Methods of Estimating Market Potential

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.

Different Forecasting Methods

A forecast is really nothing more than a guess of what is likely to happen. This kind of guess, however, is neither arbitrary nor frivolous. It is the product of an elaborate process. There are lots of different processes by which you can make a forecast and most forecasts are arrived at by blending several of these processes.

Survey and Judgement Forecasting Techniques

The most important thing to understand before forecasting is that a forecast is really just a judgment made by someone. Some techniques rely more on judgment than others, however, and they are generally known as judgment techniques. These techniques include customer surveys, expert opinions, customer intention survey, and estimates by salespeople.

Channel and Customer Surveys: In some kinds of markets, such as business to business markets, research companies tend to ask customers how much they are likely to spend on given products in a given time period. The answers are used to make a forecast. The research companies will then sell the research to companies. Sometimes the companies will conduct their own surveys to produce their own forecasts. These surveys are generally better at determining the market potential than the sales potential. They are, therefore, market potential forecasting methods. After all, a consumer probably knows what they’ll buy, but isn’t always so sure of which brand they’ll buy from.

Sales Force Composite: This is a type of forecast based on information gathered from the sales force of a company. Salespeople usually have a good intuition of how much of a product can reasonably sell in a given time period. They’re close to the customer and therefore know firsthand what is realistically possible. It’s usually harder for salespeople to estimate sales of a new product, however, unless they have sold such products before. This method of forecasting is therefore not suitable to new products. It is typically best used for existing products and near-term estimates.

Executive Opinion: This is pretty much the best guess of the company executives. It is usually the starting point of many forecasts. It can be made even more thorough and accurate by basing the bonuses of executives on the amount of sales they make. They will, therefore, have an incentive to generate well-thought-out opinions on the sales potential of a product. Nonetheless, executive opinion should always be backed by quantitative techniques and research.

Expert Opinion: This is just like executive opinion, only the expert is a third party from outside the company. Just like executive opinion, it should also be backed by research and quantitative methods.

Time Series Forecasting Techniques

Time series techniques observe patterns in sales. One of these techniques, trend analysis, can be used to measure the rate of growth of sales in the past and extrapolate it to the future. A past growth of 3 percent in sales year over year might be a good basis to estimate future growth at 3 percent, as well. Time series analysis is most useful in a stable market. A market that either fluctuates or frequently gets disrupted will not lend itself very well to this method.

Correlates Techniques

There are a variety of highly sophisticated forecasting models that can be used to forecast sales. One of these is correlational analysis, which is a special form of trend analysis. It bases sales forecasts on the trend patterns of related variables. For example, furniture making companies frequently base their future furniture sales on the rate at which new houses are being built.

Response Models

Sometimes a company will base its forecasts based on past responses of customers to marketing techniques. They can then estimate when customers are price sensitive, how they respond to offers, and so on.

Market Tests

This isn’t as much a forecasting method as it is an experiment. The company launches a new product in a small market in order to gain knowledge of how the larger market would respond to the product based on the reaction of the smaller market. Such an experiment will typically show how the marketing plan can influence sales. That is why it is called a response model. Once data has been gained from the limited market, it can easily be extrapolated to the larger market.

The importance of market forecasting cannot be understated. With a good idea of what to expect from the market, your company will be better able to anticipate and meet its needs.