Chapter -4

DEMAND FORECASTING
&
MARKET POTENTIAL
ANALYSIS.
Market Potential
and
Market
Sizing Analysis
 Market analysis help you know the economic
opportunity available to you in any geographic
market.
Whether you sell to consumers, to businesses,
or both, market sizing provides intelligence
you need to deploy sales and marketing
resources effectively.
 Benefits of Market Potential Analysis

Understand market potential for a single store,

network of stores or a new market
Deploy resources effectively by ranking
markets in priority order
Forecast total opportunity in terms of number
of customers and revenue potential
Estimate your market share
A market potential analysis include:

A customer profile to understand where to find

more like them
Market penetration and market share reports
showing performance in existing markets and
expected performance in new markets
Market ranking reports allowing you to prioritize
resource deployment into new markets
A geographic view of market opportunity on
detailed maps
 Strategies for Sizing Markets

What is a geographic market worth to your

business?
Market potential can be expressed as a function of:
The number of customers purchasing
Amount purchased
Frequency of purchase
In other words,
Market Potential = (how many * how much * how
often)
 Bottom Up or Top Down Market Analysis?

A bottom up approach to market sizing starts with

your customers. How much and often do they buy?
What is their profile? How many potential customers
do you have in the market based on your customer
profiles? How can you reach them?
A top down approach starts with market and industry
data. It takes a close look at a geographic market area
and profiles the consumers and/or businesses to let
you know their propensity to buy your products and
services.
 Cluster analysis identifies key segments in the
population that are more likely to purchase your
products than the average consumer
Knowing in which clusters people reside provides a
reasonable means of understanding and predicting how
they will behave
Understanding which clusters are more likely than
others to purchase allows better targeting
Clusters are tied to geography, allowing you to identify
and prioritize neighborhoods, trade areas and markets
 Cluster Analysis for Market Sizing

Lifestyle clustering systems is used to size

consumer markets.
Clustering systems operate under the premise
that "birds of a feather flock together." That
means people with similar buying behaviors and
demographic profiles tend to live close together.
This helps you identify neighborhoods or
markets where your potential is highest.
 Access Market Opportunity

Market analysis will provide the key intelligence

you need to rank and prioritize markets.
The top new geographic markets to target based
on customer or revenue potential
Which markets where you currently do business
have untapped potential
Gaining this market understanding is essential to
growing and expanding your business.
 Sales Territory Alignment, Design, Optimization and
Mapping

Sales organizations often change. Sales management

needs to change sales territories as well.
Key customers, sales people, sales managers,
products, and competitors come and go.
Each of these factors impacts sales productivity and
creates the need for sales territory analysis.
Sometimes just a small sales territory realignment
can have a big impact on your sales force
productivity.
 Sales territory management is a critical and
ongoing process to help maximize sales
productivity and revenue.
When was the last time your company
underwent a sales territory alignment project
or created new sales territory maps?
 Is Your Sales Force Productive?

Optimized sales territories that are compact in size and aligned to

each other without gaps will help you achieve a number of
measurable and sustainable benefits including:
Better customer coverage and customer service leading to increased
productivity and sales revenue
Increased sales by prioritizing accounts with the most potential
Reduced costs of sales through shorter travel times - often called
'windshield time' - and associated travel expenses
Improved morale, performance and tenure of sales people due to
equitable distribution of accounts and a level playing field for
achieving rewards
Competitive advantage through the ability to reach new
opportunities faster than your competitors
If Your Territories are Not Balanced

Studies show that 80% of companies are

missing 2-7% of unrealized sales because their
territories are misaligned.
Poorly aligned and unbalanced territories have
negative consequences.
 They include:

Missed revenue from not reaching all potential customers

Higher sales costs due to excessive travel times and expenses
Inefficiencies due to duplication of efforts among sales team
Low morale and high sales force turnover due to inequitable
territories that reward the size of the territory over individual
effort
Poor or excessive customer coverage due to territories too
large or small
Sales management missing revenue goals
 Locations that Deliver Customers

Customer analysis and demographic analysis

are essential to choosing the best retail store
locations. You won't want to make decisions
without knowing the profile of your best
customers and the demographics of the area
you are considering for store network
expansion.
 Reality is, not all your customers are ideal.

