Both approaches have merits: Each process typically has access to different information, and will likely result in different forecasts 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 surface
Instructor: See Exhibits 5.3 and 5.4 What’s the logic behind the chain ratio method? # of households in target market times concept purchase intent = # of households that will try if aware # of households that will try if aware times awareness adjustment = # of households will try if they find product at their store # of households will try if they find product at their store times distribution adjustment = # who will try the product 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
Ask: “What are the implications of diffusion theory for forecasting new product market penetration?” 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.
Instructor: See Exhibit 5.5
Instructor: See Exhibits 5.8 and 5.9
Instructor: Refer to Exhibit 5.10
Measuring market opportunities forecasting and market knowledge
Keshav,Raman,Narayanan,Keyur1Measuring Market Opportunities:Measuring Market Opportunities:Forecasting and Market KnowledgeForecasting and Market Knowledge
Keshav,Raman,Narayanan,Keyur2Chapter SummaryThis Chapter will introduce you to the following:TelstraTelecommunications in AustraliaA Forecaster’sToolkitRate of Diffusion of InnovationsCautions and Caveats in ForecastingMarket Intelligence and Knowledge SystemsMarketing Research
Keshav,Raman,Narayanan,Keyur3A Forecaster’s Toolkit Before choosing a method by which to prepare a forecast, one mustknow what is to be estimated or forecast Firstly, there’s the size of the potential market (likely demand fromall actual and potential buyers) Market potential estimate often serves as a starting point forpreparing a sales forecast There is also the size of the currently penetrated market (if acompany has existing sales in products)
Keshav,Raman,Narayanan,Keyur4Sales ForecastTwo broad approaches for preparing a sales forecastare:Top-down approachA central person takes responsibility for forecastingand prepares an overall forecastBottom-up approachEach part of the firm prepares its own sales forecast,and the parts are aggregated to create the forecast forthe firm as a wholeCommon in decentralized firms
Keshav,Raman,Narayanan,Keyur6Statistical Methods Use history and various techniques to forecast the future basedon extrapolation of the pastAdvantagesUseful in established firms for established productsLikely to result in a more accurate forecast than othermethods under stable market conditionsLimitationsAssumes the future will look very much like the pastOther techniques have been developed to improve newproduct forecasts (diffusion of innovations and conjointanalysis)
Keshav,Raman,Narayanan,Keyur7ObservationAnother method for forecasting is to directlyobserve or gather data about what real customersdo in the market of interestAdvantagesBased on what people actually doLimitationsTypically not possible for new-to-the-world productsRequires prior examples to observe
Keshav,Raman,Narayanan,Keyur8SurveysA common way to forecast sales or estimatemarket potential is to conduct a surveyAdvantagesMany different groups of respondents can be surveyedDoes not require history or prior examplesLimitationsWhat people say is not always what they doPeople may not be knowledgeable, but when asked theiropinion, they may provide itWhat people imagine about a product concept in a surveymay not be what is actually delivered
Keshav,Raman,Narayanan,Keyur9QualitativeQualitative research is often conducted alongwith empirical market surveys to aid inforecasting salesQualitative research such as focus groups anddepth interviews can help in finding out muchabout marketing issues and key trendsFor example, can use industry experts tocompare empirical survey findings
Keshav,Raman,Narayanan,Keyur10Analogy It can be useful to forecast sales or market potential byinvestigating similar products Advantages Requires no history nor prior examples Best for new product forecasting where neither statistical methodsnor observations are possible Useful for new-to-the-world high-technology products Limitations The proposed new product is never exactly like that to which theanalogy is drawn Market and competitive conditions may differ considerably fromwhen the product was launched
Keshav,Raman,Narayanan,Keyur11JudgmentAlthough not really a forecasting method on itsown, sometimes forecasts are made by intuition(gut feeling)AdvantagesThose with sufficient forecasting experience in a market theyknow well, may be quite accurate in their intuitive forecastsLimitationsOften difficult to defend forecasts against those prepared byevidence-based methods when the two differ
Keshav,Raman,Narayanan,Keyur12Market testsUsed mainly for new products. Methods such asexperimental or live test markets have sometimesbeen adopted.AdvantagesClosest forecasting method to the true marketLimitationsExpensive to conductCompetitors can deliberately distort market conditions toinvalidate the test
Keshav,Raman,Narayanan,Keyur13Mathematics Entailed in ForecastingRegardless of the method used, the ultimatepurpose of the forecasting exercise is to end upwith numbers that reflect the dataTwo key mathematical approaches that are used todetermine ultimate numbersChain ratio methodBrand or category indices
Keshav,Raman,Narayanan,Keyur14Rate of Diffusion of Innovations: AnotherPerspective on Forecasting The adoption process Involves the attitudinal changes experiencedby individuals from the time they first hearabout a new product, until they adopt it Five stages in the adoption process:1. Awareness2. Interest3. Evaluation4. Trial5. Adoption
Keshav,Raman,Narayanan,Keyur15Speed of AdoptionSpeed of the process depends heavily on:RiskRelative advantageRelative simplicityCompatibility with current ideas and behaviorEase of small-scale trialEase of communication of benefits
Keshav,Raman,Narayanan,Keyur16Diffusion of Innovation Curve
Keshav,Raman,Narayanan,Keyur17Cautions and Caveats in ForecastingKeys to good forecastingMake explicit the assumptions on which theforecast is basedUse multiple methodsCommon sources of error in forecastingForecasters are subject to anchoring biasCapacity constraints are sometimesmisinterpreted as forecastsIncentive pay: bonus plans cause managers toartificially inflate or deflate forecastsUnstated but implicit assumptions can overstate awell-intentioned forecast
Keshav,Raman,Narayanan,Keyur18Market Intelligence and Knowledge SystemsFour commonly used market knowledge systemsare:Internal marketing information systemsMarketing databasesCompetitive intelligence systemsClient contact and salesforce automation systems
Keshav,Raman,Narayanan,Keyur19Marketing ResearchQuestions to be asked by a critical user ofmarketing research:What are the research objectives?Will theproposed study meet them?Are the data sources appropriate? Secondary orprimary?Are the planned qualitative or quantitativeresearch approaches suited to the objectives?Is the research well designed?Are the planned analyses appropriate?
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