Welcome. I'm James Lenz with the University of Illinois and this is our last lecture as part of the module four for Quantitative Customer Insight Techniques. In this last lecture, now in market segmentation we work on the sales forecast. How many units we can sell. The second lecturer or the second part now is to calculate the revenue. And again we'll be working towards the assignment. I'll give instructions at the end of this about using your idea and calculating a revenue estimate based on market segmentation. And then you'll be asked to do peer reviews on other people's estimates. So again, the equation is quite simple, units sold. This lecture we're going to work on how do we estimate sales price. We've come up with a way of estimating units sold. How do we come up with a way of estimating the sales price? I like this illustration because I've worked with many vice presidents in my career and whenever I take to them ideas sometimes some think it's an idea that's just going to throw money out the window. Some would look at the idea and say, "Hey, I see that this is the basis of making a lot of money. It's the wheel that brings in all the money." So I've always had a chance to read people and people's judgments are important part of all this. When you show this type of data, and I'm showing these types of charts to these types of people to make decisions about a new product so I'm showing these sales forecasts, it's interesting to see how do they react to the data? How do they believe in them? That's what becomes an aspect of all this, is your own judgment. And it's an important part of about the peer reviews is you you'd think maybe you don't have any skill in this, but if you're going to be a manager in any worldly business today there's going to be all sorts of product ideas when we come to you and there's going to be sales forecasts associated with those ideas. You're going to have to generate some type of instinct or some rationale or some insight into how accurate is this or how possible is this. Is this a waste of money or is this thing really going to be the basis of building an entire new business case? So let's come back to our three examples. We have the Macaron cookie, our TE generator and now also the ring laser gyroscope. So now let's try to build a revenue forecast for these three examples. So the Macaron cookie is relatively straightforward because we've done quite a bit of work on this already with our Conjoint Analysis and I've come up with a number of 140 euros for the market price and I think our business should put this at. But again, I think conjoint analysis, if you have something like this is a very consumer oriented type of product that you can get a focus group around, you can get information about the pricing pretty quickly through a conjoint analysis and this helps. Some of these other products are a little more difficult to get the pricing and I'll show you the mechanisms to get that. But in this type of product because it's consumer base we used conjoint analysis. So now the revenue forecast is quite straightforward. I have my unit sale that I showed you from the last lecture and now I can put in the estimated price and I here I show the price being consistent over my months of sales. I'm not going to lower it or increase it, then this gives me an inflow. So now I can think about having 4,000 euros a month, 5,000 euros a month, is that enough money to cover things? So, I start to think about, is this a reasonable number? Well it seems to low to try to run a cookie business. Maybe I need to do more, I need to look at these numbers again and where can I increase it? Maybe I want increase the price and I have to think about why I would want to increase the price, what value I would be doing for that. Maybe I can think in terms of there's maybe stay open more hours, maybe the stores stay open or increase the number of people that are buying Macaron, maybe through some advertising or some activity. Or I can get them to favor my store, the one I'm selling at or maybe through social media and so on. But it gives you ideas. This data says if these numbers are too small, what can I do to increase them? How do I come up with ideas to add to my idea to make this a successful product? So the next idea we are working on is the TE generator. You remember this chart we came up with the total units sold. And now we want to look at, how can we come up with a selling price of these types of units. And the quantities again of making 17,000 to 19,000 in a few years from now. So in this case, I want to compare power generators in 2,000 3,900 watt range and they are priced roughly around a $1,000. So typically, I know also when you have a retailer selling something, they typically mark it up 100 percent. So they sell 50 percent of that price is probably for what they've paid to get the unit as a reseller. So now I know the rough price is around $500, so this is a factor that you should consider. Again, this is market segmentation or thinking about pricing is I know it can't, they're not paying $1,000 to buy this thing to resell it, so what's a typical markup? A typical markup is around 50 percent or 100 percent or 50 percent of the price. And also though you should think about is typically when you sell to these stores, they want some price decreases. So they want a reduction in prices as time goes on, maybe even every three years, maybe even every year they're looking for a price reduction because they feel like they're bringing you volume, the volume should take over some of the added costs so that now I have a lower cost, you have lower costs across all the units you were making. So I should get some benefit from this as well. So now I can go through this and if I look at my $500 and now I look at a price decrease $10 in three years and then after that three years another decrease of $10. So again, it just gives me some realism to what I can expect for cash inflow for revenue forecast. So this is and here I showed in thousands of dollars, so this is a 6 to 7, 8 million dollar. And I showed this to John, our friend John S. He thought these numbers were off. I mean he was expecting to be $100 million business. And I think this is an important aspect of what this forecast can do. Are you talking about a million dollar business potentially talking about a $10 million, 20, 100, you know get the ballpark of what you're thinking about. And so then John, my friend John, he didn't like these numbers, they are way too low because his feeling is he wants to sell this technology for 50 to 100 million dollars. Well you see this sales forecast does not justify that type of payment for that type of technology. So where we are today with John by the way, is we're sitting the investors will not pay what he thinks is his worth, but we can find a market that can justify making that type of purchase of his technology. The last idea