Ppt5

Measuring Market Opportunities

PPT 5Prof. S.Venkat

1. What is market potential and why is it important?

Discussion Question

Market potential is the demand from all actual and potential buyers of a product or product class.

Discussion Question

2. Of the two main approaches for sales forecasting - top-down and bottom-up - which is better?

DEMAND FORECASTING ENTAILS ESTIMATING SALES OF A PRODUCT DURING SOME FUTURE

TIME PERIOD.

• A sales forecast is an estimate or probable sales for one company’s brand of the product during a stated time period in a specific market segment and assuming the use of a predetermined marketing plan.– It is based on a specific marketing plan.– It can be expressed in dollars or product units.– It is best prepared after market potential and sales potential

have been estimated.– It typically covers a 1-year period but may be longer.– Marketing goals and broad strategies must be established

before a sales forecast is made.– Once it is made, it becomes a key controlling factor in all

operational planning throughout the company.

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Two Approaches to Forecasting DemandTop Down Bottom Up

1. Forecast economic conditions

2. Determine market potential

3. Estimate market share

4. Forecast sales

2. Add individual estimates to get total forecast

3. Estimate demand in market segments or from organizational units in the company

THERE ARE TWO BASIC PROCEDURES USED TO FORECAST SALES:

• A “top-down” approach in which management:– Develops a forecast of economic conditions and industry

trends.– Determines the market potential for a product.– Determines the sales potential for the product.– Measures the share of this market the firm is currently

getting or plans to capture.– Forecasts the firm’s sales of the product.

• A “bottom-up” approach in which management:– Generates estimates of future demand from customers or

the company’s salespeople.– Combines the estimates to get a total forecast.– Adjusts the forecast based on managerial insights into the

industry, competition, and general economic trends.

Top-Down/Bottom-Up• Both approaches have merits:• Using both methods concurrently adds

confidence to the forecast, if both methods produce similar results

• If the results of the two approaches differ, useful discussions of the underlying assumptions will be surfaced

• Each process typically has access to different information, and will likely result in different forecasts

Discussion Question

3. What are the advantages and limitations of the various evidence-based forecasting methods?

Statistical methods: advantages -Useful in established firms for established products-Likely to result in a more accurate forecast than other methods under stable market conditions

Statistical methods: limitations-Assumes the future will look very much like the past-Requires history-Not useful for new products with no history

Observation: advantages-Based on what people actually do

Observation: limitations-Observation is typically not possible for new-to-the-world products-Requires prior examples to observe

Surveys: advantages-Many different groups of respondents can be surveyed, from consumers to salespeople to suppliers, etc.

-Does not require history or prior examples

Surveys: limitations-What people say is not always what people do

-The persons being surveyed may not be knowledgeable, but when asked their opinion, they will probably provide it

-What people imagine about a product concept in a survey may not be what is actually delivered once the product is launched

Analogy: advantages-Requires no history nor prior examples

-Best when used for new product forecasting where neither statistical methods nor observations are possible

-Also useful for new-to-the-world high-technology products, for which product prototypes are often either not available or extremely expensive to produce

Analogy: limitations-The proposed new product is never exactly like that to which the analogy is drawn

-Market and competitive conditions may differ considerably from when the analogous product was launched

Judgment: advantages-Those with sufficient forecasting experience in a market they know well may be quite accurate in their intuitive forecasts.

Judgment: limitations-It is often difficult for them to defend their forecasts against those prepared by evidence-based methods when the two differ.

Market tests: advantages-Closest forecasting method to the true market

Market tests: limitations -Expensive to conduct

-For consumer products sold through supermarkets and mass merchants, competitors can buy the data collected through scanners at the checkout and learn the results of the test market without bearing the expense.

