Measuring Market Opportunities: Forecasting and Market Knowledge

Chapter 5

A Forecasters toolkit Statistical and other quantitative methods

Statistical methods use past history and various statistical techniques, such as multiple regression or time series analysis, to forecast the future based on an extrapolation of the past. Not useful for entrepreneurs. In established firms, for established products, statistical methods are extremely useful.

Limitations of S & Q methods

As with all forecasting methods, statistical methods have limitations. Most important one is that they generally assume that future will look very much like past. If product or market characteristics change, statistical models used without adequate judgment may not keep pace.

Observation.

This method is to directly observe or gather existing data about what real consumers do in the product market of interest. Observation based forecasting is attractive because it is based on what people actually do. If data can be found from existing secondry sourcesin company files, at the library, or on the internetdata collection is both faster and cheaper than a new study, from scratch. Does not apply to new products.

Surveys or Focus Groups

These surveys can be done with different groups of respondents. Consumers after being shown a statement or a prototype or sample of the product, can be asked how likely they are to buy, creating a survey of buyers intentions. The sales people can be asked how much they are likely to sell, completing a survey of sales force opinion.

Limitations of Focus groups

What people say is not always what people do. The persons who are surveyed may not be knowledgeable. What people imagine about a product concept in a survey may not be what is actually delivered once the product is launched.

Analogy

Used when neither statistical method nor observations are possible to forecast the sales or market potential for a new product . Then in such case analogy is used. Under this method, the product is compared with similar products for which historical data are available. Limitation is that new product is never exactly like that to which the analogy is drawn.

Judgment

Sometimes forecasts are made solely on the basis of experienced judgment or intuition. Some decision makers are intuitive in their decision processes and cannot always articulate the basis for their judgments. Those sufficient forecasting experience in a market they know well, may be quite accurate in their intuitive forecasts. As a limitation judgment cannot be defended compared to evidence-based methods, when the two differ.

Market test

Market tests of various kinds are the last of our most commonly used methods. Used largely for new products, market tests such as experimental test markets may be done under controlled experimental conditions in research laboratories, or in live test markets with real advertising and promotion and distribution in stores.

Mathematics entailed in Forecasting

The combination of judgment and other methods often leads to the use of either of two mathematical approaches to determine the ultimate numbers: the chain ratio calculation or the use of indices.

Rate of diffusion of innovations

This theory seeks to explain the adoption of an innovative product or service overtime among a group of potential buyers. This is particularly useful for entrepreneurs or other marketers to see if the investment in development and introduction of the new product will be adopted by the target market or not. This is useful to mangers in predicting the adoption rate.

The adoption process

This involves the attitudinal changes experienced by individuals from the time they first hear about a new product , service, or idea until they adopt it. Some tend to adopt early, some late, and some never.

Five stages of adoption process

1.

2.

3.

Awareness. In this stage the person is only aware about the product, and is motivated to seek information about the product. Interest. Here individual is sufficiently interested in it but has not yet involved. Evaluation. Here the individual is mentally applying the product to his own requirements and anticipating the results.

Five stages of adoption process

4. Trial. Here the individual actually uses the product, but will not yet adopt it. 5. Adoption. In this stage the individual not only continues to use the new product but also adopt it.

The rate of adoption

Those who adopt a product go through the five stages in adoption process. 1. The risk , cost of product failure or dissatisfaction. 2. The relative advantage over other products. 3. The relative simplicity of the new product. 4.Its compatibility with the previously adopted ideas and behavior.

The rate of adoption

5. The extent to which its trial can be accomplished on a small scale basis. 6. The ease with which the central idea of the new product can be communicated.

Adopter categories

Using time of adoption as a basis for classifying individuals, five major groups can be distinguished: Innovators. Early adopters Early majority Late majority Laggards.

These adopter groups can be considered market segments. One would use a different set of strategies to market a new product to the early adopter group than to market it to the late majority group. Commercial sources are most important at the awareness stage in the adoption process, while personal influence is most important at evaluation stage. In the interest stage both are important. In trial stage marketers should facilitate the prospect to try the product .

Implications of diffusion of innovation theory

A good way to estimate how quickly an innovation is likely to move through the diffusion process is to construct a chart that rates the adoption on the six key factors influencing adoption speed. View Exhibit 5.7

Keys to good forecasting

The first key is to make explicit the assumptions on which the forecast is based. This way if there is debate or doubt about the forecast, the assumptions can be debated, and data to support the assumptions can be obtained.. The second key is to use multiple methods. When forecasts obtained through different methods, converge near a common figure, greater confidence can be placed in that figure.

Sources of error

Forecasters are subject to anchoring bias, even though market conditions have changed . Capacity constraints are sometimes misinterpreted as forecasts. Incentive pay can be a source of bias in forecasting. Implicit assumptions can overstate a well intentioned forecast.

Market knowledge systems

Internal record systems. Marketing databases. Competitive intelligence systems. Client contact and sales force Automation systems.