Forecast Revenue Accurately, Then Meet Your Forecast
One of the hardest things to do when planning a new venture is forecasting the first year's revenue.
Brad Feld and
have written about how hard it is for a startup venture to "meet the numbers," especially the first year's revenue numbers.
Yes, forecasting revenue is hard. Some managers say their revenue is dependent on so many factors you don't control that it's impossible to know what the first year revenue will be.
While customers always make the decision to buy on their own schedule, there are ways to forecast revenue relatively accurately.
One approach is to make a guess, then lower it to make a "conservative" forecast that's so low the company can have a "blowout" and be well over the forecast.
Imagine a weather forecaster predicting that the high for the weekend would be 80 degrees, but it actually reached 100 degrees. Do you think he'd brag that he was over his forecast by 25%? No, he would be criticized for missing his forecast by 25%.
It's the same with revenue forecasts. If you come in 25% over your forecast it means you didn't plan to have enough inventory, you needed more customer service people, and you probably had a host of other problems. It also means you didn't understand your customers.
Fortunately, there are better ways to forecast revenue for new products than making a guess.
The important thing to remember when developing a comprehensive marketing plan is that every marketing activity has a range of typical response rates and typical lag times. This is true for promotion activities such as advertising and public relations, as well as sales activities.
What is hard to predict is whether response rates for each marketing activity will be at the high end or low end of typical response rates. One of the key factors in estimating this correctly is knowing the level of interest the market has for a new product. Products with high market interest will have response rates slightly higher than average, while products with low initial interest will generate lower than average responses.
So how do you know the market's level of interest in a new product that may be in a category they've never seen?
Two key pieces of data can help you gauge the market's interest. The first is the response rate to your marketing research study before the product is launched. When people don't respond to your requests to participate in marketing research it frequently indicates a low interest in the product. The other indicator, of course, is the response to questions on the survey from those people who do participate.
Practically all B-to-B marketing follows the traditional approach of generating leads and nurturing them into qualified prospects, some of which turn into customers. The accuracy of a revenue forecast depends on an accurate estimate of response rates for every marketing activity such as advertising, public relations, and sales. In addition, the forecast depends on knowing the lag time for every marketing activity so you can estimate when to expect the revenue it generates to be booked.
I'll grant you that there is significant variability in response rates, conversion rates, and close rates when you look at individual marketing activities. However, when these individual activities are rolled up into complete marketing campaigns and across the entire sales team the forecast can be quite accurate even for the first year of a new product or startup company.
Cliff Allen is the co-author of the book One-to-One Web Marketing; 2nd Ed., published by John Wiley & Sons, and has consulted with companies on strategic marketing for 20 years.