Nothing destroys the credibility of a business report faster than inaccurate or wildly optimistic financial forecasts. I have seen students provide financial forecasts of a product line extension that would generate billions in dollars within a couple of years. And while that may have happened with Facebook, but it is unlikely that the average new product would generate such a tremendous return.
Therefore, before you use your ATAR financial forecasts in your report and recommendations, here is a checklist of financial considerations – what I call financial reality checks.
Very high brand penetration?
Brand penetration indicates the percentage of the overall target market that will become a regular user of the product. Firms/brands with high ongoing market share could probably expect to have a reasonable level of brand penetration.
However, in most cases, your need to take care about the percentage of consumers you think will quickly gravitate to the new product. Remember that the product is in a competitive situation and generally most competitors will react to a significant decline in their market share.
Too short a pay-back period?
Other than straightforward product line extensions and product improvements, it is unlikely that most new products would have a pay-back time-frame of less than one year. Generally 2 to 3 years is the norm – but longer for more significant/expensive new product investments (such as pharmaceuticals).
Over-stated marketing return on investment?
Generally your marketing ROI for your needs to look reasonable. For example, if your marketing ROI result is 1,000% then you are almost “spinning straw into gold”. Experienced business people will realize that it is difficult to generate profits from new products (because the market is so competitive and many new products fail), let alone return 10 times the new product investment in a short period.
High prices AND low unit costs?
Another financial concern I have seen with ATAR forecast from marketing students is that they plan to develop the “leading/best” product in the marketplace. And because of this superior product quality they believe that they would able to charge premium prices, but still manufacture the product/service at incredibly low cost rate – leading to an overstated unit margin.
It is difficult to produce a truly premium quality product (especially with a new product) while having lower input costs than your competitors – price and cost need to be reflective of each other.
Lack of marketing support for the ATAR assumptions
If you have very high percentage in the ATAR forecast for awareness, trial, availability, repeat/rebuy, then you will NEED a suitable marketing program that will deliver these marketing targets.
Quite often, I will see high marketing goals for these four ATAR components, but with no clear way of how they will be delivered. Keep in mind, that not every video will go viral – that may happen on occasion – but you should not look to build it into your underlying marketing assumptions and be accountable for it in your marketing deliverables.
KEY TIP: Be realistic and justify your assumptions and use supportive data where ever possible.