Forecasting Best Practices Lesson 1: Definitions — And Minding Your Apples And Oranges

I had the pleasure of speaking with a number of Forrester clients at our Consumer Forum last October. Nothing is more invigorating than discussing the needs of the day and applying our research to solve business problems. I presented a session on the use of forecast data and thought I’d share some of that material with you.

 The first lesson I’d like to share is about definitions. Before going very far with any forecast data, make sure you know what it is that’s being forecast. This may sound simple, but definitions can be challenging sometimes; local conventions may create wrinkles in understanding, and each company makes a decision on where to draw lines around a category or behavior. For example, the Forrester Research Online Paid Content Forecast, 2010 To 2015 (US) refers to a video category. When we define the audience for online video, we include people who watch user-generated content as well as films and TV because we see all of these people as a potential paying audience for online video. This is important to know because that distinction expands the audience by more than 20 million online users.

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Forecasting The Size Of The Pie – Considering Addressable Market

Recent data from the US Census Bureau indicates that the poverty level in the US has grown to 14%.  Just consider: Is a family of four, earning less than $22,000 per year, ever going to be an online household? Can they afford a computer and the cost of Internet access?

 In fact, a household with a very low income could obtain a computer, possibly helped by a subsidy or donor program, and they may start using the Internet to purchase goods or services that can save money. The chance may be low, but there’s something to be learned from considering this possibility while assessing your market opportunity, particularly if you sell goods online.

 Firms in various sectors have benefited from looking outside their traditional target group (as defined by income). Although not addressing low-income families, Tiffany & Co. is a good example of a business where it was valuable to consider a lower-income segment even when conventional wisdom suggested leaving that out of its addressable market definition.

 Another kind of definition to be careful about is technology ownership requirements. Mobile banking is commonly looked at as an enhancement to online banking. But, Forrester’s Technographics data indicates that people who have no online access can and do take advantage of mobile banking. In fact, this offline group is more likely to engage in mobile banking than their counterparts who do have online access but do not bank online. On the other hand, if you don’t have a mobile phone, you can’t be a mobile banker.

 Please share your experiences with us; you may even uncover a new business opportunity!

Good Forecasts Deliver More Than Just Numbers

“What market research is about is adding value to the business.” This line got me a job once. It’s a perspective easily lost in the myriad complications of conducting market research but a value researchers must hold dear. The context in which I obtained that job was customer satisfaction research. I was asked how I might handle the presentation of survey results in a sensitive situation where the audience would be hostile about the results. My response was that companies don’t survey clients because they want a page full of numbers. Companies survey clients because they want to learn how to serve them better — with the end result being increased sales. My presentation wouldn’t be about customer satisfaction scores; it would be about increasing sales.

 This is also a central theme for ForecastView. We have to remember, at the end of the day, that research and researchers are investments that companies make with shareholder money and that the end goal is a positive return on those investments. This applies to forecasts, as well. But this isn’t always easy because forecasts don’t always show steeply upward-sloping curves for all of the products our clients make.

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Declining Penetration Of Consumer Tech Products – Obsolescence Or Increased Usage?

One of the interesting elements of the forecasting job is the fact that not all of our forecasts trend upwards -- and people often forget that the dynamics of decline are just as important to a company’s bottom line. In recent years, for example, the attractions of notebook/laptop PCs -- such as lower prices -- have been eating away at desktop PC sales. In our recently published Forrester Research Online Population Forecast 3/10 (US),we estimate that household penetration for the desktop PC dropped from 73.9% in 2008 to 73.6% in 2009 and will fall further to 69.7% by 2014.

 The phenomenon has happened to devices like audio cassettes, video cassettes, and POTS (plain old telephone service) lines. Technology keeps moving forward and new technology replaces the old.  But with the desktop PC, there are two interesting trends at play:

  1. It’s evidence for the steady transformation of devices from household objects to personal ones.
  2. This personal orientation results in a proliferation of devices targeted at narrower consumer segments, which reduces peak penetration rates (I’ve written about this previously).

When Sony launched the original Walkman, it included two headphone jacks on the assumption that nobody would listen to music alone. But 30 years later, this has completely changed: Mass-market home hi-fi components have virtually disappeared as a product category because it’s now harder to imagine people sitting together at home to listen to music than it was to imagine individual listening at the dawn of the Walkman. 

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Never believe a single data point when forecasting

We often receive questions such as “researcher X’s forecast is much higher/lower.”  I always take these remarks seriously – there are many elements an analyst has to take into account in forecasting and  I’ve learned over time that the content of these conversations drives the value of the forecast (for both parties).

Recently I had a discussion with a client who was skeptical of our growth projection for digital music subscriptions in our recent Music forecast.  We discussed that a key input to our estimate are discussions with companies providing these services and understanding their growth outlook.  But these discussions are expectedly biased, that’s why we routinely challenge providers to defend their expectations but we also look for corroborating data to indicate direction and scale of change. Similarly, if survey respondents happen to love a product idea, it has potential but there’s no certainty that consumers will eventually spend money on that product.  What we look for is a solid pattern of evidence supporting a growth hypothesis along with a paucity of evidence supporting the alternative (decline).

As part of the forecast process, we as analysts debate various hypotheses and I shared the content of those discussions with this client, which helped him understand that our growth expectation for digital subscription is supported by evidence beyond the confidence of subscription providers.

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Considerations in Forecasting

In my role as forecast analyst,
a day doesn’t go by where someone doesn’t ask a question like the
following, “did you account for X in your Y forecast?”  The answer is
almost always in the affirmative as our methodology incorporates a lot of
research and pulls in a wide range of perspectives.  However, producing
reliable and actionable forecasts is an exercise in prioritization so not every
influencer becomes explicit in the model. 

 

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Technology adoption shows faster uptake and increased fragmentation

Forrester’s
recently completed DTV, DVR and HDTV forecast demonstrates some important
dynamics of technology adoption.  The first is that the pace of technology
development continues to accelerate.  When analog television was first
launched, it took nearly 20 years for color TVs to penetrate more than 50% of
American homes.  Forrester’s data shows that HDTVs will reach 50% of US
households in 2010, roughly 13 years after the first HD sales.

 

 

 

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