September 07, 2014


Here's a forecast model from last week.

The marketer forecasts the business to grow, from $19.6 million to $22.6 million. That's good.

But the numbers aren't based in science. The numbers are based in faith ... a belief that things will get better.

Do not submit forecasts based on faith.

At Eddie Bauer, in 1998, forecasts were based on faith. Every major department was asked to "sign up" (to "step up" in modern language) for increases. Creative signed up for 3%. Merchandising 5%. Marketing 4%. And all of a sudden, we had a 12% productivity increase. Anytime productivity increases, you can mail more customers, you can pay more for paid search terms, and you can send more email campaigns. In other words, the 12% productivity increase rippled through the system, causing marketing expense to increase by 10% or 15%, adding even more demand.

One problem.

There weren't any strategies/tactics underlying the increases.

As a result, every year, Eddie Bauer forecast big sales increases. And two months into the season (each season was six months), sales were not meeting expectation (as one might "expect"). Markdowns ensued. Promotions were required (20% off plus free shipping). The discounts moved the merchandise, allowing us to get closer to our sales targets, but at greatly reduced profit levels.

When I became accountable for the forecasting process, I "sandbagged" the forecast. In other words, I plugged in conservative estimates. Often, the estimates were identical to estimates from the prior year, sometimes, they were 2% or 3% below last year.

Here is a forecast, using last year's actual outcomes.

If assumptions remain the same, the business grows from $19.6 million to $20.1 million.

The forecast authored earlier has demand growing to $22.6 million.

This "delta", this difference, has to be communicated to your Executive Team. Your Executive Team must know where you business heads "as is", and where it heads with typical assumptions.

At Eddie Bauer, we employed a year of sandbagged forecasts. Even though sales decreased marginally, we achieved a record year of profitability, all because we didn't have to liquidate merchandise, all because we forecast the business appropriately.

At Nordstrom, the direct channel President demanded that I tell him what my base-line forecasts were, and he wanted to know if I sandbagged more than the base-line forecasts (I did). I knew that the online marketing team would be too aggressive in their forecasting, so I put a 3% drop into my forecasts, to account for the fact that the online marketing team would be so aggressive that they would cause the inventory team to over-buy merchandise. The President, a prior CFO of the business unit, always wanted to know the assumptions, and the reasons for the assumptions.

Once Management realizes that you are trying to protect the business, Management will ask you to run numerous scenarios for them ... and you'll become an integral part of their team.

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