Forecasting Demand

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Entrepreneurship 3: Growth Strategies

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University of Pennsylvania

Entrepreneurship 3: Growth Strategies

743 notes

Cours 3 sur 5 dans Specialization Entrepreneurship

Start-ups are designed to grow quickly, but successful start-ups grow smart. This course is designed to provide you with an understanding of the essential elements of successful scaling, including an overview of demand generation, customer acquisition, adoption, diffusion and forecasting demand. You’ll also learn how to market effectively using best practices of digital marketing, social media, PR, SEO, and pricing. Finally, you’ll cover the nuts and bolts of building a sales process, partnerships and supply relationships, and examine the crucial components of attracting, developing and retaining talent. By the end of this course, you’ll have an outline of an expansion strategy for your idea or enterprise, and also be ready for Entrepreneurship 4: Financing and Profitability

À partir de la leçon

Module 1: Acquiring Customers and Forecasting Demand

This first module focuses on strategies to acquire customers and understand product demand when a start-up is in growth mode. You’ll learn foundational economic concepts in customer acquisition, including customer value over time, customer lifetime value and ROI, and customer equity. You’ll also learn about the key theory of “two-sided markets” and explore how entrepreneurs can build these markets through pricing and subsidization. Even the most exciting and useful new products and services face challenges in convincing people to adopt them, and so you'll explore actionable research and examples that explain the rate of diffusion, the adoption of new products, and ways to attack the challenge of forecasting demand. By the end of this module, you’ll have a solid grounding in the core concerns of start-ups as they move from launch to growth.

Introduction1:02

Overview of Demand Generation, Customer Acquisition23:12

Two-Sided Markets14:56

Diffusion and Adoption15:31

Forecasting Demand23:13

Rencontrer les enseignants

Kartik Hosanagar
Professor
Wharton School
Lori Rosenkopf
Vice Dean and Director, Wharton Undergraduate Division
Simon and Midge Palley Professor of Management
David Hsu
Richard A. Sapp Professor of Management
The Wharton School
Laura Huang
Assistant Professor
Management
Ethan Mollick
Associate Professor
Associate Professor of Management- Wharton School
David Bell
Xinmei Zhang and Yongge Dai Professor, Professor of Marketing
Marketing
Karl T. Ulrich
Vice Dean of Entrepreneurship and Innovation
The Wharton School

In today's lecture,

we're going to focus on the critical topic of how to forecast demand.

Now of course, we could literally spend weeks or

months going through all kinds of books and concepts.

So what I really want to give you is just the essence of some key ideas around why

it's so important and some principles that I think are going to help you,

as entrepreneurs, as you go through and try and

figure out what demand looks like for your new products and services.

So we're going to do things in two parts.

We're going to start out, how do we sort of overcome some of

the biases that causes us to mis-forecast demand?

What's a conceptual framework, the ACCORD model,

that allows us to think about what might be the barriers to realising demand.

And then why is qualitative research so

important in the early phases of understanding the demand process?

So that'll be our first section of material today.

And then secondly, we'll then get into some principles and

examples from actual sort of forecasting context.

We'll think about demand decomposition, why that's absolutely critical.

A few forecasting rules and methods.

And then we'll ask the question which is going to relate to a quote in a moment,

what if Dwight Eisenhower were wrong?

You'll understand what I mean by that in a second.

So, the key idea we're going to think about here is

how do we forecast demand for products and services where demand may be uncertain?

And the reason I'm putting the little warning or danger sign there on the slide

is that this is one of the most critical risks that the entrepreneur faces.

The risk of misforecasting or misunderstanding what potential demand for

the product will service could be.

There are other risks that we might have in execution, but if we get this one wrong

in the way that we think about the total addressable market.

This is potentially catastrophic, not just for the business, but for valuation, for

investors, for the whole kind of soup to nuts.

So let's keep that in mind.

I also want us to focus on an interesting quote by Dwight Eisenhower, president of

the United States, is that often times, we think we're coming up with something

completely new and there's no way we can really know what the demand will be.

But actually, that's not aways true.

Of course there are products and services that are totally new to the world,

that are discussed in some of the other lectures as part of this course.

