DEMAND FORECASTING

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DEMAND FORECASTING:

DEMAND FORECASTING

Measuring & Forecasting Demand:

Measuring & Forecasting Demand If you have a new product idea in mind and you are intent on putting together a business to bring it to the market, then one of the best things that you need to know is how big your potential market would be. If you over estimate the market size, then you may end up investing far too much into your production and inventory capacity, leading you to loose money on your investment. On the other hand, if you underestimate the market size, then you may end up being stuck with limited capacity that will not service the volume of demand, leading you to loose out on the growth opportunity and, at worst, having some other business steal your potential market away from you. This is why a careful estimate of the potential market size can be crucial for ensuring success.

The Market:

The Market The market for a product can be categorized as follows: Potential Market – These are those who express some level of interest in a product. For example, this can be determined from a survey where, for instance, 30% of respondents say they are interested in your product. Extrapolating forward, you may conclude that 30% of the population is a potential market. Available market – Just because someone is interested does not mean that person will actually buy or can even afford to. So the available market is subset of the potential market who have interest, income, and access to the product. Qualified available market – this is a further refinement of the available market since it may be possible that those who have interest, income, and access, nevertheless cannot get the product due to technical issues such as laws or distribution constraints.

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Served market – Also known as the serviceable available market . This is the market that the company can actually service with its current state of logistics. Penetrated market – this is the subset of the market that is already actively using the product.

Forecasting Demand for an Existing Product:

Forecasting Demand for an Existing Product if the firm already has an existing product in the market, then estimating what the future demand for the product would be will be a matter of assessing the following: Listening to what people say This includes salesforce opinions, expert opinion, and buyers’ opinions. Assessing what people have done This is generally involves the statistical analysis of past-sales data or related data. Salesforce opinion generally involves getting a composite of what each sales person, sales team, sales unit estimates to be its possible sales volume for the upcoming period based on past history. For this work, the company sales force should be relatively attuned to their respective client needs.

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Expert opinions regarding the potential market size and the acceptability of the proposed product can be taken from industry watchers or people with experience in the industry. This can include technical resource people from the department of Trade and Industry, industry veterans, observers, and insiders. Time series analysis uses data from previous periods to forecast the following period’s sales. The simplest example of this is the use of a status quoassumption: if sales last year were 1,000 units, then expected sales this year could also be 1,000. More likely, however, some form of trending analysis would be factored in: if data shows an average growth rate of 5% per annum over the the past three years, then the forecast would be last year’s sales multiplied by a factor of 1.05. more statistically-based analysis can be performed using statistical sofware packages.

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Regression analysis is a more sophisticated statistical method for predicting an outcome based on multiple possible factors. A regression model works by using statistical models to determine the correlation between a hypothetical cause and the effect (in this case, level of sales), again based on historical data. If a factor is deemed to have a strong correlation with the effect, then a regression model – a formula - can be constructed that hopes to determine sales based on highly correlated factors. Factors could include economic indicators such as gross domestic product, the performance of related industries, and leading indicators (economic indicators that tend to precede or affect performance in the target industry).

Forecasting Demand for a new Product:

Forecasting Demand for a new Product Predicting the demand for a new product is far more challenging than Predicting for an existing or established product. In fact, to be very candid, there is no clear way to predict the demand for a product that has never yet seen the light of the market day. To be even more candid, forecasting demand for a new product can be seen by skeptics as an exercise in futility. There simply is no way to predict the future, so this is where educated guess-work becomes stretched to its limits. A common technique for predicting demand for a new product is through the use of the chain ratio method. It is a method with a very simple operational logic and requires simple math abilities. The premise here is that if you define your target market well enough then you can calculate how big this market can be.

Incremental Growth:

Incremental Growth Entrepreneurs want to be an idea about how big the demand could be for their product so that they can plan how much to invest for their operations,logistics,and working capital requirements.But if the entrepreneur only has a limited pool of capital to invest,then a practical alternative will be to simply start small initially amd then build up capacity as needed. The advantage of the above strategy is that financial risks are minimized since a failed product would mean minimal capital exposure. The disadvantage, however, is that if the product turns out to be a huge success, the firm may not be quick enough to generate a capacity size that can maximize cost advantages or, worse, the firm may be crippled by an innante inability to satisfy demand (which is an opening for competitors to come in). In the end, regardless of what the forecasts say, an effectivr marketing manager is someone who manages demand proactively: if plant capacity is to big, then the marketer’s job is to find ways to increase the demand for the product.

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