Terms commonly used in Demand Measurement/Sales Forecasting
Let us first explain certain expressions that are commonly used in relation to demand measurement and sales forecasting.
Â· Market potential (or industry potential)
Â· Company potential (or sales potential)
Â· Market demand (or industry demand)
Â· Company demand (or company sales possibilities)
Â· Market forecast (or industry forecast)
Â· Company forecast (or sales forecast)
Market potential is a quantitative estimate of the total possible sales by all firms selling the same product in a given market. It gives an indication of the ultimate potential for the product for the industry as a whole, assuming that the ideal marketing effort is made.
Company potential refers to a part of the market potential; what an individual firm can achieve at the maximum in a given market; again under ideal conditions and on the assumption that the ideal marketing effort is made.
Market demand and company demand refer to those portions of â€˜market potentialâ€™ and â€˜company potentialâ€™ that are achievable under existing conditions.
Market forecast is narrower in scope in comparison to market demand. It refers to that part of the market demand that will materialize with the level of marketing effort the industry will put in during the period of the forecast.
Company forecast means the sales forecast of the company. It refers to that portion of the company demand, which the company expects to capture with the chosen marketing effort.
It can be easily seen that â€˜company potentialâ€™ is just a part of â€˜market potentialâ€™ company demandâ€™ is just a part of â€˜market demandâ€™, and â€˜company forecastâ€™, is just a part of â€˜market forecastâ€™.
Forecasting demand / sales, A Complex Exercise
Forecasting demand/ sales is normally a difficult and complex exercise. Peter Drucker the well known management expert said that about the future we can be certain of only three things.
Â· It cannot be known with certainty!
Â· It will be different from what it is now!
Â· It will be different from what we expect it to be!
One has to appreciate the complexity inherent in sales forecasting.
A Twin Task
It is obvious that two separate, though related, tasks are involved here.
1. Measuring market demand.
2. Forecasting company sales.
This is so because firms need to assess two entities: demand and sales i.e. market demand and company sales.
Measuring Market Demand
Firms need to assess,
(i) Current market demand
(ii) Future market demand.
Measuring Current Market Demand
Here again, firms need to assess
a. Total demand.
b. Area demand.
Measuring area market demand:
Area market demand refers to the demand within a particular city, district, state, zone, or country. The two main methods used for estimating area market demand are: the market-buildup method and the market â€“factor index method. The market-build up method calls for identifying how many potential buyers there are in each market and estimating the size of their potential purchases. The market-factor index method identifies market factors that correlate with market potential and then combines them into a weighted index, such as the index of buying power.
Forecasting future market demand
In forecasting future market demand too, we have two components: forecasting total demand and forecasting area demand. Once total demand is forecast, area demand can be forecast, using the same principles as in the case of measuring current demand.
Forecasting Company Sales
Now let us turn to company sales. Here, current company sales are already known from internal records. So, firms need to find out/forecast only the likely sales in a future (specified) period.
This is what one means by the familiar term, sales forecasting. The sales forecast indicates how much of a product is likely to be sold during a specified future period in a specified market, at specified prices.
To sum up all business firms would like to know the current as well as the likely demand for their products. More specifically, they would like to know how much of a given product they would sell in a given market in a given period; whether the sales would increase or decrease from the current levels and by how much; and what would be their market share. This knowledge is very essential for a firm. Without this knowledge, it cannot plan any of its activities. Demand measurement and sales forecasting provides this vital knowledge. In this article we have briefly outlined above various aspects of â€˜Demand Measurementâ€™ considering its importance for the industry / business firms.