But many times there'll be clues or signals about what demand might reasonably

be, particularly if we approach the questions correctly.

So Eisenhower said, things are more like they are now than they ever were before.

So let's not be afraid to use existing analogies when we're forecast demand.

Now with this in mind, the first thing I'd like you to think about when you're

forecasting demand as an entrepreneur for your new product of service,

is the problem of projection bias that's ubiquitous in demand forecasting.

This is the idea that we're all thinking about demand from our own vantage point

and our own experience and sometimes, we need to step back and step away from that.

So, what I'm showing here on the screen is a picture of a gentleman outside

McDonald's in China.

McDonald's is obviously a very successful corporation.

But when they went into china they completely misunderstood

the way people would use McDonald's as a product and a service.

In the United States we tend to come and go pretty quickly we like drive through,

we like sort of getting in and getting out.

In China the McDonald's was more a place for families to sit and relax and

friends and colleagues to enjoy each others company.

So by projecting the American experience onto what we thought was going to

happen in China led to a large problem in terms of the McDonald's and so

forth being way too small and not really conducive to what customers wanted.

So one way we can debias or get around this idea of projection bias is to try and

literally put our shoes, ourselves in the shoes of the customer.

So the picture on the screen here is a lady who's working at Ford and

she's trying to understand what it might be like to be someone who is 65 or 70.

Someone who is perhaps a little bit larger and how would I be getting in and

out of a new Ford product?

A new minivan in this case.

So literally taking on the physical characteristics of the intended

customer to try and get away from this idea of projection bias.

And so now I want to share one of my favorite frameworks for

thinking about how to understand impediments to demand.

This is not the forecast per se but think about all of the things that might

facilitate or retard the potential demand that we're going to realize.

This framework is called the ACCORD framework and

let me lead you through it and then ask you to do a little exercise at the end.

So, the first thing you should do as the entrepreneur is list as many things as you

possibly can that are the relevant advantages of this product or

service that you're bringing to market over the status quo.

It has better functionality,

it has better value, it looks better, it has better functional, emotional,

symbolic value to customers, it's easier for customers to use.

What are the things that give it relative advantage?

The greater the relative advantage, the greater the potential to realize demand.

Secondly, is the product or service that you're introducing, is it built-in and

compatible with the existing behaviours of customers?

So, if I'm introducing a product like Stevia, which is a sweetener for

coffee, people are already used to putting sweeteners in their coffee.

I just put another one out there.

I'm not asking you to change your behavior.

The third thing you should think about is is this an easy product to understand or

is it a complex product to communicate in terms of the benefit.

The easier it is to communicate what the product is doing,

the better off you'll be.

If you want to Google something somewhat amusing, you can go to Google and

you can type in the phrase will it blend, and you'll find a gentleman there who's

blending phones of various manufacturers, I won't name who they are.

But what you can see there is, it's a very valid and very visceral way

of representing the core value proposition of his product, the Blendtec blender.

Because it's so, has such high efficacy

in blending things that you normally wouldn't put in to a blender.

And the fourth point on the slide relates to my favorite part of the ACCORD process

because this is really interesting for the entrepreneur.

What is it about the product or service that's observable in terms of consumption

that might lead people just to pick up the product by social observation or

even word of mouth.

So the packaging can be critical here, the unboxing can be critical here.

If it's a product that other people can see and use, like those headsets,

the Beats headphones?

You might remember back even further to when Apple introduced the first iPod.

There were the iconic billboards that you could see in the United States and

other countries around the world too, of a black silhouette and

then a person with white earbuds and

headphones coming down to something that's socially observable can be very important.

Another point that I want to relate here that goes also with

the example I'm going to get you to think about is if you're selling a product or

service that's not observable in the act of consumption, like wearing a headset.

Then you might want to think about,

can I create content that people might be willing to share and

that thing creates visibility or observability into the product?

You can go to Google and

look at this one on your own but the link there is dollarshaveclub.

If you go to the website for the Dollar Shave Club you see a very humorous piece

of video content for a product that people don't actually observe others using,

which is guys shaving their face with a razor.

That's not socially observable.

I don't have people come to my house and then watch me shave, but

because of that funny content I might then share it with others.

