Chapter 2, Lesson 3:
Demand Forecasting
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).
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 periods 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 modela formulacan 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 Cant 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 markets 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).
Types of Market
A marketing perspective on the concept of market defines it as the actual or potential
demand for a product or service for a certain period of time.
Analyzing the market reveal more classification levels from the reference product market
to brand market or company market.
The reference product market includes all the consumers of all products that satisfy the
same need and all the suppliers for those products. It represents the mass of consumers or
users of the same kind of products, not considering the brand or the producer. This market
has actual geographic, demographic and social limitations.
A company's performance on a certain product's market is indicated by :
Market share represented by the percentage of the total product market that the
company supplies. This indicator is calculated by dividing the sales(quantity or
amount) to the sum of all the sales on the market.
Relative market share indicates the position of the company relative to the main
competitors. The relative market share results from dividing the sales of a company
to the sales of the market leader. For the market leader, the relative market share is
relative to the following company by sales.
The main types of markets are established considering various criteria:
1. Customers' interest, buying power and reach:
Total market containing all the customers
Potential market members of the total market that express an interest for the
product
Available market members of the potential market that dispose of financial
resources and can reach to the product
Qualified available market members that express an interest, posses the financial
resources and are ready to purchase the product
Target market the segment of the market that the producer focuses on
Penetrated market all the customers that bought the product
2. Considering the substitution and complementarity relations between
products:
Main market all the similar products sold on the market that are in direct
competition
Adjacent market different products that satisfy the same requirements in the same
consumption circumstances
Support market represented by the products that contain the product of another
company( the automobile industry is a support market for tyre industry)
Generic market all the products that satisfy the same needs. Comprises the main
market and all the adjacent markets.
2. Geographical location:
Intern market
International market.
Evaluating the market size implies the following aspects:
Market capacity(the maximum market size) is the maximum quantity of the
reference product that can be absorbed by the customers, only limited by the
physical and biological limits of the consumers(not taking into account the price).
Actual market the demand available, the clients that have already bought the
product.
Total market potential the maximum volume of sales that can be attained by the
group of companies manufacturing a product, in a certain period of time.
Q=nqp
where:
Q is the maximum sales volume possible for a product
n is the number of individuals in the market
q is the average quantity bought by a person
p is the price of the product.
Saturation level the actual sales divided by the maximum market potential.
What is market demand?
Market demand describes the demand for a given product and who wants to
purchase it. This is determined by how willing consumers are to spend a
certain price on a particular good or service. As market demand increases, so
does price. When the demand decreases, price will go down as well. Market
demand is the total of what everyone within a specific industry desires and
can help guide merchants when building an ecommerce site.