Market Potential and Sales

Forecasting

10/3, 2017
 Forecasts versus Potential

Expectations Possibilities

Firm/Brand Sales Forecast Sales Potential

Category Market Forecast Market Potential

 Major Uses of Potential Estimates

 To Make Entry/Exit Decision

 To Make Resource Level Decisions
 To Make Location and Other Resource
Allocation Decisions
 To Set Objectives and Evaluate Performance
 As an Input to Forecast
 New or Growing Product Potential

 Relative Advantage
 Compatibility
 Risk
 Role of Analogous Products
 Mature Product Potential

 For a consumable product, repurchasing will

be in proportion to the market need (if an
industrial product) or usage rate (if a consumer
product).
 For a durable product, repurchasing will occur
to replace a worn-out product, to upgrade to
get new features, or, importantly, to add an
additional model.
 Methods of Estimating Market and
Sales Potential
 Analysis-Based Estimates
– Determine the potential buyers or users of the product
– Determine how many are in each potential group of buyers
defined by step 1
– Estimate the purchasing or usage rate
 Area Potential
– Breaking down total sales by area
– To use a weighted index
 Sales Potential
 Analysis-Based Estimates

 During the 1990s, an average 4 million babies were

born annually in the United States
 The average child goes through 7,800 diapers in the
first 130 weeks of life (2.5 years) until toilet training, or
60 per week
 The annual market potential for disposable diapers is
28.7 billion [(2.3)(4 million) babies][60 diapers/week]
[52 weeks/year]
 Area Potential

 An index approach for a hypothetical new copying system might be as

follows:
 Bases:
– Percent population in the region (P)
– Percent schools in the region (S)
– Percent retail business in the region (RB)
– Percent banks in the region (B)
– Percent offices in the region (O)
– Percent warehouse in the region (WH)
– Percent manufacturing facilities in the region (MF)
– Percent other businesses in the region (XS)
– Percent other copier sales in the region (CS)

 Index = W1 P+W2 S+ W3 RB+W4 B+W5 O+W6 WH+W7 MF+W8

OB+W9 XS+W10 CS
 Demand Analysis

 Demand for products or services can be measured at

two levels
– aggregate demand: for an entire market or country
– company demand: represented by actual sales
 Both market and sales potential can be viewed as a
filtering process (Robinson 1984)
– Potential need
– Felt need
– Potential demand
– Effective demand
– Market demand
– Sales potential
 Analysis by Inference

 Market assessment by inference uses available facts

about related products or other foreign markets as a
basis for inferring the necessary information for the
market under study
 Related products
 Related markets’ size
 Related environmental factors
 Analysis of demand patterns
 Cross-Sectional Comparison
 The assumption that there is an analogy between the relationship
of a factor and demand for a particular product or commodity in
two countries
 Let
– XA = demand for product X in country A
– YA = factor that correlates with demand for product X in country A,
data from country A
– XB = demand for product X in country B
– YB = factor that correlates with demand for product X in country A,
data from country B
 If we assume that :
XA/YA = XB/YB
 and if XA, YA, and YB are known, we can solve for XB as follows:
XB = (XA)(YB)/YA
 Displacing Time
 Displacing time is a useful method of market analysis when data are
available for two markets at different levels of development
 The assumption that an analogy between markets exists in different
time periods
 Let
– XA1 = demand for product X in country A during time period 1
– YA1 = factor associated with demand for product X in country A during
time period 1
– XB2 = demand for product X in country B during time period 2
– YB2 = factor or factors correlating with demand for product X in country
A and data from country B for time period 2
 If we assume that :
XA1/YA1 = XB2/YB2
 and if XA, YA, and YB are known, we can solve for XB as follows:
XB2 = (XA1)(YB2)/YA1
 Market Size Assessment

 When using market size estimates, keep the following rules

in mind:
– Use several different methods.
– Don’t be misled by numbers.
– Don’t be misled by fancy methods.
– Do a sensitivity analysis by asking what-if
questions.
– Look for interval estimates with a lower and upper
limit rather than for point estimates.
 Major Uses of Sales Forecasting

 To answer “what if” questions

 To help set budgets
 To provide a basis for a monitoring system
 To aid in production planning
 By financial analysts to value a company
 Forecasting Methods (I)