The next point is low risk of failure, can I adopt your product or service without

incurring too much functional risk, this thing hopefully is going to work.

Not too much social risk, it's not embarrassing for me to do so.

And not too much financial risk.

If I buy into your product or service, its not going to be some unintended or

negative financial consequence.

And then finally, this is particularly important for

those of you who are addressing perhaps less developed markets around the world.

Can the product be tried or consumed in a relatively low cost or small units.

We call that divisibility.

So if you can think through this framework and you can check the boxes, really for

all seven, that's going to give you a bit of sense of where the demand is going to

expand rapidly or whether or not you're going to face impediments, which is,

of course, a critical part of forecasting the ultimate demand for your product or

service.

And so now an example, what I'd like you to think about, to really try and

apply this accord model.

Just go online and go to the website of Dollar Shave Club.

And I'd like you to apply the accord model to that business.

So does this product have a relative advantage?

Is it compatible with existing behaviors?

And so on down and try to come up with a sense of whether or

not you think this is a product that potentially can unleash a lot of demand or

whether or not there are some negatives there.

I'll let you do that on your own but

that will give you a sense of how you can apply this framework to your own business.

And now, just to conclude this piece about thinking around

how we understand whether or not demand is going to be large or small or

what the impediments might be I can't emphasize enough,

based on my experience with working with many, many entrepreneurs, the importance

in the beginning of the demand forecasting process of qualitative low cost research.

What do I mean by that?

I mean by doing a few simple interviews with potential and existing customers.

Looking into online forums about what people are saying about the product

category, overall what the level of sentiment is.

Running some very early focus groups, even if they're just selected by convenience,

where you have people physically experience the product and

kind of talk and communicate about it.

Are we able to do any simple surveys through the Internet?

Very, very low cost to administer via email and other channels.

And then finally, can we go onto online communities and just look and

see what is being discussed and what's being said about the pain point and

the existing products that are already out there.

So this requires really a minimal investment in

terms of the financial outlay.

It'll require you to spend a little bit of time.

A lot of what you learn won't necessarily be generalizable on the same way that

quantitative research is but very, very important for you to do this early on.

Just as part of your sensing process as the entrepreneur whether or

not there are impediments or things that we should be looking at to really unleash

the total demand potential for a new product or a new service.

So the first thing I want to mention here is what we call the Golden Rule of

forecasting.

And the Golden Rule of forecasting is to be conservative.

The entrepreneurial landscape is littered with companies that just had wildly

inaccurate projections about what demand was ultimately going to be.

Now, of course, in this short video session or lecture together,

we can't cover everything.

So one resource I want to point you to is to my friend and

colleague, Scott Armstrong.

Scott has incredibly deep knowledge of forecasting principals and

forecasting tools.

You can look him up on the Warton website, that's Armstrong,

A-R-M-S-T-R-O-N-G and utilize some of the free resources that he has around.

Actually forecasting tools.

So with that in mind, I want to give you the second most important concept or

principle in forecasting which is to decompose the problem, decomposition.

Very, very simple.

It requires nothing more than an understanding of multiplication.

I'm going to give two examples.

One, demand for car sharing services Right here in Philadelphia and

another one was used by a major package goods company to try and

understand demand for toothbrushes in India.

So, let's go on to those two examples,

thinking about this idea of decomposition taking a larger demand problem and

breaking it down into it's individual components.

There are two reasons we want to do this.

Reason number 1,

when we decompose, any errors that we're making in the forecast should tend to

cancel each other out, and we'll get an overall more accurate prediction.

Academic research clearly shows that.

And number 2, if we decompose the demand into its constituent pieces, that

will show us the trigger points, all the things that we might want to influence.

So let's go now into those two examples and that concept will become clear.

So the first example I want to go through together is a car sharing example.

Now if you're like me I recently sold my car.

Many of you out there might now be thinking about how to

share certain resources, like an automobile as opposed to owning one.

So this was a very, very important practical problem for

some entrepreneurs here in Philadelphia who wanted to start a car sharing service.

And of course they wanted to know how large the market could be and

how quickly it might grow.

