VARs are a good adjunct to consider. The more they are taking orders generated from marketing, and the less they are cold calling prospects, the better.

Better usability and reliability-- You'll need many more units being sold to get to the same level of Enterprise revenue, across a much larger customer base, with much less (if any) maintenance revenue to fund a large support staff. Your product better work when it's installed and better be very easy to use over time. Unless you have a highly customizable solution and are using VARs as a channel, SaaS is a great platform for delivering software to this market.

Little or No IT support--The good news is that there is no prickly IT committee or staff that you have to "go through" to sell to the real users. The bad news is that if even the littlest thing goes wrong, there's no one internally at the customer to pick up the slack--you're going to hear about it directly from the user--over an over again.

Summary

The SMB market is actually a simplistic catch-all phrase for a large, heterogeneous group of markets. But it is a useful abstraction, as a starting point for understanding how to penetrate and thrive in B2B marketing to smaller companies. I hope this short introduction is useful--feel free to pitch in and post a comment adding to this topic.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

Is It Time to Sell Your Hardware or Software Company?

This is the point that most, if not all, technology entrepreneurs aspire to reach. They dream of selling their company and laying on a beach somewhere, a colorful drink with the requisite umbrella, cooling in their hand.

There are a few of you out there that would never sell your company (it's your identity, after all), preferring to work forever lest you slow down and quickly deteriorate. But that's another story; we'll save your psychoanalysis for another day…

Some of you that want to sell your company have the most grandiose plan of all in mind: An initial public offering (IPO) through a brand name investment banker, bringing not only unimaginable riches, but fame along with that fortune. But that rarely happens--we'll also table that discussion for another column…

So let's get back to the great majority of you out there, who set out to some day cash in all of your hard work, by selling your company directly to another company. How do you know when the time is right?

WHAT MAKES PEOPLE WANT TO SELL

There are many triggers that set off serious reflection about whether or not to pursue a sale of a software or tech company. Let's examine a few of the more common:

1) A potential acquirer approaches the company with an offer
2) A strategic partnership grows closer, and it seems to make sense to grow closer still
3) Business is bad, and the principals begin to worry about losing everything
4) Negative cash flow is starving the business, forcing a sale to ward off bankruptcy
5) The owners need cash for another reason; be it investing in another business, or personal reasons
6) The owner/operators are burnt out, and no longer enjoy the business
7) Business has been robust, and the owners astutely consider whether now is the time to maximize their return, and minimize their risk by selling now
8) It becomes clear that there is a viable business, but is better suited/more valuable within a larger company
9) It's time for the owners to retire (it seems that very few high tech entrepreneurs make it that far!)

These are the most common reasons that come to mind--it is certainly not a complete list. Although we are talking about companies, the decision to sell ultimately comes down to a personal decision by one or a few individuals. So the reasons that these decisions happen are as varied as the population overall.

Given this list of common rationale for considering a sale, what are the RIGHT and WRONG reasons to consider a sale--if you want to maximize your return within your particular circumstances?

WRONG REASONS TO SELL

On an impulse--you've been running your business, not even think about selling your company. An offer comes along, and you get caught up in it--without having planned for it. Or things have been going poorly, and you are at an emotional low. Acting in these circumstances is similar to married, divorced or starting a new business--don't do it without thinking it through, or planning it properly.
Fear--don't sell just because you are scared; that's probably the best way to leave money on the table. There are ups and downs to every technology business. In my experience, things usually aren't as bad as they look at a specific "down" point in time--or as good as it looks at an "up" time. It's important to look at the prospects of a business over a period of time, considering both how things have gone and the forward-looking forecast.
Sales are in decline--this is the worst time to sell. If you do this, all leverage goes to the buyer. Of course, panic sets in, as you see your valuation melting away, and human instinct is to "get what you can" before it degrades further. But first consider the situation--is it reasonable that you can turn it around and reignite growth? Is the decline all specific to your business, or is it a cyclical market, or a bad economy overall--which might turn around in some reasonable time period? Sometimes selling under these circumstances is the right thing to do, and is unavoidable. But with proper planning, you may be able to sell your company BEFORE this happens, or turn it around first.

