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?
