July 07, 2016

Tops-Down Approach

Most big companies have a more sophisticated approach than this to tops-down forecasting, but we'll discuss this stuff at a high level so that you know where to head.

When forecasting 2017 sales, you start at a high level.
  • Forecasted 12-Month Buyers At The End Of 2016 = 100,000.
  • Forecasted Repurchase Rate = 40%.
  • Forecasted Spend Per Repurchaser = $200.
  • 12-Month Buyer Demand = 100,000 * 0.40 * 200 = $8,000,000.
  • Reactivated Buyers = 10,000 * $150 = $1,500,000.
  • New Buyers = 45,000 * $130 = $5,850,000.
  • Expected 2017 Buyers = 100,000*0.40 + 10,000 + 45,000 = 95,000.
  • Expected 2017 Demand = $8,000,000 + $1,500,000 + $5,850,000 = $15,350,000.
This exercise tells you that your 12-month buyer file is expected to shrink in 2017 ... nobody is going to want to hear that. This means you're going to have to come up with some wizardry to grow the business. At least you have six months to figure out the wizardry. 

Too many companies, especially big ones, make up numbers when they should be identifying tactics for growth. I've been in the meetings. I've been asked to make up the numbers. I share what the "fudge factor" is that gets the company to the numbers with anybody who will listen.

High-performing and honest companies run these scenarios on a monthly basis ... and they clearly communicate what impact current results are having on the future of the business. They clearly communicate what needs to change in order to grow customer counts and grow sales. Nobody is surprised. Yes, people get yelled at because the results don't meet expectations. But nobody is surprised. And tactics are put in place ahead of time, to guarantee a reasonable outcome. Numbers are assigned to each tactic. Each tactic is measured against the forecasted outcome.

But it all starts with a tops-down approach.

I'm sure I told you this story a half-dozen times, but it bears repeating. It's 1998 at Eddie Bauer. I'm fed up. My team tells me it will take a full week to put together a bottom's-up forecast of sales for the Spring Season in 1999. A full week. I need an answer in two hours, not a perfect answer, but an answer. So I employ a tops-down approach. I come up with an answer ($182,000,000). I seal the answer in an envelope on Monday morning. Then my team scrambles to come up with their answer ... it takes all week (not their fault, this is the company-endorsed process that they are required to adhere to) ... and on Friday afternoon, they present me with their answer ($181,000,000). I ask them to open the envelope. Then I ask them to follow a tops-down approach.

You use a tops-down approach to diffuse pointless arguments at an Executive Level. You use the approach to get all of your Executives aligned around a common theme. Once everybody is aligned, you do the hard work, the bottom's-up work, and you verify the estimate.