PRODUCT DESIGN &

DEVELOPMENT

LEARNING UNIT II: PRODUCT IDEATION,

OPPORTUNITY SEEKING AND
ATTRACTIVENESS VALIDATION

WEEK 7: MARKET SIZE ESTIMATION

AND SALES FORECAST
 LEARNING UNIT II: PRODUCT IDEATION,
OPPORTUNITY SEEKING AND
ATTRACTIVENESS VALIDATION

Learning results:
• Designs, analyzes and interprets research and products or concepts tests.
• Evaluates the attractiveness of the market for a new product, applying
methods of forecasting or estimating potential market demand.
Content of the session:
2.7 VALIDATION OF MARKET ATTRACTIVENESS
2.7.1 Market Size Studies, Estimations and Sales Forecast
2.7.2 Methods for New Products Demand Forecasting
2.7.3 Qualitative Break Down methodology for new products
Market Size and Demand Forecasting

Estuardo Lu
MBA, MMSc, Ind. Ind.
[email protected]
 DEMAND FORECASTING

• Procedure that attempts to predict or know the

probably behavior of the demand for a product.

• It is a process that makes judgments on what it is

probably to occur and makes estimations against an
uncertainty future.

• It allows to calculate the future sales of the product and

their viability to be launched, being essential to the
investment decision.

• It is also key to determining the size of the project.

 MARKET SIZE
Demand Offer -
Analysis Competition
Analysis

Offer – Demand
Balance

Potential
Market Current Sales

5
 Basic Types of Market Measurement

• Current Sales: sales of their products (company demand) and

sales of all companies in the market (industry demand).

COMPANY SALES = % MARKET SHARE

INDUSTRY SALES
• Sales Forecasting: indicate the level of sales to be achieved in
a future period defined (company and industry).

• Market potential: is the upper limit for the demand or the

maximum amount of sales a product can achieve within a
defined period for the total of all sellers.
 Basic Types of Market Measurements
Sales

Market
Potential

Industry Sales

Company
Sales

Time
 Market Gaps

• Primary Demand Gap:

Difference between market potential and industry sales.

• Selective Demand Gap:

Difference between company sales and industry sales.
 Changes in Market Gaps

How can the potential market change?

– Increased number of users
– Current users purchase most frequently
– Demographic changes

How can the industry sales change?

– Price reductions, improving purchasing power of
individuals.
– Extensive marketing efforts
– Environmental factors that stimulate the willingness
and capacity to purchase
 Changes in Market Gaps

How can the company's sales change?

• Changes in potential market or primary demand,

maintaining market share.
• At the expense of its competitors by offering and
promoting combinations of superior benefits.
 Consumption and Apparent Demand
Apparent Consumption is the estimated market size for a established period
and it is elaborated when there isn't data of the Historical Demand.
It´s an estimation of the market size from the point of view of the offer. It´s
estimated based in annual data of production, export, import and stock of the
good in study. This analysis is done indirectly through the real or effective
consumption of a specific good.
Potential Consumption is maximum superior limit of the demand
Consumption and Apparent Demand
Potential Consumption-Cp is above the Apparent Demand-Da,
the latter is Apparent Consumption-Ca plus Unsatisfied Demand
Unsatisfied or Latent Demand is the one that is not generally
satisfied due to lack of purchasing power.
Forecast of Apparent Consumption or Demand

Rate Method

Arithmetic

Geometric
KEY FACTORS FOR A FORECAST GENERATION
SELECT A SUITABLE FORECAST TECHNIQUE TO ESTIMATE THE DEMAND
OR THE APPARENT CONSUMPTION

QUALITATIVE QUANTITATIVE

Based on human judgment and They are used when there are sufficient
intuition: historical data and when it is judged that
 Delphi method these data are representative of an
unknown future.
 Growth curves
 Writing of Scenarios
 Focus Groups
Supported on the assumption that the past
can extend significantly to the future to
provide accurate forecasts.
They are important in the General
Scheme of Forecasts
 QUANTITATIVES DEMAND FORECASTS

RECURRING MARKETS
WITH HISTORICAL SALES DATA
(Convenience Products)

REGRESSION ANALYSIS
CAUSES
MULTIPLE REGRESSION

Identifies and determines ECONOMETRIC MODELS

relations between the forecast
variable, and other variables of
influence EMPIRICAL AND FOR DECOMPOSITION

TIME SERIES AVERAGES AND MOVING AVERAGES

Focused entirely on patterns, EXPONENTIAL SMOOTHING

changes in the patterns and
disturbances. AUTOREGRESSIVE - BOX JENKINS
Effective for 1 up to 12 months
 HISTORICAL DEMAND FORECASTS

1. Data collection, classification and

construction of Chart for determining data
pattern.

