I live in Texas, so this past week has been interesting. Normally our winters have low temperatures around 40°F. A couple of times each winter, we will experience a “hard freeze” of less than 32°F for more than a couple of hours. Often, the weather forecasters predict lower temperatures and harsher conditions and materialize.
This winter, we had a storm of a lifetime. Instead of over-predicting, the weather forecast gave low temperatures 5 to 10°F higher than observed. There was snow and ice in the Corpus Christi area, right on the Gulf of Mexico with low temperatures dipping to just 19°F (-7°C). Thick ice covered every surface, including the wind turbines which were providing about 40% of power to the state. Iced up, they could turn no more, so the state has been gripped in massive power outages, leading to loss of water supply in many places as well.
What is Forecasting?
While we often think of the weather when we hear the term “forecast,” we also make business predictions. A business forecast allows us to plan production, distribution, and resources. These forecasts are usually based on sales projections into the future, sometimes called a “demand forecast”.
Time Frames for Forecasting
Business forecasting covers a wide range of time periods. We use short-term forecasts for immediate job assignments, shipping, and purchasing. Medium-term forecasts also include plans for inventory, warehousing, and raw material supplies. Finally, long-term forecasts involve strategic product planning with potential capital investments.
Role of the Product Manager
A product manager has a broad role, including new product development (NPD) and brand management. Understanding and predicting customer needs means a product manager must be proficient in making demand forecasts. Functional departments look to the product manager for guidance in production, logistics, and purchasing.
Market trends often dictate which products will experience growth and which will experience decline. Additionally, the stage of the product in the overall product life cycle (PLC) also contributes to expected consumer demand. (Recall that the stages in the product life cycle are introduction, growth, maturity, and decline. Read more here.)
Other factors that influence the demand for a new product include competition, technology, and regulatory factors. When the US government banned incandescent light bulbs, demand initially spiked as consumers hoarded a product that was inexpensive and efficient for use. Suppliers, however, ramped up production of fluorescent bulbs. The forecast was tricky to manage – fluorescent bulbs are more expensive, tend to have a longer life, but are far more damaging to the environment if broken. In this case, the product manager’s job is to make an educated guess for light bulbs sales and where to invest product innovation dollars. New technologies, such as LED bulbs, are an optional replacement product.
Types of Forecasts
There are two main categories of forecasting: qualitative and quantitative. Qualitative forecasts use the opinions and intuition of a group of experts. Often the sales team provides valuable input to predict new product sales because they know how their customers feel about existing and competitive products, features, and needs. It is qualitative approach because no mathematical models are explicitly applied to the prediction.
A quantitative forecast, on the other hand, normally relies on historical data to predict future sales. In product innovation, we may use data from similar products or use adoption rates in similar markets. Customer surveys yield data ranges for selling price and volume. We use mathematical models and statistical analysis to predict future product sales.
It’s important to check your assumptions frequently, especially during the product introduction phase. Assumptions and risks are built into any qualitative or quantitative forecast. You’ll also want to validate your predictions with an evaluation of their accuracy to improve all future forecasts.
Forecasting for Product Managers
Because a forecast is a prediction of the future, it will most definitely be wrong. However, product managers need to master the skills of forecasting to manage product development efforts, strategic initiatives, and customer needs. If you under-predict production, customers can be left without products they want to purchase. If you over-predict demand, you might be stuck with a warehouse full of useless products (a situation one client described to me). Balancing customer needs and profitability efficiently is the definition of a successful product manager.
Learn more about Forecasting for Product Managers in our upcoming online class on Tuesday, 6 April 2021. Check out the full course calendar here and catalog of facilitated and online courses here. Contact me at firstname.lastname@example.org for more information about Forecasting for Product Managers or any other innovation topic – I love to learn and share!
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