Estimating Demand – Forecasting Current Demands and Future Demands

There are 5 different types of market we have to understand while estimating demand. This is where it is important to understand current demand and future demand

Understanding Basic Terminologies of Estimating Demand

  1. Potential Market
  2. Available Market
  3. Target Market
  4. Penetrated Market
  5. Market Demand

1. Potential Market

The potential market consists of a group of customers who have ample interest in the product and are willing to buy it, although they may or may not be able to afford to purchase it given their availability of funds.

2. Available Market

The available market consists of a group of customers who have the required funds, reach and interest for a certain deal. It makes up the set of certified obtainable market.

3. Target Market

The target market consists of the section of the qualified market in which selling the product is the main intention of the company.

4. Penetrated Market

The penetrated market consists of the group of customers who regularly buy and consume the company’s products. They are the set of customers who already exist for the company.

5. Market Demand

Market demand consists of the total volume that would be purchased by a designated group of customers in a demarcated geographical region in a particular marketing environment in a specific time duration.

Estimating Current Demand

The current demand for a certain product can be estimated by using the following methods.

  1. Total Market Potential
  2. Area Market Potential
  3. Industry & Sales Market

1. Total Market Potential

Total Market Potential is the availability of maximum sales for all the companies in an industry over a certain time period.

The number of potential buyers is multiplied by the average quantity each buyer purchases and further multiplied by the price, in order to calculate the Total market potential. Estimating the number of buyers is the task that is the difficult part of the calculation.

A ratio-chain method can be utilized for this purpose. In this manner, the unwanted group numbers can be eliminated. The ratio-chain method can be implemented by simply multiplying a base number by a variety of adjusting percentages.

2. Area Market Potential

Area market potential consists of the two following mentioned methods

1. Market Build-Up Method

The demand of the current market can be estimated by adopting selective distribution. This method works best if your business is a Business to Business market.

The current demand can be found out by identifying all the potential buyers in the specified market and estimating the potential purchases of the buyer.

2. Multiple Factor Index Method

The current market demand can be estimated by adopting intensive distribution, this method works best if your business is a Business to the Customer market. It is a little difficult to estimate as it contains a very large number of customers.

Here the factors that influence buying behaviour can be estimated and be given specific weights and then rated.

3. Industry & Sales Market

It is important for a company to know the sales taking place in the whole industry. That industry represents its competitors as well. Although individual sales of the company may not be revealed, one can collect the data from the industry trade association.

This will help in the evaluation of the relative standing of the company. Required procedures for the development can be implemented. All of this assessment can be done by comparing the growth of the company against the growth of the industry.

Estimating Current Demand – Example 1

The Society of Indian Automobile Manufacturers (SIAM)

The Indian Automobile Industry is represented by the Apex national body, SIAM. Indian automobile production figures, export trends, domestic and international sales figures and annual sales are indicated by SIAM using the quarterly and annual data and statistics.

Estimating Current Demand – Example 2

Apple – Annual Report

One can look at Apple’s Annual Report / Form 10K and understand the revenue from the Apple services and annual sales of Apple.

Apple - Annual Report

Estimating Current Demand – Example 3

Global Smartwatch Industry Demand

Compared to the entire Swiss watch industry Apple sold more watches in 2019. Apart from being the best-selling smartwatch last year the Apple Watch also put the Swiss watch industry to shame as according to the estimates compiled by Strategy Analytics.

The report shows an estimated 36 per cent jump over 2018 as it states Apple to have shipped nearly 31 million units in 2019. The Swiss watch industry showed a decline of 13 per cent as it only shipped an estimated 21.1 million units, which includes brands like Swatch and TAG Heuer.

Estimating Future Demand

The art of making a prediction of what customers are likely to do under a given set of conditions is called Forecasting.

A reasonably constant trend and competition that is either non-existent (public utilities) or stable (pure multiple monopolies) can generally be enjoyed by the few products or services that lend themselves to easy forecasting.

A key factor for success in most markets is good forecasting. A macroeconomic forecast is prepared by the company, followed by an industry forecast and then a company sales forecast as a common practice. On the assumption of the company winning a certain market share, the company can derive its sales forecast.

Following are the five methods for sales forecasting as shown in the table below

1. Survey of buyers’ intentions

Description – Research customers through surveys about purchase probability, present and future finances and expectations about the economy.

Use – The demand for industrial products, consumer durables, purchases that need planning beforehand, and new products can be predicted.

2. Composite of salesforce opinions

Description – Predicting their future sales by asking the sales representatives.

Use – To understand developing trends and gather detailed estimated by product, territory, customer and sales representatives.

3. Expert opinion

Description – Collect forecasts from experts, including dealers, distributors, suppliers, consultants and trade associations or buy from economic-forecasting firms.

Use – To gather estimates from well-informed experts who may offer internal perception.

4. Past-sales analysis

Description – Use time-series analysis, exponential smoothing, statistical demand analysis, or econometric analysis to assess past sales as the foundation of sales forecasts.

Use – To predict future demand based on analysis of past demand.

5. Market-test method

Description – Conduct a direct-market test to understand customer response and gauge future sales.

Use – To forecast sales of new products or sales of an established and acclaimed product in a new channel or area.

Estimating Future Demand – Examples

1. The Electric Vehicles Market is projected to reach 26,951,318 units by 2030 at a CAGR of 21.1% during the forecast period from an estimated 3,269,671 units in 2019, as stated by Markets & Markets.

For the report, 2018 is the base year, and from 2019 to 2030 is the range of the forecast period.

2. Joe Osha working with JMP Securities as an analyst, stated that in the case of Tesla, by 2025 the company is forecasted to reach a revenue of $100 billion by studying the continuous growth of the company as it will deliver 2.5 million vehicles.

He reaffirmed his “Market outperform” rating on Tesla’s shares by predicting a 20% EBITDA margin.