How to forecast the Upside accurately ?

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Summary

The forecast for next year is obtained as follows:

Total forecast = forecast base line + forecast upside

The forecast of the base line is explained in this previous article.
The forecast of the upside is done by following these steps:

• List the projects for next year with impacted KPI and estimated annual gain

• Review the projects, eliminate some, group some

• Forecast the upside considering phasing and adjustments

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Long answer:

Before the start of the new fiscal year, I must establish my forecast for the coming year. This forecast includes:

• Retention base line: current subscriptions that will be renewed

• Acquisition base line: subscriptions that will be acquired

• Upside: improvements that will be made during the year
  

1. The base line

The base line measures the inertia of the business. This is what I can count on if I do nothing new during the year. The baseline contains everything that is not new.

Details on baseline calculation are in this article: “How to forecast a subscription business accurately?”

2. The upside

The upside is the sum of the benefits brought by new projects during the coming year.
Calculating the upside requires a methodical process. Avoid counting the same benefit multiple times, zero-sum actions, and include delayed benefits.

Here is the step-by-step guide I recommend for a method.

Step 1: Establish the list of projects

I create a table of all the projects with the following information:

• Deadline for materialization of the upside: in the year (N), next year (N+1),

• Project delivery time (completion time)

• Dependencies

Only projects in line with the company’s overall strategy have been listed.

Materialization time:

For example, I decide to offer 2-year subscriptions in addition to 1-year subscriptions. I will see an immediate increase in my ASP.
In another project, I decide to offer a new method of payment that is supposed to bring a better retention rate. I will measure its effects on the first renewals 12 months later.

Project delivery time:

Not all projects can be delivered on day 1. Consider delivery order and availability, which is part of project management.

Dependencies:

Some projects have delivery constraints. For example, a VAT increase in a country must be carried out on a fixed date.

Step 2: Identify the impacted KPIs and calculate an annual projection

I add to the table the information relating to the impacted KPI(s)

• Macro KPI(s): number of subscribers and/or Retention Rate (RR%) and/or Average Selling Price (ASP)

• Micro KPI: more specific KPI (e.g. The upgrade rate (micro KPI) influences the ASP (macro KPI))

• A description of the impact conditions (e.g. The ASP is increased because the price is increased)

• A projection of the increase in number of subscribers and/or booking over a full year
  

Step 3: Eliminate zero-sum projects and identify non-stackable improvements

I compare all projects two by two to eliminate duplicates, opposites, and overlaps.

Zero-sum projects:

I will look for all the projects that cancel each other out.
For example, project #1 consists of lowering prices to sell more subscriptions. Project #2 is to increase prices to increase bookings.

Non-stackable improvements:

I will look for all projects that have overlaps. The gains from the second project cannot be realized if the first project has reached its maximum.
For example, project #1 is to identify subscribers likely not to renew. Then offer them a cheaper subscription. Project #2 is to address customers who have not renewed with a new offer. The better project #1 works, the smaller the opportunity for project #2 becomes.

Step 4: Group and prioritize

I rationalize by grouping projects influencing the same micro KPIs in the same direction.

For example, if I have several projects aimed at encouraging customers to better use their subscription, I create an umbrella project with several phases.

Then, I make an arbitrage between the projects. The short-term ones deliver their benefits during year N. They will help me reach my financial objectives in the year. The long-term ones will help me create the conditions for growth in years N+1, N+2.

🚧 Warning 🚧: If I only favor the long term, I will not achieve my goals for the year. If, on the other hand, I bet everything on the short term, I create unsustainable conditions for the following year.

Step 5: Project phasing

I decide the order of project launches. This part is not only a matter of project management but also of financial strategy.

First, I prioritize projects that can be launched as early as possible in the year.
Then, I choose the projects that generate the most profits in the year.
Lastly, I try to balance short-term projects and long-term projects (those that bring profits in year N+1) while giving priority to those that will bring the most.

Finally, I end up with a list of projects sorted by launch date.

Step 6: Anticipate the unexpected

Depending on whether the projections were made conservatively or optimistically, I apply a coefficient to the upsides to correct this bias.

I also account for projects that may be canceled. I identify projects that present risks and I apply a coefficient to lower their impact.

Step 7: Total Forecast

Finally, knowing the launch dates of each project, I calculate the effective upside based on the remaining time. If I launch a project in week 1, I assign it 100% of the annual upside, in week 26 only 50% and in week 39 not more than 25%.

Let’s take an example : if I have 4 projects bringing $100k each for the year. Since I launch one project per quarter, the upside won’t be $400k. My real upside will be $100k + $75k + $50k + $25k = $275k.

The sum of the upsides gives me my total upside. By adding the baseline forecast and the upside forecast, I have my total annual forecast.

Key points to remember

1. A yearly forecast requires a rigorous process, which takes time. All participants must understand this process and use the same calculation methods.
2. To succeed in the elimination and grouping step, a very good understanding of the mechanism of each project is required. This phase requires good communication between teams and diplomacy.
3. The elimination and phasing steps greatly reduce the upside values. Therefore, the initial list of projects must cover much more than the need for upside.