Chapter 6: Market Potential and Sales Forecasting

Estimating the top line

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Why estimate market potential?

    

Entry/exit decisions Resource allocations Location decisions Set sales objectives & evaluate performance Set forecast (% of potential)

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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

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Estimating potential for mature product

Past experience Recent trends
  

Competition Customers Environment

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Information sources
Secondary data Past sales data Primary data

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Methods of estimating potential

Potential for Fordham University
   

Population of New York City: 8 million 4% between 18-22 = 320,000 60% high school graduates = 192,000 40% have income > $50,000 = 96,000

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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

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Considerations in forecasting
Customer behavior (past & future) Competitors behavior (past & future) Environmental trends Product strategies

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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

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Methods of forecasting
Judgment based Sales extrapolation Customer based Model based

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Judgment-based forecasting: qualitative

Jury of expert opinion (most common)


Delphi method

Nave extrapolation / opinion (2nd most common) Sales force composite (3rd most common)

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Sales extrapolation: quantitative

Assumes future will follow on past


Appropriate for mature, static industry Average of three period sales over time Average of change in three period sales over time Alternative method to smooth data Forecast sales = a intercept + b slope (time)

Moving average (most common quantitative method)

 

Exponential smoothing


Regression analysis (next most common in U.S.)


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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

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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

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Forecasting products with new features

Show basic product
      

Ask what they would pay This price may be arbitrary Ask what they would pay Follow-up prices are coherent Ask what they would pay Ask what they would pay Ask what they would pay

Add feature: e.g., a videogame expansion card Add another feature: e.g., a Friendstar device Add another feature: e.g., a hard drive Add another feature: e.g., a Microsoft office

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Forecasting new-to-market products

Diffusion model: Bass (1969)

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Forecasting new-to-market products: Diffusion model: Bass (1969)

Innovators purchase product early / Imitators follow

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Conclusions
Forecasting is necessary, but difficult All methods have plusses and minuses
 

All are based on prior experience Will generally miss the turning points Have expected, best and worst forecasts for each

Best to come up with different scenarios



Be prepared!
Advanced Marketing BiMBA 2006