Some customers purchase infrequently, don't

spend much money, or have no loyalty, yet
manage to consume a lot of your selling
resources.
Other customers are stars: frequent purchasers,
fiercely loyal, open to cross-sell and up-sell
offers. These are the customers you want more
of.
 Customer Profile
Definition

Customer description that includes

demographic, geographic, and psychographic
characteristics, buying pattern,
creditworthiness, purchase history, etc.
Profiles can be demographically or
behaviorally based, and the difference is very
important to your business.
 Here are 2 kinds of customer profiles:

Customer is married, has children, lives in an

upscale neighborhood, and reads Time magazine
Customer visited the site every day for 2 months,
but has not visited the site at all in the past 2
weeks
The first profile is demographic, a set of
characteristics. The second profile is behavior-
based, involving what the customer is actually
doing.
 For someone selling advertising, or deciding
on content for a website, the first profile is
usually important, because it defines the
market for ad sales and provides clues to
editorial direction.
These are important considerations in
attracting customers and generating revenue in
the first stages of an online project.
 The second profile is about action, behavior, and for anybody
concerned about what their customers are doing, is more
important than the first.
Will they visit again? Will they buy again? These are the
questions answered by looking at behaviour.
Customer behavior is a much stronger predictor of your
future relationship with a customer than demographic
information ever will be.
You have to look at the data, the record of their behavior, and it
will tell you things. It will tell you "Im not satisfied." It will tell
you "I want to buy more, give me a push." It will tell you "I think
your content is boring."
 Customer profiling create descriptive segments or
groups of your customers. Each segment has specific
defining characteristics.
A customer segment is not as simple as applying a
demographic label, such as "women age 45-54" or
"businesses with revenue >$500 million.
For example, not all women age 45-54 have the same
tendency to purchase your products. So a profile like
this may not help you much, and you may waste
resources marketing and selling to the wrong people.
 What makes up a customer profile? It depends
on whether your customers are businesses or
consumers.
In either case, you typically start with your own
customer data (such as location, purchases,
spending volume), append additional consumer
or business data, then group into segments that
share similar characteristics.
 Consumer Customer Profiles

Demographics - age, income, gender, ethnicity,

education level, etc.
GeoDemographic Clusters - there are many
clustering databases available, and we will help you
choose the right one for your specific profiling needs.
Some are industry specific. Others are general. They
often include data on interests, lifestyles, purchasing
behavior, attitudes and more.
Survey Data - based on data available for purchase or
gathered through primary research.
 Standard Customer Profiles

Customer profiles can be based on commercially available

clustering systems.
These systems build lifestyle clusters around households and
adult populations based on the concept of "birds of a feather
flock together." Lifestyle clustering means characteristics are
common enough that entire neighborhoods are likely respond to
marketing in similar ways.
By grouping households with similar purchase and behavior
patterns together, clusters or segments are formed. When we
compare your customers to standardized, statistically stable
clusters from commercial systems, we can identify the clusters
more likely to buy or not buy your products.
 Customer Profiling Benefits

Once you perform customer segmentation, you can

understand who your customers are from a
demographic perspective. And you're on your way to
achieving many key benefits for your organization:
Understand Untapped Market Potential
Improve Targeted Marketing
Choose Better Sites
 Understand Untapped Market Potential

An accurate profile of your customers allows

you to analyze market areas or neighborhoods
to understand your penetration rates and the
market potential for your products and
services.
Penetration rate points to where market
opportunity exists.
 Improve Targeted Marketing

