Market Potential

and
Sales Forecasting

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM
 Why estimate market potential?
– Entry/exit decisions
– Resource allocations
– Location decisions
– Set sales objectives & evaluate performance
– Set forecast (% of potential)

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM
Estimating potential for new product

 Relative advantage over current product

 Compatibility with current system / norms
 Risk (monetary, social and psychological)
 Rate of adoption of comparable products

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM
Estimating potential for mature product

 Past experience
 Recent trends
– Competition
– Customers
– Environment

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM
Information sources

 Secondary data
 Past sales data
 Primary data

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM
Methods of estimating potential

 Potential for Delhi University

– Population of New Delhi City: 8,000,000
– 4% between 18-22 = 320,000
– 60% high school graduates = 192,000
– 40% have income > Rs.50,000 = 96,000

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM
Forecasting: specific product & target

 Why forecast sales?

– Compare proposed changes to current results
– Help set budgets
– Provide basis for monitoring results
– Aid in production planning

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM
Considerations in forecasting

 Customer behavior (past & future)

 Competitors’ behavior (past & future)
 Environmental trends
 Product strategies

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM
Range of forecasted results

 Each combination provides one scenario

 Each scenario has range of possible results
– Limit to three
– expected, better and worse than expected

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM
Methods of forecasting

 Judgment based
 Sales extrapolation
 Customer based
 Model based

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM
Judgment-based forecasting: qualitative

 Jury of expert opinion (most common)

– Delphi method
 Naïve extrapolation / opinion (2nd most common)
 Sales force composite (3rd most common)

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM
 Sales extrapolation: quantitative

 Assumes future will follow on past

– Appropriate for mature, static industry
 Moving average (most common quantitative method)
– Average of three period sales over time
– Average of change in three period sales over time
 Exponential smoothing
– Alternative method to smooth data
 Regression analysis (next most common in U.S.)
– Forecast sales = a intercept + b slope (time)

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM
Customer-based forecasting methods

 Does not assume future will follow on past

– Appropriate for dynamic markets / new products
 Market testing
 Market surveys
 Can be fed into forecasting model

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM
Model-based forecasting methods

 Regression with other factors

– Sales = a intercept + b (advertising) + c (price)
– Develop model on half of past data
– Test model on other half of data

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM
Forecasting products with new features
 Show basic product
– Ask what they would pay
– This price may be arbitrary
 Add feature: e.g., a videogame expansion card
– Ask what they would pay
– Follow-up prices are coherent
 Add another feature: e.g., a “Friendstar” device
– Ask what they would pay
 Add another feature: e.g., a hard drive
– Ask what they would pay
 Add another feature: e.g., a Microsoft office
– Ask what they would pay

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM
Forecasting new-to-market products

 Diffusion model: Bass (1969)

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM
Forecasting new-to-market products:
Diffusion model: Bass (1969)

Innovators purchase product early / Imitators follow

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM
Conclusions

 Forecasting is necessary, but difficult

 All methods have plusses and minuses
– All are based on prior experience
– Will generally miss the turning points
 Best to come up with different scenarios
– Have expected, best and worst forecasts for each
 Be prepared!

Advanced Marketing A N Bhattacharya, Associate Professo

BiMBA 20 r, IILM