Group 2: Aditya Singh (B12068) Asif Iqbal (B12077) Debarghya Dasgupta (B12079)

Rule #1 of Forecasting

Forecasts are almost always Wrong

Methods of forcasting
Quantitative: Using extrinsic data (Leading Indicators):

Eg. CRISIL industry reports, Buying power, etc.

Using intrinsic data : Past sales volumes

Qualitative: Delphi Method Management estimate Market Research- Intention to buy basis

Applicable for new products

Estimating Market Potential

Delphi Method:
Anonymous responses taken from group of expert All responses made available to experts and revision

requested. Iterative rounds of responses and revisions to reach a consensus.

1. Avoids face to face conflict and consecutive defensiveness in changing stance.

2. Measure against groupthink

3. Prevents a charismatic/dominant leader from leading the estimate in the wrong direction 1. Prone to usual human errors of judgement. 2. Long iterative process may seem as a superfluous repetition 3. No way to come out of a vicious cycle

Estimating Market Potential

Market Research:
Detailed brochures of product given to target sample Survey of stated intentions taken from sample Average stated probability to acquire adjusted using a

discount factor.
1. Actual consumer responses taken into account. 2. Arbitrary judgement by management and closed box thinking avoided.

1. Intention to buy usually overstated 2. Discount factor is at best a calculated guess.

Bass Model- Adding the time component

Developed by Frank Bass in 1969 Earlier work by Rogers on Diffusion of

Innovation; Bass refined it by adding a mathematical component to it Adopters of 2 types Innovators and Imitators L(t)= p + (q/m)*N(t) S(t) = p*m+(q-p)N(t)-(q/m)[N(t)]2
L(t) Likelihood of adoption p Coefficient of innovation External influence q Coefficient of imitation Internal influence S(t) Sale at time t m Market potential N(t)- Cumulative sales until t

Estimation of parameters
S(t) = p*m+(q-p)N(t)-(q/m)[N(t)]2

p, q Non linear regression or

extrapolation from similar product

m Managerial decision, Market research, Delphi Method N(t)- Derived from cumulative calculations

Case example of Bass Model Application

DIRECTV planning launch of Satellite television in 1994 Market survey conducted by asking for intention to buy

after giving out detailed brochures. Average probability to buy found to be 0.32 Discount factor of 0.5 estimated to adjust against overstatements. Market potential = 16% of television homes p and q estimated using guessing by analogy with cable television. Sales in 1999 estimated to be 9.4 million Actual sales in 1999 turned out to be 9.9 million !

Bass Model and sales- A Critique

Price variations across PLC not captured however the

same have been allowed for in modifications p, q and discount factor are guesstimates at best. Sales and not actual demand are used as measures. Does not account for repeat purchases.

A forward Causal Relationship?

Other possible reasons for close adherence of sales to estimates:

Production and Distribution planned as per estimates Sales targets intentionally set close to estimates

LEK Model
Sales revenue = Customer base * Total penetration *

Products share of penetration * Price per unit * Units per year

Customer base Total penetration Appropriate segmentation Factors affecting change in size of customer base Percentage of customer base being served by same category of product

Products share of Primary Features and benefits of the product penetration Secondary Marketing effort, Distribution Price per unit Units per year Perceived value to customer Price demand curves Frequency of use Compliance

Other Approaches
Historical review Test market Similar product in similar market by company or competitor Product launched into test market and sales are tracked by Nielsen or via retailers Survey for tracking awareness, trial, usage Sample of target audience in simulated retail environment purchase behaviour is tracked Before scenario product under study not there Subjects explained about product After scenario product under study is there Database of historical norms for product category Adjusts for marketing plan variables

Before after retail simulation

Normative approach

Awareness trial repeat purchase model

Advertising effort converted into television GRP equivalents and fed into a mathematical model to predict awareness and cumulative trial rate Samples are given out for product test and results are used to compute purchase curve

Failure of Forecasting Tata Nano

Consumer research conducted to find target group Plant in Gujarat capable of 250,000 vehicles a year Initially overbooked, within a year sales dropped Around 1500 cars sold in each month of Jan, Feb, March 2013 and less than 1000 in April 2013 Sales revenue = Customer base * Total penetration * Products share of penetration * Price per unit * Units per year (LEK Model) Consequence : Plant working only 4 days a week at 10 % operational efficiency,

THANK YOU