 Judgment-Based Methods
– Naïve Extrapolation
– Sales Force Composite
– Jury of Expert Opinion
– Delphi Method
 Delphi Forecasting
Questionnaire Data
Datafeed-in
feed-in
Questionnaire
(Numerical
(Numerical&&graph)
graph)
Formulation
Formulationofoffirst
first
round
roundquestionnaire
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Expert
Expertpanel
panel
selection Distribution
selection Distributionandand
collection
collectionofofresponses
responses
Statistical
Statisticalanalysis
analysis
Formulation
Formulationofofsecond
second
round questionnaire
round questionnaire

Distribution
Distributionand
and
collection of response
collection of response
Edit
Editrelevant
relevant Data
Datarequested
requestedfor for
Statistical
Statisticalanalysis
analysis
opinion
opinion search, collect, edit
search, collect, edit

Distribution
Distributionand
and Statistical
Statisticalanalysis
analysis
collection of response
collection of response
Final
Finalestimation
estimation
and circulation
and circulation
 Forecasting Methods (II)

 Customer-Based Methods
– Market Testing
 Mall Intercept Surveys
 Focus Groups
 Product Concept Tests
– Market Surveys

The top-two-boxes scores (the number of customers who
state they will either definitely or probably buy the
product)
 Purchase intentions and actual behavior
 The Top-Two-Boxes Score

 The number of people who definitely would

buy or probably would buy are usually
combined and used as an indicator of group
reaction
– Definitely would buy
– Probably would buy
– Might or might not buy
– Probably would not buy
– Definitely would not buy
 Estimating the Quantity

 The quantity of the product expected to be sold during

a time period is Q:
– Q=NAP
– N: the number of potential customers expected to make
purchases during the time period
– A: the fraction of these potential customers or purchases
for which the product is available and the customer is aware
of the product
– P: the probability that the product is purchased if available
and if the customer is aware of it.
 P=C
definitely  Fdefinitely + Cprobably  Fprobably
 Forecasting Methods (III)

 Sales Extrapolation Methods

– Moving Averages
– Exponential Smoothing
– Regression Analysis
 Forecasting Methods (IV)

 Model-Based Methods
– Regression Analysis
– Leading Indicators
– Econometric Models
 The A-T-A-R Model

 The A-T-A-R concept (awareness-trial-

availability-repeat)
 Diffusion of innovation
 How we forecast sales and profit on a new item
 The A-T-A-R Model
Profit = Unit sold * Profit per unit

Unit sold = Number of buying units

* Percentage who become aware of the product
* Percentage who opt to try the product if they can get
* Percentage of intended triers who can get the product (it is available to them)
* Percentage of triers who like the item enough to repeat their purchase
* Number of units that repeaters will buy in a year

Profit per unit = Revenue per unit (unit list price less trade margins,
promotional allowances. Freight, etc.) - Costs per unit (usually
costs of goods sold per plus direct marketing costs)

Therefore:
Profits = Buying units * Percent aware * Percent trial * Percent availability
* Percent repeat * Annual units bought * (Revenue per unit - Costs per unit)
 A-T-A-R and the Market
Testing Methods
Information Needed Sources of This Information
by the A-T-A-R Profit
Forecasting Method Pseudo sale methods Controlled sale methods Full sale methods

Number of market units Market Research studies Market Research studies

Number of market units Yes
Yes

Awareness
Awarenessofofthe
thenew
new Ad agency provides it Ad agency provides it Yes
product
productpositioning
positioningclaim
claim(A)
(A) Yes

Decides to try the item (T) Yes Yes Yes

Decides to try the item (T) Yes Yes Yes

Distribution estimates Distribution estimates

Is able to get a trial supply (A) provided by sales dept. provided by sales dept. Yes
Is able to get a trial supply (A) Yes

Likes Team estimates

Likesititand
andwants
wantsmore
more(R)
(R) Yes--in
Yes--insales
saleswave
wave Yes
Yes

Units used per year Yes--est. Yes--est. Yes

Units used per year Yes--est. Yes--est. Yes

Profit per unit (price-cost) Price plan plus estimates Price plan plus estimates Yes
Profit per unit (price-cost) from accounting on costs from accounting on costs Yes

Additional
Additionaldiagnostic
diagnosticinfo.
info. Yes--a
Yes--alittle
little Yes--more
Yes--more Yes--tons
Yes--tons