Using 'bottom-up' product forecasts to deal with disruption
by Leica Ison
Product forecasting of revenue and costs helps with lifecycle agility to quickly make decisions as an aligned virtual product team.
Product owners and executives can make a big contribution to understanding the rapidly evolving COVID-19 impact and managing a path forward using bottom-up product forecasting.
It’s familiar with any type of market volatility or downturn that businesses rightly so review or pause 'Horizon 2 / Black Swan' type product development projects and try to improve the performance of - sweat assets and generate cash - in-market or existing products.
Re-evaluating your product strategy is an essential first step when conditions change and using commercial product tools will help you get back on track. This guide outlines some tools you can handle working from home (WFM) and in a virtual team to re-evaluate your product strategy at a macro level. It shows how to forecast a range of revenue scenarios, find cost savings and do this quickly and effectively as a remote team to help ensure your business remains viable.
What is the value of 'bottom-up' product forecast?
The 'bottom-up' product forecast is a great tool to understand your product revenue and cost baseline and trajectory for 2020. This exercise of forecasting your product and portfolios – or the majority of them - will provide a granular picture to compare to your Finance view of the 'top-down’ annual budgets and cash flow work. Think of it as safety-net exercise and your product team will have a detailed knowledge of the product lifecycle and health that may not be visible in Finance team for corporate accounting.
What is bottom-up product forecasting?
Put simply it is getting a granular view of the organisations’ future performance by starting with a product lens and working up to total portfolio and then organisation level. It begins with a product owner doing a detailed review of product health and rolling this up to collective portfolio, organisation and sometimes geographic level. Think of it as a road map for your commercial product performance.
Forecasting is estimating a forward-looking view of product revenue, operating costs and product margin. Product executives add value by doing this at the monthly level, annual budget and book-ended with a 90-day audit deep dive to understand crucial trends and likely timing of revenue.
Re-evaluating your product strategy and doing bottom-up forecasting will show:
- How your revenue has changed given COVID-19 and remote working effect.
- What your costs will now be and opportunities to find savings in product operating costs.
- Find new ideas or 'gap-fillers' and finding productivity to manage through the unprecedented impact on product viability.
- Assist prioritise where to spend team time, resources and marketing budget.
The most effective product budgeting and forecasting tools for product owners and executive level:
- Budget and forward-looking forecast of revenue by month
- Budget and prospective product operating costs by month
- Market assessment – demand and market segments and trend research for a product in changing external forces
- Assessment of average revenue per user or APRU and variance analysis.
|Product commercial research||What it is good for|
|Revenue budget||Forward-looking assessment of your revenue so you can understand if your product will be profitable and plan for future expenses.|
|Revenue forecast||Forecasting helps you look into the future and plan and manage your product activity. Helps you understand and ground your product decisions in facts and assumptions instead of optimism.|
|Average revenue per user (ARPU)||Tells you how many customers you need to meet revenue target. It also helps you understand if you have the resources to make your product a commercial success.|
|Scenarios – baseline, pessimistic and optimistic||Useful to derisk your forecasts and prepare for the worst-case and best-case outcomes|
|Variance analysis||Reviewing the difference between actual and planned revenue or cost behavior helps you understand key drivers and maintain control over your product.|
How to review your Revenue Budget
The main benefit of a revenue budget is that it requires looking into the future. The revenue budget should contain the assumptions made about the future and the details about the number of units to be sold to a customer segment and the expected selling prices.
When an annual revenue budget is detailed by month, each month’s actual revenues can be compared to the budgeted amount. Similarly, the actual year-to-date revenues can be compared to the estimated revenues for the same period. In other words, monthly and quarterly deep dives into revenue budgets allow you to assess your revenues as the year unfolds instead of being caught out at the year-end.
Your revenue assumption is the estimated number of sales of your product, solution or service to your target customer and often referred to as top-line because of its sits at the top of an income statement in P&L ( Profit and Loss)
At this point, you do not take account of any deductions or expenses. Revenue is typically viewed in the accounting period - monthly and annually. Accounting can vary - but generally, revenue is reported in the period earned, and this is accrual basis of accounting. An excellent example if you sell your product in April but with 30 days to pay - the revenue of $10,000 is recorded for April even though no cash is paid. Reporting revenues in the period in which they are earned is known as accrual-based accounting. . It is common for smaller businesses to use cash-based accounting; therefore, the revenue is recognised when money comes in.
In addition, watch out for the difference between revenue and ARPU – average revenue per user. This is an essential area for product managers to track. This is the monthly revenue per user where you simply dive the total revenue by the number of users.
How to complete a product variance analysis
Your revenue and other metrics can vary to your budget or even your forecast. This variance can be favorable or negative. A favorable budget variance indicates a better result; however, this needs as much attention as a negative variance as it will drive additional costs and resources into the business to meet the demand.
Value of scenarios in setting a revenue budget
Forecasting is both science and art. The assumptions that product owners and executives adopt to formulate the forecast and budget at times can be tricky – like looking into a crystal ball.
Scenarios offer a tool to consider the range of options and understand the risk involved in each alternative in uncertain conditions. When setting a budget or forecast, I prefer to complete three scenarios so we can consider more than one outcome:
|Budget type||What it is used for|
|The Baseline product budget or forecast||Baseline – use this one with your Finance team as the most likely outcome|
|The Pessimistic product budget or forecast||Pessimistic – discuss this one with your executive team as the conservative outcome if the worst conditions arise.|
|The Stretch product budget or forecast||Stretch or optimistic – this is a possible outcome but still the most favorable outcome uncertain|
Consistent reviews of your product health and the underlying drivers will improve your decision making and product success. This is a huge benefit as it will enable your remote and virtual team to brainstorm ideas and develop alternative action plans to manage cash flow and get back on track.
“Keep reviewing your product. Bookend your monthly reviews with a 90-day product audit. The better you can anticipate changes and impacts, the stronger your product will be over the next 12 weeks. Our approach to the product lifecycle is fundamentally different at Skyjed. The difference is we have created product domains, drivers and health-check score so you can quickly and effectively make forward looking lifecycle decisions as aligned virtual team” Leica Ison CEO & Founder of Skyjed
How to quickly implement a virtual and remote product team to address product forecasts in 6 simple steps?
With Skyjed your virtual product team can be up and running in minutes, product strategy is set and frequently monitored, assessed with automated reports then re-evaluated in these 6 simple steps:
Step 1: Create a product portfolio containing products and invite your virtual team
Step 2: The team audits and input product strategy data and is prompted for information in a set of Domains and Drivers.
Step 3: AI analyses the data to create your product insights and overall Health Index
Step 4: Report, export and share your product story, insights and action plans
Step 5: Collaborate and build a product action plan
Step 6: Monitor the status of your action plan. Set your audit cadence, weekly monthly and 90 day cycles and repeat the process for product lifecycle excellence and success as an aligned team..
I’ll be posting on forecasting your product costs as remote team soon. Find out more and see our video guide How a remote team can complete audit of your product in hours not weeks, or on How-to-re-evaluate-product-strategy in disruptive times.
The Skyjed product lifecycle management and governance platform provides organisations with a 360-degree view of their product portfolios health and risk status while facilitating collaboration, transparency and product trust from anywhere, at anytime. Save time on reporting so you can get back to what you love - product strategy and innovation for growth.