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C
H 5
Measuring Market A
P

Opportunities: T
E

Forecasting and Market R

Knowledge
FIVE

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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A Forecaster’s Toolkit

o Importance of knowing the size of the potential market

o Market potential estimate as a starting point for preparing a sales forecast

Sales Forecast

o Two broad approaches for preparing a sales

forecast are:
o Top-down approach
o A central person takes responsibility for
forecasting and prepares an overall forecast
o Bottom-up approach
o Each part of the firm prepares its own sales
forecast, and the parts are aggregated to create
the forecast for the firm as a whole
o Common in decentralized firms

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Methods for Estimating Market Potential and

Forecasting Sales

o Statistical methods
o Observation
o Surveys or focus groups
o Analogy
o Judgment
o Market tests

Statistical Methods

o Advantages
o Useful in established firms for established
products
o Likely to result in a more accurate forecast than
other methods under stable market conditions
o Limitations
o Assumes the future will look very much like the
past
o Requires history
o Not useful for new products with no history

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Observation

o Advantages

o Based on what people actually do

o Limitations

o Typically not possible for new-to-the-world

products
o Requires prior examples to observe

Surveys or Focus Groups

o Advantages
o Many different groups of respondents can be
surveyed
o Does not require history or prior examples
o Limitations
o What people say is not always what they do
o People may not be knowledgeable, but when
asked their opinion, they may provide it
o What people imagine about a product concept
in a survey may not be what is actually
delivered once the product is launched

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Analogy

o Advantages
o Requires no history nor prior examples
o Best for new product forecasting where neither
statistical methods nor observations are
possible
o Useful for new-to-the-world high-technology
products
o Limitations
o The proposed new product is never exactly like
that to which the analogy is drawn
o Market and competitive conditions may differ
considerably from when the product was
launched

Judgment

o Advantages

o Those with sufficient forecasting

experience in a market they know well,
may be quite accurate in their intuitive
forecasts
o Limitations

o Often difficult to defend forecasts against

those prepared by evidence-based
methods when the two differ

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Market tests

o Advantages

o Closest forecasting method to the true

market
o Limitations

o Expensive to conduct
o Competitors can deliberately distort
market conditions to invalidate the test

Mathematics Entailed in Forecasting

o Chain ratio method

o Brand or category indices

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The Adoption Process

o Involves the attitudinal changes experienced by individuals from

the time they first hear about a new product, until they adopt it

The Adoption Process (continued)

o Adoption rate of the process depends heavily on:

o Risk
o Relative advantage
o Relative simplicity
o Compatibility with current ideas and
behavior
o Ease of small-scale trial
o Ease of communication of benefits

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Diffusion of Innovation Curve

Cautions and Caveats in Forecasting

o Keys to good forecasting

o Make explicit the assumptions on which the
forecast is based
o Use multiple methods
o Common sources of error in forecasting
o Forecasters are subject to anchoring bias
o Capacity constraints are sometimes
misinterpreted as forecasts
o Incentive pay: bonus plans cause managers to
artificially inflate or deflate forecasts
o Unstated but implicit assumptions can overstate
a well-intentioned forecast

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Market Knowledge Systems

o Four commonly used market knowledge systems are:

o Internal records systems

o Marketing databases
o Competitive intelligence systems
o Client contact and salesforce automation
systems

Marketing Research

o Intended to address carefully defined

marketing problems or opportunities.
o Questions to be asked by a critical user of
marketing research:
o What are the research objectives? Will the
proposed study meet them?
o Are the data sources appropriate? Secondary
or primary? Qualitative or quantitative?
o Is the research itself well designed?
o Are the planned analyses appropriate?

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