RIGHT REASONS TO SELL

You believe you've reached the peak of valuation--this seems obvious, but it is difficult to do. Finding the right time to sell is tricky; you don't want to exit too early and leave money on the table. So the inclination, given that tech businesses are value as a multiple of revenue or EEBITDA, is to hold on until growth stalls. But if you wait until you built up your sales so much that little "natural" growth" is left in your product/market cycle, the business may not look as attractive going forward, for potential buyers. Most strategic buyers, at least, would like to see growth prospects in a potential acquisition. So it might be best to "leave a little growth on the table"; it might lead to a higher multiple from the buyer.
You haven't been enjoying running the business for a very long time--I believe strongly this is a time to get out. If you have someone else whom you feel comfortable leaving in charge, that's fine. But otherwise, either you'll run it in to the ground from burnout, or you'll walk away and let someone else destroy it, because you just don't care anymore. Passion is important in our business; when it's gone, it's usually a good time to sell.
A fundamental shift in the market or your business--This could mean many things: you have lost a number of key people, the economics of your market changes, or a major investment will be required to keep the company on a growth path. The specifics here could be quite varied; the common thread is that with the change in fundamentals, there are real clouds on the horizon. This lead you to a thoughtful belief that continuing to operate the business as a standalone entity isn't optimal.

SUMMARY

An exit, or sale of your company, is a very important "life changing event" for the owners, founders and managers of a software or hardware company. I've seen sales come together very quickly, and completely unplanned. I view unplanned company sales as the business equivalent to a quicky divorce that comes out of an emotional event, without careful consideration, or an objective study of the alternatives and consequences. It is a once in a lifetime event for many, and should be given the careful consideration that those types of events deserve. That's my view--post a comment with your own Exit tales or opinions.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

Marketing and Selling Technology Products through the Value-Added Reseller (VAR) Channel

Selling through multiple channels is one of my preferred strategies in technology marketing. If done properly, it allows a company to fully exploit its expensive, hard-earned intellectual property to the maximum extent. One of the most popular channels (and one of my favorites) used to sell B2B software and hardware is the Value-added Reseller, or VAR channel.

VARS ARE THE DISTRIBUTION HOLY GRAIL FOR MANY STARTUP COMPANIES

In fact, with a great many startup software and technology companies, building a VAR channel network to sell their companies products is the first thing they want to do, upon releasing their first product. This is especially true when the founding management team primarily comes from a technical background. The thinking goes; they are technologists who have created a great product. They don't have a lot of experience selling or marketing--and most of the startup money has gone to, and will continue to go to developing products. Why not just recruit a bunch of resellers to market and sell their product for them? Sounds like a great idea on the surface, doesn't it?

Unfortunately, there are few strategies that are more flawed, and which have continuously led to failure than this one.

Let's contrast the realities of the VAR channel, against this simplistic notion that has been tried again and again, without success:

WHAT VARS DON'T DO

1) First of all, VARs DON'T market. At least not YOUR products, anyway (they may market their services). So the very first flaw in this strategy is that it is based on a gross misconception of what a VAR typically does.

2) VARs don't create new markets. VARs are great at selling into established markets and further expanding already growing ones. Missionary sales: brand new markets, categories and products? Not so much.

3) They don't sell a wide variety, or a large assortment of products. In fact, VARs are focused on actively selling VERY FEW products--if they are even focused on selling products at all.

4) VARs aren't motivated by high product margins.

5) The individual VAR does not exist to help YOUR company make money.

Now if you're not a sales or marketing professional with experience working with the VAR channel, you're probably very confused by the list just above. So what is it that VARs actually do? And why is it worth dealing with them at all!

What happens time and time again is that a technologist startup CEO will pursue the VAR channel as their exclusive distribution channel, without knowing any of the points in the list above. Their effort will fail miserably, and they will then scramble to begin selling their product directly, or through some other means. They will swear off the VAR channel forever, and I do mean swear:

"Those !!@#$%^^* resellers are good for nothing. They take a big cut of your margins, while adding no value in return. I'll never deal with them again."

I can't tell you how many times I've heard some version of the quote above.


But the VAR channel is a major force in the technology business, and if you know what you're doing, it can be used to great leverage by your company. So let's now take a more realistic look at what VARs CAN DO:

WHAT VARS ACTUALLY DO

1) First and foremost, VARs are in business to sell their own HIGH MARGIN SERVICES. That is why they exist, and how they put bread on the table. This revelation may be discouraging to some product vendors, but you must understand and respect this above all, if you hope to leverage this channel. The only exception to this is the "core" product, which will be discussed later in this article.

