Market Demand and

Potential
Prof. Kapil Dhatingan
• Meaning
• Importance
• Methods
Types of Forecasts
Market Potential

Market Forecast
(Market Demand)

Industry Sales

Sales Potential

Sales Forecast
 Organizational Demand
Analysis
• Market Potential
– “Maximum possible sales of all sellers of
a given product in a defined market
during a specific time period.”
• Sales forecast
– “Maximum share of market potential an
individual company might expect for a
certain product or product line.”
• Example
 Questions
• Why do we need to estimate market
demand?

• What are the uses for sales

forecasts? Why is it important that
they are as accurate as possible?
 Why demand
forecasting?
• Deciding on investment decisions
• Planning and scheduling production
• Acquiring inputs
• Making provision for finances
• Formulating pricing strategy
• Planning advertisement
 Examples of Forecasts Used in
Business Marketing
Sales Management Type of Forecast
Decisions
• Assessing market • Market potential &
opportunity & allocating market forecast
resources
• Evaluating competitive • Sales potential
performance
• Planning for • Sales forecast
manufacturing and
inventory
• Assessing the size of • Sales forecasts
the sales force
 Steps
• Specifying the objective
• Determining the time perspective
• Making choice of method
• Collection of data
• Estimation and interpretation of
results
CLASSIFICATION OF DEMAND FORECASTING

QUALTITATIVE QUANTITATIVE
TECHNIQUES TECHNIQUES
1)EXPERT OPINION
Delphi method. 1)Time Series Analysis.
2)SURVEY 2)Barometric Analysis.
3)MARKET EXPERIMENT a) leading indicators
Test marketing b)Coincident
Controlled indicators
experiments. c) lagging indicators.
Qualitative Forecasting Methods
Qualitative
Forecasting

Models
Sales Delphi
Executive Market
Force Method
Judgement Research/
Composite
Survey

Smoothing
 Qualitative Methods
Briefly, the qualitative methods are:

Executive Judgment: Opinion of a group of high level

experts or managers is pooled

Sales Force Composite: Each regional salesperson provides

his/her sales estimates. Those forecasts are then reviewed
to make sure they are realistic. All regional forecasts are
then pooled at the district and national levels to obtain an
overall forecast.

Market Research/Survey: Solicits input from customers

pertaining to their future purchasing plans. It involves the
use of questionnaires, consumer panels and tests of new
products and services.
 Forecasting Approaches:
Top-Down
• Forecast of general • Sales potential for
economic & business company as % of
conditions for industry sales
country • Company sales
• Market potential for forecast
relevant industry • Zone, region,
• Factors affecting district, territory &
company’s share of account forecasts
total industry sales
 Forecasting Approaches:
Bottom-Up
• Sales person’s
forecast of accounts
• Combined into
territory forecasts
• Combined into
District, Region,
Zone forecasts
• Company Sales
Forecasts
 ✓Expert Opinion
• The expert opinion method, also known as “EXPERT
CONSENSUS METHOD”, is being widely used for
demand forecasting.
• This method utilizes the findings of market research
and the opinions of management executives,
consultants, and trade association officials, trade
journal editors and sector analysts. When done by
• An expert, qualitative techniques provide reasonably
good forecasts for a short term because of the
expert’s familiarity with the issues and the problems
involved.
• DELPH I METHOD:- The Delphi method is primarily
used to forecast the demand for “NEW PRODUCTS”.
 Qualitative Methods
Delphi Method: As opposed to regular panels where the individuals
involved are in direct communication, this method eliminates the
effects of group potential dominance of the most vocal members. The
group involves individuals from inside as well as outside the
organization.

Typically, the procedure consists of the following steps:

Each expert in the group makes his/her own forecasts in form of
statements
➢The coordinator collects all group statements and summarizes
them
➢The coordinator provides this summary and gives another set
of questions to each
group member including feedback as to the input of other
experts.
➢The above steps are repeated until a consensus is reached.

.
 Determining Market & Sales
Potential
• Market Research
– Uses
• Estimate demand from few buyers
• Estimate demand for new products
• Supplement data from statistical series
– Methods
• Surveys – Institute for Supply Chain
Management
– Manufacturing -- http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942
– Non-Manufacturing -- http://www.ism.ws/ISMReport/NonMfgROB.cfm
• Focus groups
• Customer visits
 SURVEY
A firm can determine the demand for its products through a
market survey. It may launch a new products, if the survey
indicates that there is a demand for that particular product in
the market.
For example, Coke in India expanded its product range beyond
carbonated drinks, after the company conducted a nationwide
survey. The survey revealed that about 80% of the youth
preferred to drink tea or coffee rather than carbonated drinks at
regular intervals. The remaining 20% preferred to have milk
products while only 2% preferred to drink carbonated drinks like
coffee.
The company is now trying to bring tea and coffee brands to India
by installing vending machines. It is also planning to introduce a
coconut flavored drink in kerala and a black currant in Tamilnadu
named portello.
 Market Experiment
• Market Experiment can help to
overcome the survey problems as they
generate data before introducing a
product or implementing a policy.

