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Market Demand, Market Potential and Sales Forecasting (Module V)
How Are Market Demand, Market Potential and Sales Forecasting Related to Each Other?
Estimating the market demand and potential is an important part of the product planning process. Companies will only invest in projects that earn them a sufficient return on investment; properly forecasting sales and market demand will require a lot of time before a company invests in a new project. Larger companies will devote entire departments to researching and developing products based on consumer demand and market potential.
Product Planning
Product planning is the first stage a company goes through when deciding to invest time and money in a new product or service. Several weeks or months are dedicated to the planning process to ensure the success of the product or service. After determining the production method and project financing, companies must estimate the amount of sales the new product or service will create. This is done by reviewing the market demand, market potential and sales forecasting for the new item.
Market demand is the current desire of consumers for the new product or service. Market demand can be determined using surveys, customer reviews or customer requests regarding a need for an item. Companies will use market demand as the base figure for how many units they might sell of their new product or service. Sales beyond the market demand fall under total market potential.
Market potential is the growth opportunities beyond the current market demand. Once a consumer purchases a good, his positive comments may cause other consumers to purchase the new item. Positive reviews from consumer groups may also push market demand if the new item brings value to the consumer. These extra sales fall under the estimated market potential; companies strive to fill the market potential because it generates sales above the actual market demand for goods or services.
Sales forecasting is a crucial step when planning to enter a new product or service into the marketplace. Sales forecasts must include high sales, expected sales and low sales estimates so a company will know how much expected profit or loss may be generated by the item. Companies will also estimate the sales based on current market demand and future market potential; estimates might also be generated on sales if a competitor enters the market and sells a similar item.
Management will rely on market demand, market potential and sales forecasting to determine the amount of capital to invest in a new product or service. Because the risk/reward relationship is based on the sales generated by a project, accurately estimating the demand for a new item is crucial. Overinvesting will hurt the company's bottom line, while underinvesting may create a stock shortage and allow competitors to quickly enter the market and steal market share.
SALES FORECASTING METHODS
A sales forecasting method is a procedure for estimating how much of a given product (or product line) can be sold if a given marketing program is implemented. No sales forecasting method is foolproof each is subject to some error. Some methods are
unsophisticated, such as the jury of executive opinion or the poll of sales force opinion.Others involve the application of sophisticated statistical techniques, such as regression analysis or econometric model building and simulation. Two sales forecasting methods may be either sophisticated or unsophisticated, depending upon how they are used the projection of past sales and the survey of customers' buying plans.
Well-managed companies do not rely upon a single sales forecasting method but use several. If different methods produce roughly the same sales forecasts, then more confidence is placed in the results. But if different methods produce greatly different
sales forecasts, then the sales situation merits further study.
The forecasting methods can be broadly classified as qualitative and quantitative .
Qualitative methods are:
Jury of Executive opinion
The Delphi Technique
Poll of Sales force opinion
Survey of customers buying plan
Quantitave Methods
Projection of Past Sales
Time series Analysis Moving Average Method
Exponential smoothening
Regression Analysis
Econometric model building and simulation
Qualitative Forecasting Methods
Jury Of Executive Opinion
There are two steps in this method:
(1) high-ranking executives estimate probable sales, and
(2) an average estimate is calculated.
The assumption is that the executives are well informed about the industry outlook and the company's market position, capabilities, and marketing program. All should support their estimates with factual material and explain their rationales.
Companies using the jury of executive opinion method do so for one or more of four reasons:
1. This is a quick and easy way to turn out a forecast.
2. This is a way to pool the experience and judgment of well-informed people.
3. This may be the only feasible approach if the company is so young that it has not yet accumulated the experience to use other forecasting methods.
4. This method may be used when adequate sales and market statistics are missing, or when these figures have not yet been put into the form required for more sophisticated forecasting methods. Its findings are based primarily on opinion, and factual evidence to support the forecast is often sketchy
The Delphi technique.
Several years ago researchers developed the Delphi a technique for predicting the future. This is a version of the jury of executive opinion method in which those giving opinions are selected for their "expertise". The panel of experts responds to a sequence of questionnaires in which the responses to one questionnaire are used to produce the next questionnaire. Thus, information available to some and not to other experts is
disseminated to all, enabling all to base their final forecasts on "all available" information. Some contend that "this technique eliminates the bandwagon effect of majority opinion."
