Chapter 6: Market Potential

and Sales Forecasting

Estimating the top line

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BiMBA 2006

Why estimate market potential?

Entry/exit decisions
Resource allocations
Location decisions
Set sales objectives & evaluate performance
Set forecast (% of potential)

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Estimating potential for new product

Relative advantage over current product

Compatibility with current system / norms
Risk (monetary, social and psychological)
Rate of adoption of comparable products

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Estimating potential for mature product

Past experience
Recent trends

Competition
Customers
Environment

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Information sources

Secondary data
Past sales data
Primary data

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Methods of estimating potential

Potential for Fordham University

Population of New York City: 8 million

4% between 18-22 = 320,000
60% high school graduates = 192,000
40% have income > $50,000 = 96,000

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Forecasting: specific product & target

Why forecast sales?

Compare proposed changes to current results

Help set budgets
Provide basis for monitoring results
Aid in production planning

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Considerations in forecasting

Customer behavior (past & future)

Competitors behavior (past & future)
Environmental trends
Product strategies

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Range of forecasted results

Each combination provides one scenario

Each scenario has range of possible results

Limit to three
expected, better and worse than expected

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Methods of forecasting

Judgment based
Sales extrapolation
Customer based
Model based

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Judgment-based forecasting: qualitative

Jury of expert opinion (most common)

Delphi method

Nave extrapolation / opinion (2nd most common)

Sales force composite (3rd most common)

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Sales extrapolation: quantitative

Assumes future will follow on past

Moving average (most common quantitative method)

Average of three period sales over time

Average of change in three period sales over time

Exponential smoothing

Appropriate for mature, static industry

Alternative method to smooth data

Regression analysis (next most common in U.S.)

Forecast sales = a intercept + b slope (time)

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Customer-based forecasting methods

Does not assume future will follow on past

Appropriate for dynamic markets / new products

Market testing
Market surveys
Can be fed into forecasting model

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Model-based forecasting methods

Regression with other factors

Sales = a intercept + b (advertising) + c (price)

Develop model on half of past data
Test model on other half of data

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Forecasting products with new features

Show basic product

Add feature: e.g., a videogame expansion card

Ask what they would pay

Add another feature: e.g., a hard drive

Ask what they would pay

Follow-up prices are coherent

Add another feature: e.g., a Friendstar device

Ask what they would pay

This price may be arbitrary

Ask what they would pay

Add another feature: e.g., a Microsoft office

Ask what they would pay

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Forecasting new-to-market products

Diffusion model: Bass (1969)

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Forecasting new-to-market products:

Diffusion model: Bass (1969)

Innovators purchase product early / Imitators follow

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Conclusions

Forecasting is necessary, but difficult

All methods have plusses and minuses

Best to come up with different scenarios

All are based on prior experience

Will generally miss the turning points
Have expected, best and worst forecasts for each

Be prepared!

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