Forecasting Without a Crystal Ball: Leveraging Advanced Analytics to Boost your Business Plan Success
Working primarily with entrepreneurs at the genesis of their new ventures, we (TNG) come across individuals and teams displaying diverse levels of sophistication. On one extreme, we find serial entrepreneurs with prior success starting new businesses and years of business experience; on the other, we have individuals attempting to turn their first idea into a success. Either way, most of our clients (or potential clients) are usually familiar with the concept of a ‘business plan’ – that document that is so critical to charting their way from idea, through venture, into successful business. In today’s world, it is easy to Google an ‘expert’ that can build an inexpensive business plan; worse yet, many people seem to think that they are the ‘expert’ and that no particular skill or expertise is needed to do so; and, unfortunately, we often run across individuals that are inappropriately confident regarding the professionalism or completeness of their ‘business plan’. And, there seem to be trends. We often find the same elements that are missing, incomplete, or simply of poor quality – these include:
- a concise, yet informative one to two page executive summary,
- a sales and marketing strategy that discusses advanced concepts such as channel strategy, marketing mix, and brand strategy,
- details about the management, including roles and responsibilities within the proposed venture, prior relevant experience, successes, and other concurrent responsibilities, and
- business analytics, which includes marketing analytics / competitive intelligence, forecasting and financial analysis, and decision analysis.
I may discuss some of the other items at a latter time, but this month I’d like to dedicate the TNG Blog to #4 – business analytics. Why this particular one? Well, two reasons. First, most entrepreneurs approach us looking for a marketing strategy that will generate loads of revenue, without really thinking about how that is going to happen, without doing any solid analytics. Second, it’s the one area where if you do a fantastic job, you will shine before potential investors and partners, more so than with any other aspect of the business plan. With the right data, advanced analytics, professional graphs and diagrams, you can wow anyone exposed to your plan or investor presentation. So, what are some critical aspects of great business analytics?
First and foremost, before you can do anything else, you need to implement marketing analytics – you need to have a solid understanding of your market, both customers and competition. Primary market research (going straight to the source of information) can yield such insights in several ways: you can directly reach out to your customers, competitor’s customers, competitors, or even other industry experts or consultants; there’s also a variety of methods to do so: face to face interviews, telephone interviews, surveys, or even focus groups. You can even conduct some tests or trials. Heck, in today’s world, you can read online posts and comments to hear it straight from the customer. Be creative!
You can also leverage secondary data (getting the information indirectly): purchase customer lists or syndicated research reports, research competitive websites or journals, use financial sites to search competitive 10K forms and other financial reports, and so on (we’ve got a few more up our sleeve, if anyone is interested). Often we review business plans that describe a single target customer type without really segmenting customers, quantifying the opportunity by segment, or looking at market share by key competitor. These are just some examples of the usual gaps we see, but there are many more potential benefits for implementing marketing analytics. Once you’ve finally built a solid quantitative and qualitative understanding of the market, you can begin evaluating the potential of your product(s) in that competitive environment. This analysis is broadly referred to as forecasting. I’m often amazed at how loosely people utilize this term…
Who can tell me what is missing from the anonymous ‘forecast’ shown below?
A thorough forecast should be more than just one simple graph. Period. A forecast should contain the factors and assumptions that impact it, the reason for any observed growth or decline, the theoretical / feasible outcomes (scenarios) and their probability, the financial results / NPV under these various scenarios, the key uncertainties and how they may affect the forecast, and where there might be important decisions that will positively or negatively affect the forecast. Wow, who would have thought there was so much involved? Well, even us ‘experts’ sometimes forget, so it’s always good to get a refresher. I was recently sorting through my books and came across a copy of ‘Decision Making with Insight’ by Sam Savage from Stanford University. This is a pretty advanced book but a real good reference on some of these concepts.
To start, you should consider at least 3 basic scenarios (that’s right, basic / minimum should be 3) – base case, more optimistic (aggressive), and more pessimistic (conservative). You can always expand but 3 is a good starting point. Next, you should assess the factors that may affect these 3 outcomes. For example, you may have different levels of investment, various response rates from a PPC campaign, different levels of pricing, and so on. You can have as many factors as you like and their outcomes should vary across the scenarios. If you really want to get fancy, you can sort these factors from top to bottom in decreasing order of those that elicit the greatest impact to the forecast (or those that might vary the most) – this is also known as a ‘tornado analysis’. From this little step alone, you should be able to knock the socks off of potential investors or partners. But, you want more? You want to get real fancy? Feel free to read Sam Savage’s book on advanced decision / probability analysis or reach out to us for more advice.