Improving the Revenue Estimate of Forecasting

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Editorial March 2016

Planning always includes a bit of guesswork because it deals with the unknown future.  Most executives must rely on historical extrapolations and probabilities about what the actual future might bring from the effect of actions they plan to take. Often when forming business plans a chosen strategy often doesn’t include alternative future scenarios and potential options. There may be a tendency to focus on the strategy with little consideration of what happens if assumptions about the market might be off-the-mark.  All executives have to deal with the reality of getting those strategic decisions wrong can wreck his or her career.  As a practical matter it is impossible to anticipate all possible future scenarios and business planning always focuses on the intended outcomes such as market share and overall financial performance.  Perhaps it is just easier to plan when using the “concrete” past? Or perhaps executives don’t have enough confidence or ability to anticipate potential scenarios?

In the February, 2014 “Harvard Business Review[1], Roger Martin made the point that “If you are entirely comfortable with your strategy, there’s a strong chance it isn’t very good.” Producing a vast array of spreadsheets and data analysis may only divert attention for any emergent strategy situations. As the financial industry always discloses, “past performance is no guarantee of future performance.”

Forecasting is about objectively and subjectively placing a “bet” on what will happen in the future. The best statistical models deal with probabilities, which are based on historical data. However, business planning and forecasting requires some assumptions about what will be changing in the future.  By nature, assumptions are subjective. What that implies is that forecasting is part objective and part subjective; an art form. That artful component can’t be taught effectively in business schools; the ‘art’ is more of a personal asset of individual executives that cannot be defined by resumes or academic prowess. In fact, the higher an executive goes up the corporate ladder, the more there is to lose when making bad calls or demonstrating that there may not be a good feel for what is happening in the market for the particular product or service. That personal risk factor may influence assumptions and cajole decision makers to lean toward the more predictable. In the changing times of today, there is a real demand for executives who are insightful, creative and willing to be open to new ideas that may conflict with more politically conservative and opt for “business  as usual.”

Some planners may feel that producing spread sheets and neat tables of data may help to reduce the odds of being wrong.  Perhaps the most influential variable of all is usually left to the “artistic evaluation” of planners that can set planning up for failure: estimating revenues.

The planning process normally has a good grasp of the cost side when forecasting financials but the revenue side is not nearly as predictable. Customer buying habits can change, emerging competition, quality, price elasticity and sales and marketing effectiveness issues all make forecasting revenue a real challenge.

To help improve revenue forecasting, executives need to get closer to their customers. They need input from the field about objective data coupled with intense and detailed awareness of what the customer requires from the firm – the met and un-met needs and the needs they may not even know they have. They need to know more about competition and changing patterns of consumer behavior. Recent years have seen more buzz around understanding the “customer experience” and strategies are becoming much more focused on all the touchpoints that customers have with our companies.

Accessibility and Anticipation

“Contextual marketing” depends on accessibility and anticipation of customer purchasing behaviors.  Accessibility refers to the technology and analyzing the touch points can provide, which can gather data on how customers engage with companies and their brands (online, mobile, social campaigns, etc.) and the strategies to gain opt-in permission to engage  in a two way dialogue (surveys, experience ratings, problems, etc.). With the advent of big data capture and analysis and the Internet of Things (IoT), there is a whole new paradigm for getting closer to the customer. However, it requires the ability for companies to build trust between the customer and those who wish to learn more about their behavior.

Loyalty means profits

Studies have shown the strong correlation between profits and repeat (“loyal”) customers.[2]

  • A 10% increase in repeat customers adds 75% to profitability
  • A 5% increase in repeat customers adds 40% to profitability
  • A 5% decrease in the repeat customer base will shrink profitability by 37%

Identifying loyal, repeat customers should be high on the priority list for top level executives and planned marketing activities. Some companies have initiated “Brand Ambassador Clubs” where the company has identified and recruit loyal customers who agree to provide a regular stream of input as well as helping to spread the word on social media. In exchange, club members get special discounts as well as invitations to company events. A real trend is that more companies are spending money and training on developing customer relationships through digital media marketing. Loyal customers are golden and more companies are increasing their focus on the revenue side of the equation by digging deeper into what makes for loyal customers.

Executives need to put more energy into understanding the always uncontrollable revenue forecasts instead of focusing on the more easily identifiable and controllable expense side of financial forecasts and budgets. As companies get closer to their customers, they will be able to gain a deeper understanding of how the company can best serve their needs as well as react quickly to unexpected changes in revenue. The end result will help in the development of better strategies as well as construct agile emergent strategic plans that identify and anticipate potential scenarios before they happen.

Anticipation

Proactive companies are already deploying the infrastructure and data collection to develop real-time measurements of customer experiences. It is anticipation that separates the wildly successful marketing campaigns from the mediocre.[3] Anticipating the customer need indicated by a specific social status update, a local event or use of an app at a certain time and place gives digital marketers the opportunity to wow consumers through brilliant contextual marketing.

 

[1] Martin, R. Harvard Review, “The Big Lie of Strategic Planning” Feb  2014 issue

Retrieved from: https://hbr.org/2014/01/the-big-lie-of-strategic-planning

[2] Reinhartz, W. “The Impact of Customer Relationship Characteristics on Profitable Lifetime Duration” AMA Journal vol. 67, issue 1, 2003 p77-99

[3] Flint, D “Customer value anticipation, customer satisfaction and loyalty: An empirical examination” Industrial Marketing Management, Vol 40, Issue 2, p 219-230

 

Additional Reading

Gender Diversity: A Good Thing for Profits

Change Management Street Smarts: Interview with Jeff Cole

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