2. Historical Analysis and Current Situation with

Classification and/or Reduction of data.

3. Construction of the model and determining

STEPS the growth rate per year.

4. Projected Situation Analysis or Extrapolation

model

5. Estimate errors

6. Follow and confront information

 KEY FACTORS FOR THE FORECAST GENERATION
BASED ON HISTORICAL FIGURES

• Data must be Reliable and Accurate

• Data must be Relevant
• Data must be Consistent
• Data should be Periodic

First basic consideration

for generating a forecast

Behavior of the Patterns

interest variables Exploration
 SOURCES OF EXTERNAL DATA

LIBRARIES

GOVERNMENT / MINISTRIES / SUNAT

COMMERCIAL ASSOCIATIONS
SECONDARY DATA
PRIVATE COMPANIES

ADVERTISING MEDIA

RESEARCH INSTITUTES

SURVEYS / INTERVIEWS
PRIMARY DATA
OBSERVATION

EXPERIMENTATION
 HISTORICAL DEMAND FORECASTS

Simple Linear Regression method (least squares)

• Relates two variables, Y is the dependent variable, X the

independent variable, as follows:
Y =A + BX
• The independent variable X that we use is the time.
• The numerical values ​of "A" and "B" can be found with the
following formulas:
 Simple Linear Regression (Example)

Determine the sales forecast for next year:

Numbers Years Sales / Millions Trend

1 1995 28 0

2 1996 18 -10

3 1997 50 +32

4 1998 40 -10

5 1999 56 +16
 Simple Linear Regression (Example)

PV=a +bx

PV = SALES FORECAST
a = FIRST FIGURE IN THE SERIE
b = AVERAGE VARIATIONS
X = NUMBER OF YEARS
 Simple Linear Regression (Example)

AVERAGE CALCULATION OF THE VARIATIONS

b= -10+32-10+16=28/4=7
a= 28
SUBSTITUTION:
PV = a + bx
PV = 28+(7)(5)
V = 28+35 = 63 Millions
FORECAST FOR 2000
 Simple Linear Regression (Example)

GRAPHIC:

Sales Forecast vs Real Sales

The Error level is estimated by the differences between the
actual sale and the sale estimated by the regression model.
SIMPLE
REGRESSIONS
METHODS

With Historical data

observed on Demand,
Offer, or the variable
you want to project,
we can graph the
points cloud, its
distribution and if they
come closer to some
function.
 QUALITATIVES DEMAND FORECASTING

FOR NEW PRODUCTS and/or

NON-RECURRING MARKETS
(Special and Comparison
Products)
MARKET FACTORS ANALYSIS

PURCHASE INTENTION SURVEYS

MARKET TEST
JUDGMENTS OR
SUBJECTIVE MARKET RESEARCH

SALES FORCE ESTIMATION

EXPERTS JUDGEMENTS
CHOOSE THE MORE
ADEQUATE TECHNIQUE EXPERT PANEL – DELPHI METHOD
DEPENDS OF
THE TYPE AND MARKET
SITUATION
MARKET SIZE ESTIMATION TECHNIQUES AND
PRODUCT LIFE CYCLE

Introduction Growth Maturity Decline

Qualitatives Quantitatives Quantitatives Quantitatives and

Technics Technics - Trends Technics - Leveled Qualitatives
Data

• Market Research • Regressions • Mobile average • Regressions

(Purchase • Proyections of • Seasonal Index • Proyections of
Intention) Trends • Exponential Trends
• Historical smoothing • Historical
Comparison or Qualitatives • Regressions Analisis
Benchmarking Technics • Econometrics • Experts
• Experts Models Judgement
Judgement • Sales Force
(Delphi Method) Estimation
 PURCHASE INTENTION
FORECASTS

• Also called forecast by customer

expectations.
• It uses the answers of purchase
intentions manifest by the target
market.
• It seeks to identify and reflect the
potential of the market, identifying
potential buyers by applying
successive percentage ratios that
divide the possible market,
specifying the demand that may exist
for a given product.
 PURCHASE INTENTION OR CUSTOMER
EXPECTATIONS FORECASTS

