As you develop your idea and see the possibilities, you can easily envision the almost universal appeal of your product or service and its rapid adoption across the globe. Your envisioned model is the iPhone and its millions of unit sales in the first twenty-four hours in markets everywhere. Perhaps your vision is not quite that large, but the trap remains the same. This fast and universal adoption vision model represents almost unavoidable landmines that new entrepreneurs and seasoned companies fall victim to all of the time. An unrealistic view of a business’s quick, widespread success is probably the major flaw that investors encounter in talking to entrepreneurs about their plans. Left unchecked, these highly aggressive forecasts will result in the expenditure of effort and funds long before they are actually required by market demand. To the investor, this, in turn, means the company will need more cash to fund operations while the market “catches up” to the forecast. For the company, it may mean going back to the financial markets after having missed the forecast and perhaps in a desperate need for cash. This situation can result in having to accept draconian financing terms to stay in business.
Of course, the opposite could be true. Unexpected high demand that occurs earlier than anticipated can cause a company to lose market momentum and allow competitors time to catch up. However, being able to respond to unfulfilled demand is a much more palatable situation which can usually be addressed in different ways.
So the challenge is to forecast demand and timing that results in the right amount of product, available at the right time, in the right places. It sounds simple, but it is certainly not easy. Clear thinking for products in the consumer market can be masked by the overnight success of certain products such as tablet computers and iPhone or Android applications. For business-focused products, it is easy to miss the impacts of budget and buying cycles, trial rollouts, and widespread implementations.
A good way of setting realistic volume and timing goals is to not forecast by sales dollars. Instead, forecast by sales events. At first, sales events and dollars may appear to be the same thing. They are not. A sales event is defined as the actual issuing of a purchase order or commitment by a customer. It is the culmination of a series of events that include the product/service introduction, sales channel preparation, prospect awareness, prospect interaction, proposal preparation, sales negotiation, and then, and only then, the actual purchase. Of course, this process can be very fast for the purchase of a soda or can take years for the purchase of a utility power plant. However, all sales go through a defined process. Some move fast, some move slow, some with only a few steps, while others are incredibly complicated. Carefully thinking through the steps in the entire process that leads to the actual sales event for each product or service, in each segment, and in each geographical market, will help you refine your forecasting efforts and allow you to build credibility and confidence with your investors. Landmines may still be present, but you will be far better equipped to avoid them.
Positive initial reaction to a new product or service by prospects is always exciting and boosts the confidence of all those involved. However, until those prospects take some positive action that starts the sales cycle, they should probably be referred to as suspects, not prospects. Except for products with a highly emotional appeal in the consumer market, sales are not made to “suspects”, and forecasts should not be based on their initial enthusiasm. It takes time to move a suspect to the prospect stage and then to a qualified potential customer and finally to a customer. Companies need to carefully allocate the right amount of effort and the right amount of time required to interact with potential buyers during each phase. Realistically, take the time to focus on the ground ahead of you to avoid the sales landmines that are likely to be present.