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You are here: Home / Product Marketing/Management / Forecasting New Technology Products

By Phil Morettini 10 Comments

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”. Unfortunately, sales forecasting methods for new tech products don’t always allow the desired anonymity.

Make no mistake, sales 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 an more even critical issue–you have to worry about creating too much or too little inventory–either of which can create a huge problem for your business.

Forecasting is hard in the best of circumstances

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

Early in my career at Hewlett Packard I spend 4 months in a special assignment dedicated solely to improving our product forecast accuracy. The marketing department was engaged in an ongoing “discussion” (OK-argument!) with the manufacturing department 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 often lead to missed sales opportunities.

I became a Lotus spreadsheet guru and we used all of the sales forecasting methods 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 products are the worst case scenario for forecasters

The main message here is that forecasting  any product in high tech industries is very difficult from an accuracy perspective. Forecasting accurately the performance of NEW PRODUCTS with no historical data in technology markets is nearly impossible, imo. When you add in 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 better be able to handle stress well 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 brand new technology product:

Top down sales forecasting methods

The first approach that I usually employ is 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  via existing market research or by estimating the total number of potential users, as well as also estimating what a reasonable market share will be for your product — given the various attributes of your market position. To establish your share 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, however; remember that garbage in equals’ garbage out and your assigned numbers are by definition imprecise. 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 market share % you believe you can obtain times the market size that you came up via research.

Image showing Sales Forecasting Methods for New Technology Products Techniques -Top Down & Bottom Up
Top Down & Bottoms Up Forecasts are Complementary

Bottoms up sales forecasting methods

After I’ve done the top down or macro forecast, I like to also use 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 by canvassing individual stakeholders in the sales arena: 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 at least some statistical 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 (10% of dealers, 10% of direct sales reps, etc). 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 forecast 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–or two , it’s probably time to reconsider some of your assumptions and fine tune your projections.

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 a daunting new product forecast. Feel free to shoot me an email with your questions, or leave a comment to extend this discussion on sales forecasting methods.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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Filed Under: market research, Pricing, Product Marketing/Management, Startup/Early Stage Tagged With: bottom up, forecast, forecasting, hardware, new product, product, product management, product marketing, revenue, sales, smoothing, software, technology, top down, trend, units

About Phil Morettini

Phil Morettini is the author of the Morettini on Management Tech Blog and President of PJM Consulting. Mr. Morettini has an extensive C-level software and hardware company executive background. PJM Consulting provides management consulting and interim management services to technology companies.

Comments

  1. Adi says

    November 2, 2007 at 5:07 am

    Hi Philip visited your blog i have a company by the name appliedeye consulting in India, do visit my blog .
    Added your blog to my rss reader

    Reply
  2. Curt Becker says

    October 12, 2011 at 7:18 am

    Great topic Phil… always like your thoughts… And the top up and bottom down are necessities. And certainly there is a different approach for established products and market relative to new ventures.

    I always liked the quote I have heard attributed to Henry Ford… Something like if I had listened to my customers I would have built a better horse. And yes, forecasting discontinuous innovation can be very difficult… So sometimes, rather than predicting the future, with new products you have to invent the future as well… In other words build the business and sales models that are as innovative as the technology they support.
    Case in point… the very first automated DNA sequencer… After 1 year on the market (and mostly unhappy customers who wanted their money back) the 3 year plan developed was based on rebuilding the way the company did business and interacted with its customers. 3 years later the actual sales… boxes, reagents and total revenue were withing 3% of the plan developed 3 years earlier.

    Reply
    • admin says

      October 12, 2011 at 8:07 am

      Curt, thanks for the terrific comments that ring really true…

      Reply
  3. Scott Thompson says

    October 15, 2011 at 11:13 am

    “…reconsider some of your assumptions…”

    The most important few words in your very good article. And much, much more easily said (or written) than done. Get your org to do that in a systematic way you solve all the BIG problems much more easily.

    Reply
  4. jeffrey sherow says

    June 30, 2015 at 3:29 pm

    Phil,

    Thank you, good article. Creating forecasts is just never easy but we keep trying.

    Suggest you should have mentioned monthly adjustments based on real data to compare and determine how to adjust up or down. It’s also not perfect but required, especially when a board or investors want answers (why did you beat the estimates? why did you miss the estimates? will this trend continue, etc.)

    Best
    Jeff

    Reply
    • philfourwordpress says

      June 30, 2015 at 3:39 pm

      Thanks, Jeff. Good addition to the topic. -Phil

      Reply
  5. marty tascona says

    July 1, 2015 at 2:57 am

    basically people suck at forecasting.

    over the past 30 years , I’ve enjoyed the spectre of
    – sales people
    – project managers
    – programmers / sw developers
    – program managers
    – sales managers
    – marketing managers
    – stock market speculators / day traders
    – blue chip investment houses and their analysts (the 2%/year kind)

    all miss their forecasts. It might be for revenue, or profit, or lines of code or some other unit of measure as relevant to their profession.

    invariably people over estimate their potential, underestimate the difficulty of the challenge, fudge the politics of their reality (;expectation management), and generally avoid the truth.

    key variables are always Time, Effort, Money, and Emotion expressed as Revenue, Cost, Schedule, or Risk.

    The arrogance of vanity in each profession is pretty much equal.

    Its a human thing.

    The quality of the parchment on the wall is no determinant.

    Reply
  6. Jim Delaney says

    May 30, 2019 at 6:34 pm

    Too many people launch a product based on top-down analysis before they get to the “addressability” aspect of actually winning new customers and managing them. Too often people say, “the market is huge and if we only get x% we’ll be billionaires!”

    My experience with launching new things is to understand the potential size of the market, then test with or win a few customers to understand the buyer-journey and the sales/budgeting and implementation cycles to define addressability, then forecast sales.

    Reply
    • Phil Morettini says

      May 30, 2019 at 8:25 pm

      Jim, thanks for your comments.

      Reply
  7. Mirketa says

    November 4, 2019 at 12:24 pm

    Thanks for sharing

    Reply

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