What's for Launch?
When evaluating potential product or service innovations, there is only one number a business person wants to know: How much am I going to sell? Development costs are always clear, but the gap between known costs and unknown revenue makes deciding how much to invest in new or improved products and services so difficult.
Given the importance of sales forecasting, it's amazing how little research exists to provide practical advice for business owners. An informal survey of small and large companies that work with my Eureka! Ranch found average error on current forecasts runs from 50% to 150%. I searched academic articles and found one—by W.B. Bartner and R.J. Thomas in the January, 1993, issue of Journal of Product Innovation Management—that offers some guidance. The authors studied the forecasting accuracy of 103 computer software firms, finding accuracy improved when more customers gave their opinions on the new product. That was a simple and important finding, but one that apparently is often overlooked. Other dimensions thought to impact forecasting accuracy didn't seem to help, including the judgment of the founder and industry experts, and competitive analysis.
From there, I went into my own data archives to identify the specific customer questions whose answers result in the most reliable forecasting. I analyzed 100 products that were introduced by our clients. We had highly detailed information on customer perceptions of the ideas before they were introduced, and very specific data on marketplace results.
The most predictive number for success: meaningful difference. That's a blend of customer interest in purchasing your offering and how unique they perceive it to be. When your offering is meaningfully different you generate more first-time buyers, more repeat purchases, faster repeat purchases, and higher perceived value. Customers view your product or service as giving them more for their money. That makes it easier for you to charge a premium price. And your competition will have a harder time stealing your customers.
The bottom line: The more customers see your goods as unique, the more they will buy, and the more money you will make.
I applied that lesson to 2,400 products and services, and created a process and formula that can improve your forecasting. It seems a little complicated, but it is actually easy to do and worth the effort. Start by writing a description of your offering. Write it as you would talk about it to a potential customer. Describe what overt benefits your product or service provides along with details on how it works and what makes it better than other companies' offerings. Lastly, include specifics on cost.
Get feedback on your description from 50 potential customers. Do this via e-mail, at a trade show, or by simply calling them. Ask customers to read the description and then answer two questions: On a scale of 0 to 10, how likely is it that they would purchase this product/service? And on a scale of 0 to 10, how new and different do they believe it is?
Calculate the simple average for each question and add the two numbers. Then multiply the answer by .007. That result is an estimate of what percentage of your prospects will become buyers. To calculate potential sales, multiply this percentage by the number of prospects to whom your company will make at least three sales contacts, and then multiply by the amount an average customer would purchase in a year. Voilà! A pretty good answer to one very important question.
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