And so what they did is they went through a five step process that's

incredibly simple but often overlooked by the entrepreneur.

So first of all, what's the total addressable population,

well it's residents of Philadelphia.

Then secondly, of that total addressable population how many people need transport?

Of that, how many people have a drivers license?

Of that group now d, how many people don't have their own car or

their own other way of getting around.

And then on that, what fraction of those people might use Philadelphia car share.

An important point of caution here when you get to point number E

is often what people tell you in terms of their intention

is not always what they follow through on.

So again, remember the golden rule, be conservative.

So if you ask people on, say, a five-point scale,

how likely are you to use Philadelphia Car Share, extremely unlikely,

slightly unlikely, I'm not sure, slightly likely, extremely likely.

The research would suggest, only count those people who give the most

extreme positive response, and maybe even cut that group down by half.

We want to be as conservative as possible.

Note, of course, that the answers that we get to these five questions that we've

asked will also inform us about what actions

we might want to take that influence the ultimate demand number.

Now we could do this for the car sharing example.

Maybe I'll get you to think about that.

As a homework exercise, I'm going to do it for

you in the toothbrush example from India, that one's coming up next.

So now, we've just thought about car sharing in Philadelphia.

Now I'd like you to put yourself in the shoes of a large multinational,

manufacturer in toothbrushes and trying to sell them into India.

So, I love going to India.

I was there recently, so this is an example that I personally find very,

very interesting.

So if you look at the landscape of India, it's about 80-20 rural to urban.

So that becomes important because people in urban environments might be more likely

to use the toothbrush, which is more of a developed world kind of device.

However, among people who might be willing to brush their teeth,

there's also the issue of frequency.

So on the chart there we can see some people might only brush once a week, 7%.

Some people, almost a quarter, go through and they brush twice a day.

So now let's combine those pieces of information to try and

come up as the company in question, that I can't name,

actually did in terms of the decomposition to develop the overall forecast.

So in order to do the overall demand, or the total demand, addressable demand, for

toothbrushes in India, we would start on the left-hand side by thinking about

the entire population of the country, or maybe for practical reasons,

we might limit it just to the urban population, for example.

Then we would multiply that, i.e.

decomposing, by the customers who, the percentage who currently brush.

Now obviously the implication underneath that If that percentage were relatively

small, we would want to engage in a marketing tactic or

a campaign to persuade people to brush for the first time.

Continuing on, with the demand forecast, we would then think about the percentage

of people who would buy a brush in a store or our channel of distribution.

Then we would think about how many times people might brush per month.

Then we might think about how many times are they going to use the brush.

So how many times do we use it before we actually want to replace the brush and

get rid of it?

Now if we went through all of that multiplication from the left to the right

and kind of a waterfall,

we would come up with an ultimate number of what brush sales might be.

And we would also have four triggers that we could use to bend a forecast or

to improve the overall amount of demand that we might realize.

Of course count to much about the population but

we could increase the number of people who are persuaded to use a brush.

We might be able to persuade people to use

brushes instead of the alternatives which a twig or our brand versus somebody else.

We might also be able to run a campaign or run public health or

something else to increase the incidence of brushing.

And then finally, we might be able to encourage people to replace the brush

once a month as opposed to once every two months.

So this is a fairly simple example, but believe me was very, very powerful for

the company that was concerned,

a large multinational trying to introduce this product into India.

And so now I just want to give a brief introduction to some of the kinds of rules

and methods that we can use practically to forecast as entrepreneur.

Again, earlier in the lesson I refered you to my colleague,

Scott Armstrong who has a whole portfolio of tools that you can investigate

that might be particularly appropriate for your own product or service.

And so now let me give you a simple road map for

thinking about demand forecasting methods and different kinds of rules.

First of all, you want to try and surround yourself as the entrepreneur

with as many experts call them domain experts, as possible.

So if you were launching a new kind of a business to educate people around

the world in mathematics or something else, you might talk to people who were

professors of mathematics that would be an example of a domain expert.

The second thing you want to do when you set up the forecast is try and

decompose all the customer behaviors that lead to demand.

That means the search for information.

That means the evaluation of alternatives.

That means thinking about the criterion that people use

before they make a buy versus no buy decision.