By identifying and understanding the

customers in the clusters where you have the
highest penetration, you can target marketing
or business activities to those who are most
likely to purchase your products.
You can improve response rates and ROI by
precisely marketing to prospects with offers
that will appeal specifically to them.
 Choose Better Sites
Customer profiling is a key analysis necessary
to project the size of the total market
opportunity, and project revenue and
customers for new or planned locations.
Few companies can make successful site
selection decisions without first understanding
customer profiles.
 Marketer tend to collect information about consumers,
their behavioural patterns, & consumption choices &
demand patterns.
Forecasting & estimation attempts to know the current
as well as future demand patterns so that they can
forecast demand for different periods of time.
Demand forecasting is done for the product category or
for the industry , sales forecasting is done for a specific
product or brand manufactured by an enterprise.
 Market information is a necessary input for successful
marketing planning& execution.
Forecasts are not to be confused with guesses.
Forecasting what will happen in the future. Short term
forecast are tactical in nature & typically are a projection for a
month to few months or a year.
The long term forecast is strategic in nature & covers a period
of five years & is used as the basis for building organizations
business strategy.
Demand forecasting is a process of estimating the future
demand or sales patterns of a firm by taking into account the
past information , opinion of industry observers & evolving
consumption patterns for a desired time period.
Role
of
Demand Forecasting
Short Term Forecasting
Short term forecasting may cover a period of three months, six months to one year,
depending upon the nature of business.
Appropriate Production Scheduling: the firm can avoid the problem of
overproduction &the problem of short supply by estimating seasonal variation in
demand.
Suitable Purchase Policy: demand forecasting helps the firm in reducing the costs
of purchasing raw materials & controlling inventory by determining its future
resources requirement.
Appropriate Price Policy: it can be determined depending upon the anticipation
of market demand conditions.
Setting Realistic Sales Targets for Salesmen : if targets are set too high , they will
discourage salesmen. If targets are set unrealistically low levels, the targets will be
easily achieved & incentive given by management will prove to be meaningless.
Forecasting Financial Requirement : cash requirement depend on demand level
& production operations.
Long -Term Forecasting
Long term forecasting covers a period of five, ten or twenty years.
Business Planning : starting a new unit or expansion of an existing unit of
production requires an analysis of the long term demand potential of the
product in question. A multi product firm must ascertain not only the total
sales situation , but also the demand & its distribution over various
products.
Financial Planning : planning for raising funds requires considerable
advance notice. Long term forecasts financial are quite essential to assess
long term requirements for purchasing machines, raw materials, research
& development programs.
Planning Manpower Requirements : training & personnel development
are long-term propositions , taking considerable time to complete .
Measures of Market Demand
The commonly used units of market measure include measurement
of market potential, market demand, market forecast, sales forecast,
sales budget, demand estimation.
The size of market number of customers available for a
product /service.
The potential market is a set of consumers who have the interest to
buy products & services from the market within a stipulated period.
Buying intentions &buying power are necessary preconditions to
define a market, known as Available Market (AM).
The set of customers who have interest, income,& access &qualify
to become the buyers of products & services are called Qualified
Buyer Market (QAM).
 A commodity marketer does not make any distinction
between category of consumers & sells to everyone in
the market.
A brand marketer may decide to exclude some part of
the market &concentrate only on portion of market.
Limitations in resources to build &serve market very
often force marketers to concentrate on a specific part of
the market. This market is called Target Market(TM).
It is this part of the market, which the company decides
to pursue to achieve its marketing objectives.
Over a period of time the company will be able to sell to
a specific part of the target market. This market is
known as Penetrated Market (PM)
Market Demand
It is defined with reference to a price & a time
period.
Demand for a commodity may be defined as
the quantity of a commodity that will be
bought at a particular price & during a given
period or point of time.
Market demand means the demand of all the
consumers in the market for a commodity at a
particular price.
Market Forecast
Market forecast refers to
estimates of a future sales of a
companys product in the market.
Sales Forecasting
Accurate forecasting is essential for to
produce the required quantities at the
right time & arrange well in advance for
the various factors of production.
It helps firm to assess the probable
demand for its products & plan its
production accordingly.
Sales Budget
It is a program designed for stipulated time that
highlights the selling expenses & the anticipated
sales quantitatively & in value terms.
It is a statement aimed at comparing the revenue ,
net profits, sales volume & the selling expenses
relating to a product or entire business.
There are two key issues
The quality of sales force ,
The size of sales force
 Demand forecasts may be passive or active. The former
predicts the future demand by extrapolating the demands
of the previous years in the absence of any action by the
firm.
These forecasts are used only to assess the impact of
new policies on the market. These forecasts are more
meaningful , as they take into account the likely changes
in the relevant variable in the estimating future demand.
Demand forecast method vary acco0rding to whether
they apply to a large aggregate , such as the whole
economy (macro forecasts) or to a component of this
aggregate , such as an industry or a company(micro
forecasts).
 Macro forecasts are based on national income ,
production, general price level, etc. These
forecasts help the Government in implementing
price control policy, export-import policy, etc.
Macro parameters like levels of GNP, rate of
interest, savings, investment, taxation,
Government expenditure, unemployment,
prices, income & population are a few macro
variables of concerns.
Steps in Demand Forecast6ing
These steps present a systematic way of
initiating, designing,& implementing a
forecasting system.
Identification of objectives,
Nature of product & market,
Determinants of demand, analysis,
Analysis of factors,
Choice of factors,
Identification of objectives,

