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FIVE

Measuring Market
Opportunities:
Forecasting and
Market Knowledge
McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

A Forecasters Toolkit
o Importance of knowing the size of the
potential market
o Market potential estimate as a starting
point for preparing a sales forecast

5-2

Sales Forecast
o Two broad approaches for preparing a sales
forecast are:
o Top-down approach
o A central person takes responsibility for
forecasting and prepares an overall forecast

o Bottom-up approach
o Each part of the firm prepares its own sales
forecast, and the parts are aggregated to create
the forecast for the firm as a whole
o Common in decentralized firms
5-3

Methods for Estimating Market Potential and

Forecasting Sales

o Statistical methods
o Observation
o Surveys or focus groups
o Analogy
o Judgment
o Market tests

5-4

Statistical Methods
o Advantages
o Useful in established firms for established
products
o Likely to result in a more accurate forecast than
other methods under stable market conditions

o Limitations
o Assumes the future will look very much like the
past
o Requires history
o Not useful for new products with no history
5-5

Observation
o Advantages
o Based on what people actually do

o Limitations
o Typically not possible for new-to-the-world
products
o Requires prior examples to observe

5-6

Surveys or Focus Groups

o Advantages
o Many different groups of respondents can be
surveyed
o Does not require history or prior examples

o Limitations
o What people say is not always what they do
o People may not be knowledgeable, but when
asked their opinion, they may provide it
o What people imagine about a product concept
in a survey may not be what is actually delivered
once the product is launched
5-7

Analogy
o Advantages
o Requires no history nor prior examples
o Best for new product forecasting where neither
statistical methods nor observations are
possible
o Useful for new-to-the-world high-technology
products

o Limitations
o The proposed new product is never exactly like
that to which the analogy is drawn
o Market and competitive conditions may differ
considerably from when the product was
launched
5-8

Judgment
o Advantages
o Those with sufficient forecasting
experience in a market they know well,
may be quite accurate in their intuitive
forecasts

o Limitations
o Often difficult to defend forecasts against
those prepared by evidence-based
methods when the two differ
5-9

Market tests
o Advantages
o Closest forecasting method to the true
market

o Limitations
o Expensive to conduct
o Competitors can deliberately distort
market conditions to invalidate the test

5-10

Mathematics Entailed in Forecasting

o Chain ratio method
o Brand or category indices

5-11

The Adoption Process

o Involves the attitudinal changes
experienced by individuals from the
time they first hear about a new
product, until they adopt it

5-12

The Adoption Process (continued)

o Adoption rate of the process depends
heavily on:
o Risk
o Relative advantage
o Relative simplicity
o Compatibility with current ideas and
behavior
o Ease of small-scale trial
o Ease of communication of benefits
5-13

Diffusion of Innovation Curve

5-14

Cautions and Caveats in Forecasting

o Keys to good forecasting
o Make explicit the assumptions on which the
forecast is based
o Use multiple methods

o Common sources of error in forecasting

o Forecasters are subject to anchoring bias
o Capacity constraints are sometimes
misinterpreted as forecasts
o Incentive pay: bonus plans cause managers to
artificially inflate or deflate forecasts
o Unstated but implicit assumptions can overstate
a well-intentioned forecast
5-15

Market Knowledge Systems

o Four commonly used market knowledge
systems are:
o Internal records systems
o Marketing databases
o Competitive intelligence systems
o Client contact and salesforce automation
systems

5-16

Marketing Research
o Intended to address carefully defined
marketing problems or opportunities.
o Questions to be asked by a critical user of
marketing research:
o What are the research objectives? Will the
proposed study meet them?
o Are the data sources appropriate? Secondary
or primary? Qualitative or quantitative?
o Is the research itself well designed?
o Are the planned analyses appropriate?
5-17