MKT 538-Chapter 05

Chapter 5
Measuring Market
Opportunities:
Forecasting and Market
Knowledge
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Important Terminologies related to forecasts
• Evidence-based forecasts – No forecast could

be fully correct
• Market potential – likely demand from the
actual and potential customers
• Penetrated market + potential market
• Sales forecast – predicted sales revenue
5-2
Sales Forecast – Broad Approaches
• Top-down approach
• A central person takes responsibility for
forecasting and prepares an overall forecast
• Bottom-up approach
• Common in decentralized firms
• Each part of the firm prepares its own sales
forecast
5-3
Advantages of bottom-up approach
• Forces them to think clearly about the drivers of

demand for each market segment or product line and thus
better understand the real potential of their business and its
parts.
• Forced to make explicit Assumptions about the
drivers of demand in each category.
• Assumptions they could debate.
• Support with evidence gathered from their research—
with prospective investors and which they could later
verify as the business unfolds.
• Facilitates “what if” planning.
5-4
Statistical Methods
• Mainly based on the assumption that the past

trends will be continued
• Advantages
• Useful in established firms for established products
• Results in a more accurate forecast
• Limitations
• Assumes the future will look very much like the past
• When product or market characteristics change:
• Statistical models used without adequate judgment may
not keep pace
5-5
Observation
• Based on actual observation of the current

purchase behavior, which may include
mechanical observations too.
• Advantage
• Based on what people actually do
• Limitation
• Not possible for new-to-the-world products
5-6
Surveys or Focus Groups
• Conduct a detailed survey or run a focus

group discussion
• Advantage
• Methods can be done with various kinds of
respondents and increasingly done online
5-7
Surveys or Focus Groups
• Limitations
• What people say is not always what they do
• People may not be knowledgeable when asked
their opinion about
• What people imagine about a product concept in
a survey may not be what is actually delivered
once the product is launched
5-8
Analogy
• Make a comparison with a similar product or

market, on which the data is already available
• Advantages
• Used for new product forecasting where:
• Neither statistical methods nor observations are
possible
• Useful for new-to-the-world high-technology
products
5-9
Analogy
• Limitations
• New product and its pricing are never exactly like
that to which the analogy is drawn
• Market and competitive conditions may vary from
when the analogous product was launched
5-10
Judgment
• Making a knowledgeable judgement by an

experienced person, which is a rule-of-thump
method
• Advantage
• Is quite accurate when there is sufficient
forecasting experience in known market
• Limitation
• Difficult to defend against evidence based
methods
5-11
Experiments and Market Tests
• Done:
• Under controlled experimental conditions
• In live test markets with real advertising and
promotion and distribution in stores
• Limitations of test markets
• Expensive to conduct
• Competitors can engage in marketing tactics to
mislead the company
5-12
Other Mathematical Approaches
• Chain ratios and indices

• Market potential is estimated and multiplied by
fractional factors
• Predict the portion of the overall market potential that
one firm or product can expect to obtain
• For examples and details, see EXIBITS 5:3 and 5:4 in
the book.
5-13
Diffusion of Innovation Theory
• Explains the adoption of an innovative

product or service over time among a group
of potential buyers
• Useful to managers in predicting the likely
adoption rate for:
• New and innovative goods or services
5-14
The Adoption Process
• Attitudinal changes experienced by

individuals from:
• The time they first hear about a new product, until
they adopt it
5-15
The Adoption Process
• Speed of the process depends on:

• Risk
• Relative advantage
• Relative simplicity
• Compatibility with previously adopted ideas and
behavior
• Extent to which its trial can be accomplished on a
small-scale basis
• Ease with which the central idea of the new
product can be communicated
5-16
Size and Characteristics of Individual
Adopter Group
• Innovators: Venturesome than later adopters
• Receptive to new ideas and have high incomes
• Reduces the risk of a loss arising from an early adoption
• Early adopters: Opinion leaders
• Serve as vital links to members of the early
majority group
• Participate more in community organizations
than do later adopters
5-17
Adopter Group
• Early majority: Display less leadership than
early adopters
• Active in community affairs
• Do not like to take unnecessary risks
• Want to be sure that a new product will prove
successful before they adopt it
5-18
Adopter Group
• Late majority: Adopt a new product because
they are forced to do so for either economic
or social reasons
• Laggards: Participate less in community
matters than members of the other groups
and stubbornly resist change
5-19
Exhibit 5.5 - Diffusion of Innovation Curve
5-20
Cautions and Caveats in
Forecasting
• Psychological biases
• Common sources of error
• Forecasters are subject to anchoring bias
• Capacity constraints are sometimes misinterpreted as
forecasts
• Incentive pay
• Unstated but implicit assumptions can overstate a well-
intentioned forecast
5-21
Cautions and Caveats in Forecasting
• Keys to good forecasting

• Make explicit the assumptions on which the
forecast is based
• Use multiple methods
5-22
Market Knowledge Systems
• Four commonly used market knowledge

systems
• Internal records systems
• Marketing databases
• Competitive intelligence systems
• Systems to organize client contact
5-23
Marketing Research
• Intended to address carefully defined

marketing problems or opportunities
• Questions to be asked by a critical user of
marketing research
• What are the research objectives? Will the data to
be collected meet them?
5-24
Marketing Research
• Are the data sources appropriate? Is secondary

data used? Qualitative or quantitative?
• Is the research designed well?
• Are the planned analyses appropriate
5-25

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Chapter 5

• Evidence-based forecasts – No forecast could

• Forces them to think clearly about the drivers of

• Mainly based on the assumption that the past

• Based on actual observation of the current

• Conduct a detailed survey or run a focus

• Make a comparison with a similar product or

• Making a knowledgeable judgement by an

• Chain ratios and indices

• Explains the adoption of an innovative

• Attitudinal changes experienced by

• Speed of the process depends on:

• Keys to good forecasting

• Four commonly used market knowledge

• Intended to address carefully defined

• Are the data sources appropriate? Is secondary

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