we've talked about is the pricing of the ring laser gyroscope. So in a flight navigation system, here is the what's called a Laser Inertial Reference Unit. There's one of these sold, there's three of these put into each aircraft. You'll see the little blue boxes in there are ring laser gyroscopes. And for a flight navigation system in an aircraft it roughly costs $100,000. So when an airplane costs $10 million to buy a 757, at least at this time, 100,000 was just going to buy the navigation system to replace that seat basically and to run those glass cockpit, that glass display that gives such accuracy now that you can land airplanes on rivers if you want to. And what I know is about of this $100,000 about 15 percent of that cost can be affordable to the gyroscope. So now I'm thinking about affordability. So if I have to sell this system for $100,000 for an airplane that's roughly what the value is of replacing that seat to the airline. Then and they're buying this airplane. So now 15 percent of that system can be afforded for the gyroscope. So I can't get 100 percent of course, because you need a box of electronics, you need to have connectors and so on. So, maybe 15 percent because the gyros are certainly the most important part of that box, but they're not going to be 100 percent cost, they're not going to be 50 percent. So 15 percent of that cost. So, from that understanding of the cost of a navigation system here, we can add that now to our spreadsheet for the ring laser gyroscope. And, you can see here we have a cost of an aircraft system as I said 100,000, I've shown some reduction in that going down to $90,000. And again, 15 percent across the board for the percentage of what's affordable for the gyroscopes in that system, which then I can use that to calculate what the price of each gyro would be. And from that price I could multiply times my units sold, my sales forecast and I get a revenue forecast for this type of device that goes out 10 years. So $70 million seems like a pretty good number. What is interesting of course is to think about is that enough to justify a 100 million dollar type of investment. And that type of thinking is something that will come in the next course associated with this whole series of new product development activities. So in summary here, I want to get to your final assignment as part of this course and you're bringing together your idea. And we talked about this idea of understanding the product define and the technology is ready. The last thing now is this market forecast and as we said in new product development, forecast in the market is the riskiest part of any new product development activity. So, I want you to spend some time to try to do this with your idea and build from this experience that you have and this understanding you have now of how to build the sales forecast based on units sold and revenue from these activities. So we are going to create a cash flow estimate. We're going to consider maybe 10 business cycles so if you want to think in terms of days, months, years, whatever you think is a business cycle that you could make decisions about and make an investment around. Then we'll calculate the sales volume, the revenue and then finally it will end with this peer review, which I say again, is an important aspect of any type of being a manager of business and be able to look at other ideas that maybe you don't have familiarity with, but coming up with some way to understand them. So let's go through this step by step. So there will be a spreadsheet here that you can pull down. I really like you to add it to your spreadsheet that you have defined your idea. So now you'll have two sheets, one defining the idea and your assessment of scoring against these three different parameters, as well as now the sales forecast. And so by looking at the sales forecast, maybe you will readjust your market forecast thinking and say, "I've really got now a 10. I really have lot of confidence in this or wow, I have a five. I'm not so confident that I really know what the market sales potential could be." From that, I want you to think about 10 business cycles. Again, think about the sales volumes, think about the revenue, fill that spreadsheet in. Maybe it's consistent. Maybe there's some reasons over the business cycle that's going to be some reductions or some increases, build this into your forecast. And lastly, is the peer review. Share your revenue forecast into the system and then review others for completeness. And there's a scoring system that you've used throughout the Coursera courses, same thing too use your assessment of reasonableness. What I call the, is the person that created this have they really been impartial about putting the data down or they tried to really slant this and haven't looked at it impartially and so not using really fair judgment and doing this. So you have to think about that and kind of give some criticism or some thinking about that. And really that's what we're looking for as your peer review is how reasonable is this type of forecasts and can you come up with some insight into that yourself. So in summary, I want to thank you for following through this course and certainly it has taken some effort. It's been fun for me to walk you through this. I think again these skills that you've developed can be applied to many ideas. Many times when you're even applying for a grant or looking for working for a charity or maybe trying to raise some funding and doing some community service, all these skills apply to this and not just trying to build your own product, develop your own company associated with it. So this will lead to the next course. Lastly, you've seen some maybe pieces of cartoons here. What does an innovator do all day? I asked an artist when I sat down with an artist one day and try to describe what goes on. So as I said, an innovator is not just an inventor but also is part of the commercialization. And so you're part of that activity. There's many activities besides just inventing new products that we're just showing here. You have to worry about patterns and we'll talk about patents in the next course as well. It's about working with other groups of people. There's about meeting with customers, marketing to the customers, there's about writing papers, reading memos, cost accounting. What I love here is this selling ideas to management. I mean many times you come in, it's like you're putting a shotgun to them, almost saying, "Hey, you've got to do this." It becomes more of a threatening activity than it is a positive thing about how can this be done. So anyway, you build all sorts of emotional activity about bringing your own ideas together. That's why I try to illustrate here with this chart. So hopefully, you've enjoyed this very much and maybe you now can play many of these roles yourself after you finish this course. Thank you very much.
