Chapter 2, Lesson 3:

Demand Forecasting
 Learning Objectives

• To know the different market

categories

• To have essential skills for

estimating market demand both for
existing and new products
 Market Categories
1. Potential Market. This is made up of those who
express some level of interest in a product.
2. Available Market. This is the subset of the
potential market who have interest, income,
and access to the product.
3. Qualified Available Market. This is a further
refinement of the available market since it may
be possible that those who have interest,
income, and access, nevertheless cannot get
the product due to technical issues such as
laws (e.g., minimum age requirements for
liquor) or distribution constraints (e.g.,
remoteness of their location).
 Market Categories

4. Served market. Also known as the serviceable

available market, this is the market that the
company can actually service with its current state
of logistics.
5. Penetrated market. This is the subset of the
market that is already actively using the product.
An Illustration of the
Market Categories
What Is “Market Demand” for a
Product or Service?
 It is the total volume of the sales that is
generated by a defined customer group in a
defined geographical area, time period, and
marketing environment under a defined
marketing program.

 It is a factual number, meaning that market

demand by definition is something that has
already happened.
Factors to Assess in Forecasting
Demand for an Existing Product
1. Listening to what people say
‒ includes salesforce opinion, expert
opinion, and buyers’ opinion

2. Assessing what people have done

‒ generally involves the statistical analysis
of past-sales data or related data
 Salesforce Opinion
 It involves getting a composite of what each
sales person, sales team, or sales unit
estimates to be its possible sales volume for the
upcoming period based on past history.

 For this instrument to work, the company sales

force should be relatively attuned to their
respective clients’ needs; otherwise, the
opinions will be driven more by blind
guesswork than by educated indicators.
 Expert Opinion
 It can be taken from industry watchers or
people with experience in the industry.

 It can include technical resource people from

the Department of Trade and Industry, industry
veterans, observers, and insiders.

 What makes an “expert” an expert in the first

place?
‒ He/she must truly understand the potential
market of a new product, most likely due to
years of experience and exposure to the market.
‒ He/she has done extensive research on the
potential market or has spent years selling
related products to the potential market.
 Some Quantitative
Forecasting Methods
1. Time Series Analysis
‒ uses data from previous periods to forecast
the following period’s sales
2. Regression Analysis
‒ works by using statistical models to
determine the correlation between a
hypothetical cause and the effect (in this case,
level of sales), again based on historical data
‒ If a factor, which could include economic
indicators, is deemed to have a strong
correlation with the effect, then a regression
model—a formula—can be constructed that
hopes to determine sales based on highly
correlated factors.
Techniques in Forecasting Demand
for a New Product
1. Chain Ratio
‒ a method whose premise states that if you
define your target market well enough, then
you can calculate how big this market can
be
‒ it relies on simple multiplication to fine-
tune a market size based on available data

2. Test Market
‒ launching the product in a smaller
location and conducting an exact but
smaller-scale market strategy in order to
assess the actual sales that will occur
Why Can’t Expert Opinion Be Reliable
in Predicting New Product Demand
 An expert is already emotionally invested in an
outcome that he or she wishes for. Therefore,
even when all indicators show otherwise,
he/she will refuse to believe these and instead
making a prediction based on what was hoped
for.

 An expert is unaware of shifting industry or

market trends. He/she may base all analyses on
a status quo perspective when, in fact, the
environment has been shifting and changing all
along, rendering his/her experiences irrelevant
for the prediction.
 Why Is Forecasting Demand
for a New Product Invaluable?
ANSWER:

Product existence needs to be justified. There is a

need to validate why the product can be a good
business to invest in, so as to attract sufficient
financing from potential investors.
 Outline of the Process of
“Incremental Growth” Strategy
“Start small, scale fast, think big.”

1. Start small, producing small quantities of the

product at first.
2. Test the market’s reaction and if the demand
has the potential to grow.
3. If a favorable market response is detected,
scale fast by immediately investing in
additional production capacity in incremental
and manageable steps.
Advantage and Disadvantage of
“Incremental Growth” Strategy
ADVANTAGE
Financial risks are minimized since a failed
product would mean minimal capital
exposure.

DISADVANTAGE
If the product turns out to be a huge
success, the firm may not be quick enough
to generate a capacity size that can
maximize cost advantages or, worse, the
firm may be crippled by an innate inability to
satisfy demand (which is an opening for
competitors to come in).