Don’t do revenue forecasting of innovations!
Revenue forecasts are unhelpful
Developing a good business case for your project is part of any good innovation process. And yes, this business case must cover the costs, the benefits, and the risks of your innovation. Just check the definitions of “business case” in stage-gated innovation process, in software development, and in Prince2 for project management. Now, if your organization’s innovation strategy is to go for top line growth, expected new revenues are an important part of benefits.
However, business case templates that just ask for expected revenues over time are unhelpful at best and potentially misleading.
Forecasts are for communication
Revenues are the result of the choices you make for your innovation project. In this way, they are much like new product costs, that are the results of product design and manufacturing decisions. By making the underlying drivers of revenues explicit, these choices are revealed and up for scrutiny and improvement. In my experience, the following formula is very helpful to understand what determines future revenues:
revenue = market size x market share x price
What do the market size, market share and price forecast communicate? Let me describe how they each link to one of the fundamental tools of innovation: understanding the “job-to-be-done”. This concept of the job-to-be-done is essential in focusing both incremental and disruptive innovations on customer needs(refer to Christensen e.a. descriptions e.g. in MIT Sloan Review or Ulwick’s book “What Customers Want”).
Forecasting market size, share, and price helps you answer key questions on this job-to-be-done by your innovation.
- market size:
How many potential users does your innovation address? How often could they benefit from your solution? Or: how often is the job-to-be-done actually done?
- market share:
How does your solution compare or compete with alternative ones? Looking at existing and expected tools for the job-to-be-done, how often will yours be preferred? Or: when and where is your solution better than the alternatives for the job-to-be-done?
What do you plan to charge for your solution? How does this compare to the price of competing solutions? How does this price compare to the increased value or reduced cost for the user? Or: what are they willing to pay for your solution to their job-to-be-done?
Think about business drivers, calculate the consequences
The three best reasons to forecast market size, market share, and price point separately are:
- They focus on different customer-related aspects of your innovation, for a richer understanding.
- Their forecasted values can have different dynamic patterns (where you may expect price erosion, market share ramp-up, and market size fluctuations).
- They can be tracked and adjusted separately as your innovation is progressing.
With the answers to these three fundamental drivers, revenue forecasts can be derived to include in the business case and cross-check the costs of your solution against its revenue potential. Do you center your innovation forecasts around the drivers of the business case?