-Competitors can deliberately distort market conditions to invalidate the test

Discussion Question

4. How does one go from methods to math?

• Chain ratio method• Brand or category indices

Chain-Ratio Method• What’s the logic behind the chain ratio

method?1.# of households in target market times concept

purchase intent = # of households that will try if aware

2.# of households that will try if aware times awareness adjustment = # of households will try if they find product at their store

3.# of households will try if they find product at their store times distribution adjustment = # who will try the product

Brand/Categories Indices• What’s the logic behind brand or category

indices?• Category Development Indices report the ratio of

consumption in a certain category to population in a defined geographical area.

• Brand Development Indices compare sales for a given brand to population in a defined geographic area

• Commonly used to assess whether a category or brand has above-average or below-average penetration in different geographic markets

Discussion Question

5. Why is looking at adoption and diffusion important?

Ideas for new products or new ventures: How do we know how fast

customers will adopt?

Source: Adapted with permission from Marketing, 11/e, Acetate 8-8, by Michael J. Etzel, Bruce J. Walker, and William J. Stanton. The McGraw-Hill Companies, Inc. © 1997. All rights reserved.

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ADOPTERS

Early LateYounger Older

Well educated Less educated

Higher income Lower income

Innovators; cosmopolitan Totally local

Higher social status Lower social status

Uses wider variety ofinformation sources andmany media

Limited media exposure;limited reliance on outsidemedia; rely on local peergroups

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WHAT IS ADOPTION AND DIFFUSION?

• Awareness– Individual is exposed to the innovation– Becomes a prospect

• Interest– Prospect is interested enough to seek information

> Adoption Process Stages

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• Evaluation– Prospect judges the advantages and disadvantages

of a product and decides whether to try it.• Trial

– Prospect tries the product on limited basis. If possible tries a sample.


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• Adoption– Prospect decides whether to use the innovation

on a regular basis• Confirmation

– Becomes a user who seeks assurances that the decision to purchase the product is correct.


Discussion Question

6. How fast will the adoption curve move for a particular innovation?

Diffusion theory suggests that high penetration levels are rare at the outset. Typically, first-year penetration levels include some but not all of the innovators, i.e., less than 2½ percent will likely adopt in year one.

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CHARACTERISTICS AFFECTING THE ADOPTION RATE

• Relative advantage – the degree to which an innovation is superior to

preceding ideas• Compatibility

– the degree to which an innovation is consistent with the cultural values and experiences of adopters

• Complexity or simplicity – the degree to which an innovation is difficult to

understand or use

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• Trialability (Divisibility) – the degree to which the new idea may be sampled

on some limited basis. • Observability (Communicability)

– the degree to which the results of using the innovation are observable or communicable to others.

• Risk– the degree to which buyer may lose money or not

get needs met

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Adoption Rate Relative Advantage

Compatibility

Complexity

Trialability

Observability

Risk

Discussion Question

7. What makes for good forecasting?

What are common pitfalls?

Keys to improve the credibility and accuracy of forecasts of sales and market potential•Make explicit the assumptions on which the forecast is based

•Use multiple methods

Biases in forecasting•Forecasters are subject to anchoring bias

•Capacity constraints are sometimes misinterpreted as forecasts (production or service capacity is not a forecast)

•Incentive pay: bonus plans can cause managers to artificially inflate or deflate forecasts

•Unstated but implicit assumptions can overstate a well-intentioned forecast

Discussion Question

8.Where does the market knowledge come from to help us assess markets and industries, understand buyer behavior, and prepare forecasts?

Four key kinds of systematic market knowledge systems•Internal records•Marketing databases•Competitive intelligence systems•Client contact systems

What are these? Explain

Plus marketing research targeted at particular marketing challenges

Discussion Question

8. What questions should informed users of marketing research ask, before approving a study?

1. What are the research objectives? Will the proposed study meet them?

2. Are the data sources appropriate? Secondary or primary? Qualitative or quantitative?

3. Is the research itself well designed?

4. Are the planned analyses appropriate?

Questions to Ask Before Approving Research

Business

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