new product development sales forecasting & financial analysis
Post on 22-Dec-2015
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New Product Development
Sales Forecasting &
Financial Analysis
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Sales Forecasts
With Sales Potential Estimates
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Mail Concept Test – Drawing / Diagram
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Sales Potential Estimation
Translating Intent into Sales Potential Example: Aerosol Hand Cleaner
After examining norms for comparable existing products, you determine that: 90% of the “definites” 40% of the “probables” 10% of the “mights” 0% of the “probably nots” and “definitely nots”
will actually purchase the product Apply those %age to Concept Test results:
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Sales Potential Estimation
Translating Intent into Sales Potential Apply those %age to Concept Test results:
90% of the “definites” (5% of sample) = .045 40% of the “probables” (36%) = .144 10% of the “mights” (33%) = .033 0% of the last 2 categories = .000
Sum them to determine the %age who would actually buy: .045+.144+.033= .22
Thus, 22% of sample population would buy(remember: this % is conditioned on awareness & availability)
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From Potential to Forecast
With Sales Potential Estimates: To remove the conditions of awareness and
availability, multiply by the appropriate percentages:
If 60% of the sample will be aware (via advertising, etc.) and the product will be available in 80% of the outlets, then:
(.22) X (.60) X (.80) = .11 11% of the sample is likely to buy
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Sales Forecasts
With Sales Potential Estimates Diffusion of Innovations
The Bass Model: Predicts pattern of trial (doesn’t include repeat
purchases) at the category level Works for all types of products, and can be used with
discontinuous innovations
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The Bass Model
Estimates s(t) = sales of the product class at some future time t:
s(t) = pm + [q-p] Y(t) - (q/m) [Y(t)]2
Where
p = the “coefficient of innovation” [Average value=.04]
q = the “coefficient of imitation” [Average value =.30]
m= the total number of potential buyers
Y(t) = the total number of purchases by time t
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The Bass Model
Important Feature Once p and q have been estimated, you can
determine the time required to hit peak sales (t*)
and the peak sales level at that time (s*):
t* = (1/(p+q)) ln (q/p)
s* = (m)(p+q)2/4q
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Financial Analysis
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Financial Analysis
How Sophisticated? Depends on the quality/reliability of the data and the stage
you’re in
Early Stages: Simple cost/benefit analysis or “Sanity Check” as 3M uses:
attractiveness index = (sales X margin X (life).5 ) / cost sales= likely sales for “typical year” once launched
margin = likely margin (in percentage terms)life = expected life of the product in years (sq root discounts future)
cost = cost of getting to market (dev., launch, cap.ex.)
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Financial Analysis: Later Stages
Payback and Break-Even Times Cycle Time Payback Period Break-Even Time (BET) = Cycle Time + Payback Pd.
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Financial Analysis: Later Stages
Payback and Break-Even Times
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Financial Analysis: Later Stages
Payback and Break-Even Times Discounted Cash Flows (DCF, NPV, or IRR)
The most rigorous analysis for new products: year-by-year cash flow projections discounted to the present the discounted cash flows are summed if the sum of the dcf’s > initial outlays, the project passes
The “Dark Side” of NPV (for NPD) Unfairly penalizes certain projects by ignoring the
Go/Kill options along the way (option values not accounted for in traditional NPV)
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Financial Analysis: Later Stages
Payback and Break-Even Times Discounted Cash Flows (DCF, NPV, or IRR)
Options Pricing Theory (OPT) Recognizes that management can kill a project after an
incremental investment is made At each phase of the NPD process, management is
effectively “buying an option” on the project These options cost considerably less than the full cost of the
project -- so they are effective in reducing risk Kodak uses a decision tree and uses OPT to compute the
Expected Commercial Value (ECV) of a given project
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Using OPT to find the ECV
Development$D
Pts
Pcs
Technical Success
Technical Failure
Launch$C
CommercialSuccess
Commercial Failure$ECV
Yes
No
Yes
No
KEY: Pts = Prob of tech success $D = Development costs remainingPcs= Prob of comm success $C = Commercialization/launch costs$ECV = Expected commercial value $PVI = Present value of future earnings
$PVI
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Using OPT to find the ECV
ECV = [ [(PVI * Pcs) - C] * Pts] - D
KEY:
Pts = Prob of tech success $D = Development costs remainingPcs= Prob of comm success $C = Commercialization/launch costs$ECV = Expected commercial value $PVI = Present value of future earnings
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NPV vs. OPT: An Example
TRADITIONAL NPV (no probabilities):40 - 5 - 5 = 30 Decision = Go
NPV with probabilities:(.25 X 30) - (.75 X 10) = 0 Decision = Kill
ECV or OPT:{ [(40 x .5) - 5] * .5} - 5 = 2.5 Decision = Go
Income stream, PVI (present valued) $40 millionCommercialization costs (launch & captial) $ 5 millionDevelopment costs $ 5 millionProbability of commercial success 50%Probability of technical success 50%Overall probability of success 25%