So all of those drivers that ultimately lead to one individual making a decision

in favor of your product or service, added up over all of those individuals.

The next thing you should think about doing are what we call

judgemental methods.

So a judgemental method is exactly as it seems you simply ask

experts what they're opinions are about the demand for your product or service and

also most importantly get them to articulate by writing down or

verbalizing what the reasons are their demand forecast.

When you do this you should use structured analogies.

Remember Eisenhower's quote?

The future looks more or less like the past, that's my paraphrase.

So when people are thinking about the demand for your new product and

service, what kind of analogous products or

services that already exist in the market are they referring to?

And then, finally, very, very importantly,

again my colleague Scott here at the Wharton School is very big on this.

You should combine forecasts from different individuals,

different experts to give some kind of a weighted average which will ground you in

the good territory for the ultimate forecast for your product or service.

And then finally, if you're a little bit more sophisticated or

a little bit more inclined to quantitative analysis, you could do this yourself or

you could outsource it.

Running some kind of regression based models where you're trying to figure

sales, market share or demand as a dependent variable.

Model is a function of different cause or factors, that's a little bit beyond our

lesson for now but there are companies out there that can help you do it.

Probably most of you know somebody who's somewhat facile in the area of regression

analysis as well.

And so now in our final piece for forecasting demand let's go

through situation where demand might be really quite uncertain.

So a little bit of a counterpoint to president Eisenhower

that things are not necessarily the same today as they were in the past.

So, the first thing that you would want to do here with your team is sit down as

an entrepreneur and try to identify all the potential users and

also users of the product.

So one of my favorite examples here that lead to a lot of expansion around demand

is that little thing called baking soda.

Baking soda used to be used of course just by people who cooked and

in cooking but now that product appears in all kinds of things from toothpaste and

detergent and so on.

So try and identify as many users and uses as you can for

this potentially new product or service.

Same thing if we were to think about eyewear.

Eyewear could be used as a functional product just because i need to be able to

see but also one use could be as a fashion use that might have an implication for

me buying more than one pair of sunglasses or one pair of eyewear.

The second thing that you should do is really drill down into the different

segments for the product.

The component pieces of demand, group A versus B versus C, and so on.

Thirdly, you should try and develop a point of view on what are the key forecast

drivers or macro factors affecting the demand for your product or service.

This will be something that you'll have to think about in the example that we're

going to go on to in just a moment.

For example, if we were thinking about eyewear,

perhaps the fact that people now get LASIK surgery and

permanently correct their eyes may have a very, very big impact on a market for

a product that is something that we're currently wearing on our face.

And then finally of course, all good forecasters taking the golden rule

from Scott Armstrong, being as conservative as possible,

but on top of that, can we identify sensitivities?

Are there particularly extreme scenarios where demand might literally explode and

or fall off a cliff?

And if so what would be those things that would cause that dramatic change?

Again, if you were to go through these four steps in detail.

If you are faced, as an entrepreneur, with a product or service that was particularly

new I think you will find this very instructive and very helpful.

And now as the final part of our session, I'd like you to focus on an exercise.

There is nothing quite like it as an entrepreneur

to really have the rubber meet the road and

really put these concepts into practice than to actually do them.

So here's the example I'd like you to think about.

This is a product that I've come across quite a lot recently at the gym and

other places.

Coconut water, no particular brand but

if you've been living in the United States you might recognize this as a product that

all of a sudden is appearing all over the place.

So imagine that you are introducing a new

high quality premium brand of coconut water.

I'd like you to take two concepts from our lesson today.

First of all the ACCORD model.

What would be the various factors that might inhibit or

retard demand for your new brand of coconut water.

And then number two,

could you do a decomposition that would give you an estimate of roughly how much

coconut water might be drunk in a year in the country that you live in?

Could be the United States or it could be elsewhere?

So, take those two concepts, ACCORD and decomposition.

Pretend that you're an entrepreneur, as there are many now coming up with

new types of coconut water and try and go through that process of forecasting.

Again all the best are applying these concepts from our lesson.

Forecasting demand for your product or service, is absolutely make or

break particularly in the early stage of the entrepreneurial journey.

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