2) VARs are very interested in things that apply to their own vertical focus. Although it wasn't so true many years ago, most successful VARs these days have a very tight vertical focus.

3) Many VARs act as "thought leaders" for their corporate customers. So they are very interested in "what's new" in the market, so they can stay on top of trends and remain market experts for their clients. This means that they will sometimes spend a lot of time talking to you about your new product, but never find the time to actually "sell" it (even if they have the best of intentions). In the busy world of the small VAR, client demands and selling the core product and services usually soak up all excess time.

4) VARs are often used as "aggregators" of purchases by corporate clients. This way, the corporation can use a single vendor point of contact for their technology purchases, greatly simplifying their purchasing process. They can also leverage the VAR as an evaluator/validator of new products and technologies. This makes them a very important part of the purchasing chain for many corporations.

5) If they put any real effort into selling products at all, it is usually into one or two "core" products that they have built their service offerings around. If you aren't a product that pulls services, forget about getting high mindshare with the VAR.

6) When it comes to selling "non-core" products, VARs are almost completely driven by the demand they see in their installed customer base. They won't often add in new products that they don't see a demand for, unless they are really techie, early adopter types. And these techies will often add a product, but never find time to actually offer it (let alone sell it) to their customers.

7) The VAR channel is EXCELLENT at fulfilling demand for great new products into their existing, installed customer base.

8) VARs can be an excellent proxy for a vendor in installing, configuring and offering first level support. This can enable a vendor extend its reach and to leverage the VAR channels existing infrastructure rather than building out a large field organization (which depending on the product category, may not even be feasible).

So given the points outlined above, what are the "best practices" to follow when you are seeking to build and leverage a VAR channel?

VAR CHANNEL BEST PRACTICES

*Always sell your new product directly in the beginning. Even if you don't plan to build a direct sales force and sell directly in the long run, it is critical to establish that the product works, and can be sold successfully. If you can't sell your own product, no VAR will be able to either (and few smart ones will be willing to try). De-bug and systemize the sales process, make sure that your end user price points are right, and build a small reference account list--at a minimum. Only at this point should you begin to approach VARs to distribute your product.

*Marketing the product is the vendor's responsibility. Do not naively think that the VAR will market the product for you, or that since you have VARs to sell, you don't need to market at all. Remember, VARs are great at fulfilling demand among their existing customers--and very poor at creating it among new customers. The vendor must position its products in the market and create demand for them--otherwise your channel efforts will certainly fail

*Treat VARs like the valued business partners they should be. If you do sell direct, don't "steal a deal" and take it direct just to make a few more points on one sale. Nothing is more short-sighted. Not only will this VAR not do business with you again, in any given vertical it's a small community--and word gets around fast. You risk becoming a pariah in the VAR channel, and losing all the hard work that you put into building your network. My philosophy is: when in doubt, cut the VAR in on the deal. If you don't feel he's adding any value to your business, eliminate him from your network after the deal. But don't use your low opinion of a particular VAR to convince yourself to cut him out of the deal. You risk cutting off your own nose in spite.

*Be realistic in what the VAR channel can do for you. If you have a non-core offering, be happy that they "make it available" to their customer base, rather than expecting them to sell it actively. Remember, VARs are key influencers of their clients; just being available to endorse your product as something they offer, to a customer that hears about the product elsewhere, can be very valuable.

*Provide a reasonable margin, but don't "throw margin away" thinking that it will motivate a VAR to actively push your product--if they otherwise would not. It won't work, and you'll just be giving away money for no reason--that you could use creating demand instead.

*For most products, make sure that you don't over-distribute by signing up more VARs than your market will support. Even though greater margins might not make a VAR push your products, the erosion of margins to near zero will cause a VAR to eliminate your product from their portfolio. It's better to leave a few deals on the table, than to risk demotivating your entire reseller network, because they are 6 competitors are bidding on every deal in an particular area. The exception to this is if you represent a "core" product that pulls significant service revenue, you can get away with a lot more stuff, because the product margins are trivial to the VAR compared to the lucrative service revenue. But in this case, be careful when using your market strength to abuse partners. People have long memories, and "what goes around, comes around."

SUMMARY

That's my primer on how to approach, and even more importantly, how NOT to approach doing business with Value-Added Resellers. Post a comment or send me an email to delve into this important topic further.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/