Be clear about the uses of forecast data

& how it is related forward planning.
Choose the type of forecast short run,
active or passive, conditional or non
conditional,etc.
 Nature of Product & Market,

It is necessary to examine the product under consideration

carefully, whether it is consumer goods, perishable goods,
durable.
While analyzing the demand for finished goods, demand for
corresponding raw materials& intermediate goods should be
analyzed.
The elasticity of demand depends on their relative importance in
the price of the final product. Time factor is crucial determinant
in demand forecasting.
Perishable commodities can be sold over a limited period of time.
The forecasting of demand must consider the
stage at which the product is
introduction -slow rise in sales,
growth rapid rise in sales with acceptance
of the products,
maturity & saturation maximum sales or,
obsolescence &decline sales taper off with
introduction of substitute products,
Determinants of demand, analysis,

Depending on the nature of forecasts, different

determinants will assume different degree of
importance in different demand function.
It is important to consider socio-psychological
determinants, specially demographic,
sociological & psychological factors affecting
the demand.
Analysis of factors,

It is customary to classify the explanatory

factors into
Trend factors,
Cyclical factors,
Seasonal factors
Random factors
Choice of Method
This depend on the nature of products. Then
data is collected make the forecast. The choice
depends
The degree of accuracy required, reference
period of the forecast, complexity of the
relationship postulated in the demand function,
available time for forecasting exercise,
availability of data, size of cost budget for the
forecast, etc.
METHODS OR TECHNIQUES
OF DEMAND FORECASTING
Forecasting
Survey
Survey Method
Surveys are conducted to know about the
intentions of consumers (individuals, firms, or
industries),opinions of experts or of a markets.
There are two types of surveys
Census- all consumers /experts/markets are
surveyed,
Sample- selected subset is surveyed,
These methods are suitable for short term
forecasts due to nature of consumers intensions .
The important survey methods are
Survey
Consumer Survey
Consumer Survey Method

This can be one of the important methods of

forecasting. In this method a firm can ask
consumers , what & how much they are
planning to buy at various prices of the
product for the forthcoming time period.
The survey may involve a complete
enumeration of all consumers of the given
product, whose demand is to be forecast.
If there are n consumers in all , each demand
Di, then the total demand forecast will be,
Collective Opinion Method

This method is also called sales-force polling.

Salesmen or experts are required to estimate
expected future demand of the product in their
respective territories &sections.
The estimates of individual salesmen are
average consolidated to find out the total
estimated sales & then reviewed by the top
executives to eliminate the bias of optimism on
the part of some salesmen & pessimism on the
part of others.
 The revised estimates further examined in the light of
factors like proposed changes in selling prices,
product designs,advertisemet programs, expected
changes in competition, changes in secular forces like
purchasing power, income distribution, employment,
population, etc.
This method is called collective opinion method as it
takes advantage of the collective wisdom of salesmen
, department heads like production manager, sales
manager, marketing manager, & top executives.
Reasoned Opinion (Delphi)Method

The Delphi Method is based on a structured process for

collecting and distilling knowledge from a group of
experts by means of a series of questionnaires
interspersed with controlled opinion feedback.
Delphi method has been developed in order to make
discussion between experts possible without permitting
a certain social interactive behavior as happens during
a normal group discussion and hampers opinion
forming.
The Delphi method has been widely used to generate
forecasts in technology, education, and other fields.
 The Delphi method is a systematic,
interactive forecasting method which relies on
a panel of independent experts.
The carefully selected experts answer
questionnaires in two or more rounds.
After each round, a facilitator provides an
anonymous summary of the experts forecasts
from the previous round as well as the reasons
they provided for their judgments.
 Thus, experts are encouraged to revise their
earlier answers in light of the replies of other
members of their panel.
It is believed that during this process the range
of the answers will decrease and the group will
converge towards the "correct" answer.
Finally, the process is stopped after a pre-
defined stop criterion (e.g. number of rounds,
achievement of consensus, stability of results)
and the mean or median scores of the final
rounds determine the results
 First applications of the Delphi method were in the
field of science and technology forecasting.
The objective of the method was to combine
expert opinions on likelihood and expected
development time, of the particular technology, in
a single indicator.
Later the Delphi method was applied in other
areas, especially those related to public policy
issues, such as economic trends, health and
education.
It was also applied successfully and with high
accuracy in business forecasting.
Market Experiments Method

