1. Market Potential and Sales Forecasting
10/3, 2017

2. Forecasts versus Potential
Expectations
Possibilities
Firm/Brand
Sales Forecast
Sales Potential
Category
Market Forecast
Market Potential

3. 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

4. New or Growing Product Potential
Relative Advantage
Compatibility
Risk
Role of Analogous Products

5. 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.

6. 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

7. 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]

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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.

14. 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

15. Forecasting Methods (I)
Judgment-Based Methods
Naïve Extrapolation
Sales Force Composite
Jury of Expert Opinion
Delphi Method

16. collection of responses collection of response collection of response
Delphi Forecasting
Questionnaire
Data feed-in
(Numerical & graph)
Formulation of first
round questionnaire
Expert panel
selection
Distribution and
collection of responses
Statistical analysis
Formulation of second
round questionnaire
Distribution and
collection of response
Edit relevant
opinion
Data requested for
search, collect, edit
Statistical analysis
Distribution and
collection of response
Statistical analysis
Final estimation
and circulation

17. 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

18. 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

19. 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 = Cdefinitely  Fdefinitely + Cprobably  Fprobably

20. Forecasting Methods (III)
Sales Extrapolation Methods
Moving Averages
Exponential Smoothing
Regression Analysis

21. Forecasting Methods (IV)
Model-Based Methods
Regression Analysis
Leading Indicators
Econometric Models

22. 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

23. 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)

24. A-T-A-R and the Market Testing Methods
Sources of This Information
Information Needed
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
Yes
Awareness of the new
product positioning claim (A)
Ad agency provides it
Ad agency provides it
Yes
Decides to try the item (T)
Yes
Yes
Yes
Distribution estimates
provided by sales dept.
Distribution estimates
provided by sales dept.
Is able to get a trial supply (A)
Yes
Likes it and wants more (R)
Yes--in sales wave
Team estimates
Yes
Units used per year
Yes--est.
Yes--est.
Yes
Profit per unit (price-cost)
Price plan plus estimates
from accounting on costs
Price plan plus estimates
from accounting on costs
Yes
Additional diagnostic info.
Yes--a little
Yes--more
Yes--tons