Expected P&L vs. Potential P&L

There seems to be a common confusion among "expected" and "potential". In the action panel, you will see words like "expected P&L", "expected financials", "potential P&L", "base case P&L", "base case financials", etc. But what exactly do they mean? 

Let's first take a look at how we model a product, we usually consider two stages of the product - development stage and the stage from launch to end of life. In the development stage, we ask the question about how difficult it is to launch the product and use probabilities of success to measure the difficulty. In the stage after launch, we use a range (low, medium, and high) to assess the uncertainty in market and economics e.g. market size, COGS. 

Now let's talk about "Potential P&L" and "Base Case P&L". They are interchangeable in the system. It assumes the overall probability of success equals 1 in the development stage. In the uncertainty assessment during the stage after launch, we have low, medium, and high value. When we take the medium values from all inputs and use them to calculate financials, we got "Base Case P&L" or "Potential P&L". It is one of many cases which may be realized.

After you understand "Base Case P&L", understanding "Expected P&L" becomes easier. Expected P&L is development-adjusted base case P&L. Here, we take the Potential P&L and multiply it by the probability of development success.

To sum up, the difference between Potential P&L and Expected P&L is in the probability of success. Expected P&L is based on the probability of development success and base case (medium) market, whereas Potential P&L is based on the base case (medium) market with the probability of development success.


** Note: One may argue that the expected P&L, in this case, is not truly expected since it didn't take the market uncertainty into consideration. And we accept that it is a fair point.

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