• Market Experiments are two types:-

1) Test marketing:-
2) Controlled experiments:-
 Test marketing
In this case, a test area is selected, which should be a
representative of the whole market in which the new product is
to be launched. A test area may include several cities and towns,
or a particular region of a country or even a sample
of consumers.

More than one test area can be selected if the firm wants to
assess the effects on demand due to various alternative
marketing mix.

Advertising or packaging can be done in various market areas.

Then the demand for the product can be compared at different
levels of price and advertising expenditure. In this way,
consumer’s response to change in price or advertising can be
judged.
 DRAWBACKS OF THE MARKET
EXPERIMENT
1) The test experiments are that they are very
costly and much time consuming.
2) If in a test market prices are raised, consumer
may switch to the competitor’s products.
3) It may be difficult to regain lost customers even
if the price is reduced to the previous level.
Moreover, it is often difficult to select an area,
which accurately represents the potential market.
 Controlled experiments
• Controlled experiments are conducted to the test
demand for a new product launched or to test the
demands for various brands of a product.
• They are selected some consumers.
 DRAWBACKS OF THE CONTROLLED
EXPERIMENTS

1) The consumers may be biased in the process of

selection of a sample of consumers on which
experiments is to be performed.

2)The selected consumers may not respond accurately

If they come to know that they are a part of an
experiment being conducted and their behavior is
being recorded.
 Quantitative Forecasting
Methods
Quantitative
Forecasting

Time Series Regression

Models Models

2. Moving 3. Exponential
1. Naive
Average Smoothing
a) simple a) level
b) weighted b) trend
c) seasonality
 Quantitative Forecasting
Methods
Quantitative
Forecasting

Time Series Regression

Models Models

2. Moving 3. Exponential
1. Naive
Average Smoothing
a) simple a) level
b) weighted b) trend
c) seasonality
 Time Series Models

• Try to predict the future based on

past data

– Assume that factors influencing the past will

continue to influence the future
Time Series Models:
Components
Random Trend

Seasonal Composite
 Product Demand over Time
Demand for product or service

Year Year Year Year

1 2 3 4
 Product Demand over Time
Trend component
Seasonal peaks
Demand for product or service

Actual demand
Random line
variation
Year Year Year Year
1 2 3 4
Now let’s look at some time series approaches to forecasting…
Borrowed from Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e
 Time Series Analysis
• The time series analysis is one of the most common
quantitative method used to predict the future
demand for a product. Here the past sales and
demand are taken into considerations.

• TIME SERIES ANALYSIS IS DIVIDED INTO FOUR

CATEGORIES:
1)TREND
2)SEASONAL VARIATIONS.
3)CYCLICAL VARIATIONS.
4)RANDOM FLUCTUATIONS.
 METHODS OF TIME SERIES
ANALYSIS
•

1)TREND:- Past data is used to predict the future

sales of firm trend is a long term increase or
decrease in the variable.
2)SEASONAL VARIATIONS:- It is taken into
account the Variations in demand during
different seasons.
Eg:- The sale of cotton dresses increases in summer.
The sale of Woolen clothes increases in winter.
3)CYCLICAL VARIATIONS:- This variations in
demand due to the fluctuations in the
business cycle – Boom, recession and
depression.
4) RANDOM FLUCTUATIONS:- It may happen due to
Natural calamities like flood, earthquake, etc.
Which cannot be predicted accurately.
Quantitative Forecasting
Methods
Quantitative
Time Series
Models

Models

2. Moving 3. Exponential
1. Naive
Average Smoothing
a) simple a) level
b) weighted b) trend
c) seasonality
 1. Naive Approach
 Demand in next period is the same as
demand in most recent period
✓ May sales = 48 → June forecast = 48

 Usually not good

 Determining Market & Sales
Potential
• Statistical Series
– Assumes there is a good relationship between
demand and statistical series
Example: # employees and number of uniforms
– Single Series Method
• Based on NAICS or market segments
• Steps
– Select Statistical series
– Relate series to demand through usage factor
– Estimate series for desired time period
– Potential = usage factor X value of series for year
– Multiple Series Methods – for more complex
demand
• Multiple regression techniques
 Forecasting Methods:
Association/Casual & Time Series
Association/Causal Time-Series
• Correlation • Moving Averages
• Exponential Smoothing
• Regression Models
• Adaptive Filtering
• Leading Indicators • Time-Series
– http://www.newyorkfed.org/
research/national_economy/ Extrapolation
• Econometric Models • Times Series
Decomposition
• Input-Output • Box-Jenkins
Models
– http://www.bea.gov/industry
/
 Summary
• Demand Analysis (Market Potential) and
Sales forecasts are used throughout the
organization
• Choosing a forecasting technique is based
on:
– Who and how it will be used
– Time frame
– Data available
– Costs/Benefits
• Various methods may be used, but should
combine top-down & bottom- up
 Conclusion
• Accurate demand forecasting
requires
– Product knowledge
– Knowledge about the customer
– Knowledge about the environment