Chapter 6: Market Potential

and Sales Forecasting

Estimating the top line

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 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
 Naïve extrapolation / opinion (2nd most common)
 Sales force composite (3rd most common)

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Sales extrapolation: quantitative
 Assumes future will follow on past
 Appropriate for mature, static industry
 Moving average (most common quantitative method)
 Average of three period sales over time
 Average of change in three period sales over time
 Exponential smoothing
 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
 Ask what they would pay
 This price may be arbitrary
 Add feature: e.g., a videogame expansion card
 Ask what they would pay
 Follow-up prices are coherent
 Add another feature: e.g., a “Friendstar” device
 Ask what they would pay
 Add another feature: e.g., a hard drive
 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
 All are based on prior experience
 Will generally miss the turning points
 Best to come up with different scenarios
 Have expected, best and worst forecasts for each
 Be prepared!

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