Advantages Disadvantages
• Estimations come • Customers should be few
directly from the and well defined
source • Works well in consumer
• Information about the goods
use of the product is • Depend on the accuracy
often very detailed of estimates of the
• Information helps customer (are more
marketing strategies accurate when there is a
• It can be very useful for good relationship of
forecasting new confidence)
products • Expensive and slow
method
 Forecast with Purchase Intention
Proportion Break Down or Chain Ratio Method
Roof or Utopian Market.- Maximum ideal demand for a product,
everyone who should consume it. Population is estimated by
applying macro-economic segmentation factors: (gender, age,
economic activity, geographic location, SES - socioeconomic
status, # of households, # of industries-according to ISIC-, # of
stores, etc.).
Total Market.- All those with the necessary characteristics of
consumption, ability to pay and the specific need. It is estimated
by applying ratios of the microeconomic or psychographic
variables: (local demand, micro geographic sector, # family, # of
industries, lifestyles, tastes, fashions,% market penetration, etc.)
Potential Market.- Long term. Maximum available for bidders in
the sector. Part of the total market with high interest in the offer.
It is calculated with the highest level or % of purchase intention.
Objective Market.- Medium term; part of the potential market
accessible to convert by a brand. It is estimated based on the
objectives of the highest % of distribution coverage, the %
communication reach and the % or level of intention to
repurchase of the strongest brand (also replace or recommend).
Target Market.- Short term; part of the objective market that the
brand can capture in the first year. It serves for the first year
sales forecast. It is calculated by estimating a % of realizable
adoption and based on the % of desire market share in the first
year.
Niche Market.- market obtainable by promotional actions, which
must be given immediately to conquer first purchases.
 IDENTIFICATION OF POTENTIAL DEMAND

"How many people have financial capacity and is willing to pay for our goods or
services?"

TOTAL POTENTIAL MARKET

MARKET (WITH CAPACITY, NEED AND
WILLINGNESS TO BUY)

CEILING (WITH THE 2,800 demandant

NEED OR
MARKET INTERESTED)
(80%) %T2B Buying Inten.

(POPULATION WITH POPULATION WITHOUT

3,500
PAY CAPACITY) WILLINGNESS TO BUY
demandant
700 demandant
5,000 demandant
(70%) Urbans (20%) Not interested
(100%)
POPULATION
Peru S.E.S A+B+C WITHOUT THE NEED,
NOT INTERESTED
1,500 demandant
(30%) Rural

30
Brand Penetration Development for the
Objective Market

Communicati • Brand Awareness

on Strategy

Product • Attractive benefits

Strategy

Price • The price is acceptable

Strategy

• The product is available and easy

Distribution to buy
Strategy

Service and • Favorable experiences with the

Sales service and sales promotions
Promotion
Strategy
 Concept Test - Buying Intention
 Measures the level of attraction to a product and the ability to do the first
purchase.
 To be conclusive must be a quantitative study using closed questions and Likert
Scale.
 Question: Given all that we've shown, how willing or not willing are you to buy
this product?
 Tabulated: How many responses correspond to each of the options set for each
question.
Buying Intention

Definitely won’t Probably Maybe will Maybe will Probably will Definitely will TOTAL
buy it won’t buy it not buy it buy it buy it buy it

1 2 3 4 5 6

4 13 28 23 18 4 67

6% 20% 35% 27% 25% 6% 100%

Top Box

Top 2 Box
 Purchase Intention Adjustment to Estimate
Market Size Potential for a Radical Innovation

From the Concept Test question of Purchase intention:

After everything you've seen and been told, if this product were
on the market, how much do you think you would buy or not
buy this product for yourself or for someone else?
5- Definitely will buy 31% x 0.75 = 23.25%
4- Probably would buy 42% x 0.25 = 10.50%
3- May buy or may not buy 10% x 0.10 = 0.10%
2-Probably would not buy 12% x 0.03 = 0.36%
1- Definitely won´t buy 5% x 0.02 = 0.10%
100% 1.15 35.21%

If the % T2B-Top Two Box of the Purchase Intention from the surveys looks like
over estimated for a product with a radical Innovation, a weighing can be use to
get a % of purchase intention. (J. Pope, 1980)
 MARKET DEMAND
IN POPULATION, VOLUMEN AND VALUE

NUMBER OF AVERAGE AVERAGE TOTAL AVERAGE TOTAL

TOTAL X QUANTITY X FREQUENCY = MARKET X PRICE OF = MARKET
CONSUMERS OF OF VOLUME THE IN $$
CONSUMP CONSUMPTI MARKET
TION ON

% OF BRAND PRICE % OF VALUE

% OF INDEX OF INTENSITY
MARKET INDEX BRAND
PENETRATION OF THE CONSUMPTION
SHARE IN OF THE SHARE IN
OF THE BRAND OF THE BRAND
VOLUME BRAND $$
 Average Consumption per User
from the Surveys
To the question: Which is your purchase frequency for a blue jean?

