Mistakes to Avoid When Making Forecasts

by | Mar 8, 2023 | economics

Business plans require a sales forecast. Scott Fishman, the CEO of Envisage, sees three common mistakes in business plans (Fishman 2015):
• They forecast “hockey stick” revenue growth.
• They forecast smoothly rising trend lines.
• They lack convincing evidence of market size.
A “hockey stick” forecast—a revenue graph shaped like a hockey stick—involves limited revenues initially followed by explosive growth.
It is a potentially effective sales technique to use in discussions with executives and investors because it suggests that the business opportunity might be extremely valuable.
In contrast, smoothly rising trend lines do not seem plausible from an economic standpoint. The number of customers and their consumption of any product is typically finite. Furthermore, any true blockbuster product will attract competition.
Every new product faces a complex environment: features and benefits, competitive environment, regulatory conditions, payment models, distribution, pricing, market positioning, and so forth. A genuinely new product will have multiple unknowns in its market. If there are no unknowns, it is not really a new product. A convincing forecast demands market research, an honest recognition of what is not known, and a strategy for resolving some of the unknowns.
Discussion Questions
• What is problematic about a “hockey stick” forecast?
• Can you find an example of a product that displayed “hockey stick” revenue growth?
• What is problematic about a forecast with a smoothly rising trend line?
• Can you find an example of a product that displayed smoothly rising revenue growth?
• From an economic point of view, what is implausible about smoothly rising trend lines?
• Can you find an example of a product that wildly underperformed early forecasts?
• Can you find an example of a product that wildly overperformed early forecasts?
• What external factors might cause below-forecast sales? Above-forecast sales?
• What internal factors might cause below-forecast revenues? Above-forecast revenues?
• What are examples of new products with uncertain prospects in healthcare?

Sample Solution

• What research is required to make a convincing forecast?
• How can you resolve some of the unknowns present in an uncertain market?

What is problematic about a “hockey stick” forecast? Hockey stick forecasts depend heavily on unrealistic assumptions and tend to be overly optimistic, making them potentially unreliable for decision-making purposes. Furthermore, they don’t reflect the realities of how markets typically evolve over time; i.e., with gradual growth followed by slower periods as competition increases.

Sample Solution

• What research is required to make a convincing forecast?
• How can you resolve some of the unknowns present in an uncertain market?

What is problematic about a “hockey stick” forecast? Hockey stick forecasts depend heavily on unrealistic assumptions and tend to be overly optimistic, making them potentially unreliable for decision-making purposes. Furthermore, they don’t reflect the realities of how markets typically evolve over time; i.e., with gradual growth followed by slower periods as competition increases.

An example of a product that displayed “hockey stick” revenue growth is Apple Inc.’s iPod music player which experienced explosive growth after its launch in 2001 due to its innovative features such as portability and huge storage capacity coupled with great marketing campaigns .

What is problematic about a forecast with a smoothly rising trend line? Smoothly rising trend lines are implausible from an economic standpoint since any true blockbuster product will attract competition over time ,therefore production should plateau at some point rather than growing exponentially indefinitely.

An example of a product that has experienced steadily increasing revenues would be Microsoft’s Office Suite which has been around since 1990s but continues remain highly popular amongst consumers & businesses alike due its user friendly design & cross platform compatibility.

From an economic point of view, what is implausible about smoothly rising trend lines? From an economic point of view it’s implausible because number customers their consumption any product typically finite – meaning eventually amount sales will reach certain level stabilizing thereon . Additionally, any true blockbuster product attract competition thus creating downward pressure prices diminishing demand over time .

Can you find an example of a product that wildly underperformed early forecasts ? One example would Google Glass – wearable computer system released 2013 had immensely hyped prior launch however failed meet expectations due high price tag , privacy concerns along lack compelling use cases resulting rapid decline popularity even being pulled from market less year after launch .< br>< br > Can you find an example wild over performed early forecasts ? One such case would Sony PlayStation 2 video game console had massive success despite predictions failure mostly attributed superb library exclusive games well wide range multimedia capabilities offered device like DVD playback something no competitor could match during period 2002-2006 when was most active part life cycle . < br >< br > What external factors might cause below-forecast sales ? Above-forecast sales ? External factors causing below forecast sales include things like introduction new substitute products offering better performance lower costs or regulatory changes restricting access certain markets above production could result unanticipated demand either tied technology advancements improved marketing/branding strategies etc ..

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