Measuring Market Opportunities: Forecasting and Market Knowledge Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge

Sales Forecast Top-down approach Bottom-up approach A central person takes responsibility for forecasting and prepares an overall forecast Bottom-up approach Common in decentralized firms Each part of the firm prepares its own sales forecast Advantages of bottom-up approach Forces them to think clearly about the drivers of demand for each market segment or product line and thus better understand the real potential of their business and its parts. Forced to make explicit: Assumptions about the drivers of demand in each category. Assumptions they could debate. Support with evidence gathered from their research—with prospective investors and which they could later verify as the business unfolds. Facilitated “what if” planning.

Statistical Methods Advantages Limitations Useful in established firms for established products Results in a more accurate forecast Limitations Assumes the future will look very like the past When product or market characteristics change: Statistical models used without adequate judgment may not keep pace Statistical methods: Use past history and various statistical techniques, such as multiple regression or time series analysis to: Forecast the future based on an extrapolation of the past.

Observation Advantage Limitation Based on what people actually do Not possible for new-to-the-world products Directly observe or gather existing data about what real consumers do in the product-market of interest.

Surveys or Focus Groups Advantage Methods can be done with various kinds of respondents and increasingly done online

Surveys or Focus Groups Limitations What people say is not always what they do People may not be knowledgeable when asked their opinion What people imagine about a product concept in a survey: May not be what is actually delivered once the product is launched

Analogy Advantages Used for new product forecasting where: Neither statistical methods nor observations are possible Useful for new-to-the-world high-technology products Product is compared with similar historical data that are available.

Analogy Limitations New product and its pricing are never exactly like that to which the analogy is drawn Market and competitive conditions may vary from when the analogous product was launched

Judgment Advantage Limitation Is quite accurate when there is sufficient forecasting experience in known market Limitation Difficult to defend against evidence based methods

Experiments and Market Tests Done: Under controlled experimental conditions In live test markets with real advertising and promotion and distribution in stores Limitations of test markets Expensive to conduct Competitors can engage in marketing tactics to mislead the company

Other Mathematical Approaches Chain ratios and indices Market potential is estimated and multiplied by fractional factors Predict the portion of the overall market potential that one firm or product can expect to obtain Instructor: See Exhibits 5.3 and 5.4

Diffusion of Innovation Theory Explains the adoption of an innovative product or service over time among a group of potential buyers Useful to managers in predicting the likely adoption rate for: New and innovative goods or services

Attitudinal changes experienced by individuals from: The Adoption Process Attitudinal changes experienced by individuals from: The time they first hear about a new product, until they adopt it

Speed of the process depends on: The Adoption Process Speed of the process depends on: Risk Relative advantage Relative simplicity Compatibility with previously adopted ideas and behavior Extent to which its trial can be accomplished on a small-scale basis Ease with which the central idea of the new product can be communicated

Size and Characteristics of Individual Adopter Group Innovators: Venturesome than later adopters Receptive to new ideas and have high incomes Reduces the risk of a loss arising from an early adoption Early adopters: Opinion leaders Serve as vital links to members of the early majority group Participate more in community organizations than do later adopters

Size and Characteristics of Individual Adopter Group Early majority: Display less leadership than early adopters Active in community affairs Do not like to take unnecessary risks Want to be sure that a new product will prove successful before they adopt it

Size and Characteristics of Individual Adopter Group Late majority: Adopt a new product because they are forced to do so for either economic or social reasons Laggards: Participate less in community matters than members of the other groups and stubbornly resist change

Exhibit 5.5 - Diffusion of Innovation Curve Instructor: See Exhibit 5.8 Way to estimate how quickly an innovation is likely to move through the diffusion process is to construct a chart that rates the adoption on the six key factors influencing adoption speed.

Cautions and Caveats in Forecasting Psychological biases Common sources of error Forecasters are subject to anchoring bias Capacity constraints are sometimes misinterpreted as forecasts Incentive pay Unstated but implicit assumptions can overstate a well-intentioned forecast Instructor: See Exhibit 5.10

Cautions and Caveats in Forecasting Keys to good forecasting Make explicit the assumptions on which the forecast is based Use multiple methods

Market Knowledge Systems Four commonly used market knowledge systems Internal records systems Marketing databases Competitive intelligence systems Systems to organize client contact Instructor: See Exhibit 5.12 Internal records are needed to track what is selling, how fast, in which locations, to which customers, and so on. Marketing databases capture information about: Transactions Instances of customer contact Customer demographics Customer responses Competitive intelligence systems is a systematic and ethical approach for gathering and analyzing information about competitors’ activities and related business trends. Client contact systems Salesforce automation software.

Intended to address carefully defined marketing problems or Marketing Research Intended to address carefully defined marketing problems or opportunities Questions to be asked by a critical user of marketing research What are the research objectives? Will the data to be collected meet them? Instructor: Refer to Exhibit 5.14

Marketing Research Are the data sources appropriate? Is secondary data used? Qualitative or quantitative? Is the research designed well? Are the planned analyses appropriate