by Different companies call the process of forecasting the need for future goods or services different things. Some refer to the process as sales forecasting, while others call it demand forecasting or product forecasting. No matter what terms are used, market demand, market potential and sales forecasting are inextricably tied together by virtue of the end result knowing what, how much and when consumers want to purchase goods or services.
Market Demand
Demand reflects the willingness of a consumer to purchase a good or service. Market demand reflects the willingness of all consumers within a given market to purchase a good or service. Companies spend millions of dollars on software and experts to help them predict or forecast market demand. Companies forecast market demand because it fluctuates and has an unstable nature. If every company knew exactly how many people would buy a given product or service, the need to forecast market demand would evaporate.
Market Potential
One company selling widgets in a certain market has a certain percentage of that market’s total sales volume. The maximum number of widgets sold by every company that sells widgets in that same market comprises the market potential for widgets in that market. Market potential refers to the maximum sales volume of any given product or service in a given market before the product or service reaches market saturation.
Sales Forecasting
Sales forecasting refers to the process by which a company attempts to predict future market demand of a product or service. Companies typically use historical sales data to predict future market demand. Problems can occur with blindly using historical sales data as a forecast input because at times it does not parallel actual market demand.
Demand Vs. Sales
For example, a furniture company makes a very popular dining room set but has constant production issues in manufacturing. Because of these issues, it cannot keep up with demand for the product. At the end of the year, the historical sales data show the company sold 5,000 of the dining room sets between September and December, but the historical sales data misses a vital piece of the demand equation: It doesn’t show the 2,500 dining room sets people came into the store to buy but couldn’t because the company could not produce the goods in time. The additional 2,500 potential sales make the actual market demand 7,500 units (5,000 sold + 2,500 missed sales). If the dining room continued to sell at its current rate and the company only used the 5,000 units as an input to forecast the future market demand, the forecast would fall short during the same time period next year because it does not reflect the actual market demand of 7,500 units. The result leads to loss sales and revenue.
Considerations
Despite being called “sales forecasting,” the goal remains forecasting future market demand. This becomes more difficult when trying to forecast new goods or services and the market potential for these new products. Many different forecast methods exist for determining market potential, but as with all forecasts the result is inherently wrong, the Don Rice Company notes. Whether forecasting market demand or market potential, using clean, accurate and relevant data–human and system-generated–gets the forecasting process off to a good start.
Creating an effective strategy for your marketing efforts doesn’t happen all at once, and neither is it a problem only the marketing department has to deal with. Once you implement the marketing strategy, the entire company will have to deal with the consequences. An important part of the marketing strategy is the forecasting process. Perhaps the most important forecast in this respect is the sales forecast, which estimates how much will be sold by the company within a given time period. The rest of the company should be prepared to meet the demands of the sales forecast.
When it comes to preparing forecasts, of utmost importance is accuracy. If you overestimate how much consumers will demand of your product, then you could end up spending an exorbitant amount of money, on such things as manufacturing and distribution, only to be unable to recoup it, when the actual sales start to flow in. When you overestimate demand, you might overextend yourself financially and find that your revenue is incapable of paying your vendors, suppliers, and other business creditors. Sometimes, you might have to lay off your employees.
Performing an underestimation of demand levels can also be disastrous for your company. When you introduce a new product into the market, you have to market it in order to generate demand for the product. In case you are incapable of delivering just the right amount of product as demanded by the market, then your market share is in danger of being snatched away from you by your competitors. If your competitors’ products can match or exceed yours in quality, then you might never be able to recover your market share.
Your marketing department has to do a lot more than simply generate sales forecasts. Their forecasts have to be a little more elaborate because there will be many factors that will determine how much your company will be able to sell. These factors, such the reaction of your competitors, the cost of the products, and others should be considered to determine how much you are likely to sell. As the factors change over time, you will also have to change your forecasts. A sales forecast is therefore really a special forecast that is the composite of a variety of estimates and it has to be dynamic enough to change.
Usually, the first step to take is to determine something called market potential. This is an estimate of the total sales expected across the industry for a given product category within a certain time frame. It could be a month, a quarter, a year, and so on. The key idea here is the market potential is an estimate of what the market can take in total, from all the companies within it, so it includes both you and your competitors.
Once you have a good idea of what the market potential is, you can estimate the sales potential. This is an estimate of the maximum revenue you are likely to generate from the sale of a product. Alternatively, you can estimate it as the maximum number of units of the product that your company can hope to sell in a given market over a given time period. The sales potential is typically represented in percentage terms, where it is a percentage of the market potential. It is also the same as the estimate of the markets total market share in a given time period. Any method that forecasts sales potential is therefore also a market share forecasting method.
Companies will typically sell less than their sales potential. After all, not everyone that is expected to buy a product will end up buying that product. Some will postpone their purchases while others will never make it. Others yet will buy the product from your competitors while others still will prefer some kind of substitute. As you make a budget, it is a good idea to compare the revenue forecasts against both the costs of the product and the market potential.