Under this the main determinants of the demand of a

product like price, advertising,
productdesign,packaging, quality, etc, are identified.
These factors are then varied separately over different
markets or over different time periods holding other
factors constant.
The effect of the experiment on consumer behaviour
is studied under actual or controlled market
conditions , which is used for overall forecasting
purpose.
Statistical
Time Series Analysis
Statistical Method
These methods make use of historical data as a
basis for extrapolating quantitative relationships
to arrive at the future demand patterns &trends.
Statistical method are based on scientific ways of
estimation , which are logical ,unbiased,
&proved to be useful.
These methods are cannot be used for forecasting
the demand for new products & products, which
have ,short existence due to data problem.
Time Series Analysis
It is a arrangement of statistical data in a chronological order in
accordance with its time of occurance.The data may be presented in
the form of table or a graph.
Time series analysis can be used for demand forecasting by first
evaluating ,extracting &interpreting its various components, so as to
make it understandable & explainable. The four components are
Trend,
Seasonal Variations,
Cyclical Variations,
Residual Variations
Depending on the nature, complexity &extent of the analysis
required , there are various types of models that can be used to
describe time series data.
 Trend- it shows the underlying ,long-term tendency of the data , which
may be result of basic developments in population, capital, technology,etc.
any event of future period can be forecasted using trend line.
Seasonal Variation- these are short term cyclic fluctuations in the
data about the trend ,which is measured in an interval in a year. The word
season can have different meanings, it may be related to weather ,holidays,
customs, festivals, fashions, etc. Here , a series fluctuates according to
seasons of the year.
Cyclical Variations in this case the length of cycle is generally
longer than one year. Study of variations is essential for predicting the
turning points in business cycles. Cyclical variations are affected by
swings in general economic activity , wherein recovery & boom are
followed by recession & depressions &vice versa.
Residual Variation these are disturbance due to unforeseen
events such as weather conditions, illness, strikes, lockouts, riots,
fires,wars,transport breakdown, & many more.
Graphical Method

This method gives the basic tendency of a series to grow,

decline, or remain steady over a period of time.
This method is useful in forecasting Indias population,
demand for cement, textiles, steel, paper, where the future is
not too much different from the average past. The period of
time in the trend analysis is always a long time period.
Trend can be both linear & non linear. If the time series values
are plotted on a graph , one can pass straight line depicting the
trend such that the values will fall on or near the line.
This line may be drawn up to the present period or the period
for which the data is available.
 If the values of the variables are such that they
cluster around a non linear path, we get a
curvilinear or non linear trend. Non linear
trend can be either quadratic or cubic.
Study of trends enables managers &firms to
forecast their business in the long run & to
plan future operations without the formal
knowledge of economic theory & the market.
Semi Average Method

According to this method the data is divided in to

two parts, preferably with same number of years.
The average of first & second calculated
separately.These average is called semi-averages.
Semi-averages are plotted against the middle
point of respective time periods covered by each
part.
The line joining these points gives the straight
line trend fitting the given data.
Moving Average Method
When time series analysis does not reveal a significant
trend of any kind ,the moving averages method may
be used.
This method consist of obtaining a series of moving
averages of successive overlapping groups of time
series.
The averaging process smoothens out fluctuations as
well as the ups &downs in the given data.
The moving average is characterized by a constant
known as the period of extent of the moving average.
Least Square Method

The method of least squares is used to approximately solve over

determined systems, i.e. systems of equations in which there are
more equations than unknowns. Least squares is often applied in
statistical contexts, particularly regression analysis.
Least squares can be interpreted as a method of fitting data. The best
fit, between modeled and observed data, in the least-squares sense is
that instance of the model for which the sum of squared residuals
has its least value, a residual being the difference between an
observed value and the value given by the model.
Least squares corresponds to the maximum likelihood criterion if the
experimental errors have a normal distribution and can also be
derived as a method of moments estimator.
Regression analysis is available in most statistical software
packages.