CAMDEN —The forecast for sales and revenue growth for new products can be foggy at best, but a Rutgers finance professor is providing some clarity for entrepreneurs.
“A lot of new business startups guesstimate their sales forecast, and that’s just like throwing darts,” says Richard Michelfelder, a clinical associate professor of finance at the Rutgers School of Business-Camden. “It doesn’t have to be a guess. It doesn’t have to be nonsystematic.”Michelfelder warns that it would be unwise to simply forecast revenue growth by blindly assuming that sales will continually increase throughout a product’s lifecycle. He says there is proof in the pudding, so to speak.
“We discuss a method found in the marketing research literature for predicting sales for new ventures that is based on hundreds of marketing research articles,” he says. “The research suggests that sales for new products follow an S-curve, meaning the products are sold at a gradual increase over time before reaching market saturation.”
Michelfelder discusses the method in “Predicting Sales and Revenues for New Ventures with Diffusion Models,” a paper he co-wrote with Maureen Morrin, a professor of marketing at the Fox School of Business at Temple University.
The paper will appear as a chapter in the forthcoming book Trademark Valuation: A Tool for Brand Management (Wiley, second edition, 2013) by Gordon V. Smith and Susan M. Richey. The book details methods for determining the value of a trademark.
“The business value of anything is equal to the amount of cash flow it will generate,” Michelfelder says. “Trademarks generate a cash flow because people recognize them. Newer trademarks have potential value, and that’s where our work comes in.”
Michelfelder points to several products that are found in most homes today — items such as cell phones, color televisions, and home computers — and says that in each case, sales gradually increased over time until most consumers became owners of the product.“The pattern by which we can forecast sales follows the sales of thousands of products that came before it and follow a similar lifecycle,” he says. “Every product has the innovators — the people who immediately buy the new product — and then the early and late adopters, followed by the laggards, who are the last set of first-time buyers.”
All successful products, Michelfelder says, follow this first-time purchase curve. A new product that is similar to or improves upon an existing one can forecast sales based upon a predecessor within the same market.
“We didn’t have an S-curve for Blu-ray when it came out, but we had one for DVDs,” notes the Rutgers–Camden scholar. “We can apply the equation to any new product in order to make a great prediction on future sales and revenue. It can be used for predicting any new good or service or message.”
Some innovations, like VCRs and cell phones, have required only a few years to become fully adopted by consumers, Michelfelder says. Others take decades.
“You can predict an exact numerical estimate for sales in each time period based on this mathematical S-curve model,” he says. “That can be very advantageous to new business ventures. The point is that it’s useful in helping to get funding for products that create value and usefulness for society.”
Michelfelder is a former president and chief executive officer of a national public utilities consulting firm. He is the author of numerous articles on energy and public utilities. His latest article, “Comparative Evaluation of the Predictive Risk Premium Model™, the Discounted Cash Flow Model, and the Capital Asset Pricing Model for Estimating the Cost of Common Equity Capital,” was published in The Electricity Journal in May 2013.
He teaches courses in statistical financial analysis, multinational corporate finance, and corporate finance and applications at the Rutgers School of Business–Camden.
A Brigantine resident, Michelfelder has testified before many state utility regulatory jurisdictions and the Federal Energy Regulatory Commission on matters involving the cost of capital for public utilities. He earned his bachelor’s degree from Holy Family College (now University), and his master’s and doctoral degrees from Fordham University.