Average
Distribution % Frequency Annual Quantity
Consumption
1 0.4% Once every 2 weeks 24 0.10
12 4.8% Once every month 12 0.58
25 10.0% Once every 3 months 4 0.40
60 24.0% Twice per year 2 0.48
133 53.2% Once every year 1 0.53
19 7.6% Once every two years 0.5 0.04
250 100.0% Average Consumption per User 2.12

*Average Consumption per User: Total Volume / # Users, is different to

Consumption per Capita or Cpc = Total Volume / Total Population of the Country.
 NON HISTORICAL FORECASTS
Mapping Method or Flow of Business Opportunities Planning
Suitable for non-recurring sales markets.
Opportunity map is constructed based on territory
information provided by key accounts

Purpose:
• Build a Map of Opportunities.
• Have a key account planning methodology.
• Identify objectives for the business.

Benefits:
• Identify the solutions.
• Improve the knowledge of the business segments and
the various strategies to be applied in each.
• Understand the objectives for each business
• Have the Map of Opportunities, listing them and
segmented according to solution initiatives.
FORECASTINGS FROM SALES FORCE

Responds to the sum of the opinions of each

team member.
The end result towards the company is the result
of the analysis of each manager of the zonal
team, manager of the regional team, key account
managers-KAMs, etc..
 FORECASTINGS FROM SALES FORCE

Advantages
• Is given by those with responsibility for the outcome,
which makes it more accurate.
• The forecast is available for marketing units, helping
the control and direction of the sales effort.
Disadvantages
• Prejudices of the sales personnel for personal
interests.
• Deep knowledge of the team leaders of their people
to filter those prejudices.
 FORECASTING FROM EXECUTIVE
JUDGEMENTS

Respond to a formal or non-

formal survey of the opinion of
internal executives, about the
possibilities of sales.
These opinions are combined
and averaged, the differences
are adjusted in a cluster analysis
 FORECASTS FROM EXECUTIVE
JUDGEMENTS

Advantages
• Easy and fast to perform
• It requires the use of statistics
• Use the collective knowledge

Disadvantages
• Expensive ( hours involved, transport,
telecommunications)
• Dispersed responsibility for the outcome
• Responds to the dynamics of group interaction
(directors prevail)
 Direct Sales Force Forecast
Flow of Business Opportunities Management

Pipeline Flow of Business Opportunities – Not Recurring Sale

Demand Generation
Events Campaigns Visites

1,000 100%
Prospects The forecast is based
on the list of leads or
Probability of Closure - Time

300 30% opportunities

Maturation Process

Quotations generated, the

maturing process of
150 15% each lead to the next
Monitoring step and the
probability of closure
50 5%
Closure
10 1%
FORECASTING FROM EXPERT PANEL

Expert opinion (internal and external) who prepare

their forecasts with facts, figures and information
from the environment.
To forecast with accuracy, a third feedback to each
with a compendium of proposals, keeping in
anonymity the source and including notes of why
some of them move away from the average.
This process is repeated until the estimates
converge.
FORECASTING FROM EXPERT PANEL

Advantages:
• Minimizes the effects of group dynamics of the
executive panel method
• Use statistical information

Disadvantages:
• It is very expensive
• It can take a long time
FORECASTING FROM MARKET TEST

The product is placed in

representative and
diverse areas. Its behavior
is observed, then
projections are done to
the whole market.
Widely used for new or
improved products.
 FORECASTING FROM MARKET TEST

Advantages
• Shows the market reactions to the product
• Allows to evaluate the effectiveness of the marketing plan
• Useful in new consumer products

Disadvantages
• Alerts the competitors
• Expensive
• It is slow to implement
• Difficult to accurately assess the level of initial demand and
repurchase
Which is the best method to apply for
getting a Forecast?

The appropriate approach is a

combination of objective and
subjective methods that
provide background
information, which combined
with the management of
scenarios, and the manager's
judgment, leading to the final
decision.
 Forecast Technics according to the
Projection Horizon

1 to more years • Qualitatives Methods

Long and very long Terms
• Regressions
1 to 5 years
• Econometric Models
• Trend Analysis
Medium Term • Auto-regressives (ARIMA- Box-Jenkins)
3 to 12 months
• Regressions
• Econometric Models
• Moving Average – Exponential Smoothing
Short Term
1 to 3 months
• Regressions
 SELECTION OF THE MOST
APPROPRIATE TECHNIQUE

THE BEST TECHNIQUE IS ONE THAT:

• Facilitate decision making at the right time.

• It is understood by the decision maker.
• Has a cost-benefit analysis.
• Complies with restrictions on the system:
available time, data, computing availability.
• Complies with criteria: accuracy, stability and
objectivity.

48
 To think about…

"Human beings have a unique knowledge and

inside information not available in quantitative
methods.
However, human beings tend to be optimistic and
underestimate the uncertainty of the future.
Besides the cost of the forecast with judgement
methods is often considerably higher than when
using quantitative methods. "
 References

Kahn, K. (2006). Chap. 1. In New Product Forecasting: An Applied

Perspective. (pp. 10-18.). Sharpe Inc.