Estimating Market Demand

In assessing current product demand and forecasting future demand, reliable historical data are required. As previously noted, the quality and availability of secondary data frequently are inadequate, nevertheless estimates of market size must be attempted to plan effectively. Despite limitations, some approaches to demand estimation are usable with minimum information. The success of these approaches relies on the ability of the researcher to find meaningful substitutes or approximations for the needed economic, geographic, and demographic relationships.

When the desired statistics are not available, a close approximation can be made using local production figures plus imports, with adjustments for exports and current inventory levels. These data are more readily available because they are commonly reported by the United Nations and other international agencies. Once approximations for sales trends are established, historical series can be used as the basis for projections of growth. In any straight extrapolation, however the estimator assumes that the trends of the immediate past will continue into the future. In a rapidly developing economy, extrapolated figures may not reflect rapid growth and must be adjusted accordingly. Given the greater uncertainties and data limitations associated with foreign markets, two methods from forecasting demand are particularly suitable for international marketers expert opinion and analogy.

Expert Opinion:

For many market estimation problems, particularly in foreign countries that are new to the marketer expert opinion is advisable. In this method, experts are polled for their opinions about market size and growth rates. Such experts may be companies own sales managers or outside consultants and government officials. The key in using opinion to help in forecasting demand is triangulation that is, comparing estimates produced by different sources. One of the tricky parts is how best to combine the different opinions. Developing scenarios is useful in the most ambiguous situations, for example predicting demand for accounting services in emerging markets such as China and Russia or trying to predict the impact of SARS on tourism to Hong Kong.


Another technique is to estimate by analogy. This assumes that demand for a product develops is much the same way in all countries as comparable economic development occurs in each country. First, a relationship must be established between the item to be estimated and a measurable variable in a country that is to serve as the basis for the analogy. Once a known relationship is established, the estimator then attempts to draw analogy between the known situation and the country in question. For example, suppose a company wanted to estimate the market growth potential for a beverage in country X for which it had inadequate sales figures but the company had excellent beverage data for neighboring country Y. In the country Y per capita consumption is known to increase at a predictable ratio as per capita gross domestic product (GDP) increases. If per capita GDP is known for country X, per capita consumption for the beverage can be estimated using the relationship established in country Y.

Caution must be used with analogy because the method assumes that factors other than the variable used (in the preceding example GDP) are similar in both countries, such as the same tastes, taxes, prices, selling methods, availability of products, consumption patterns, and so forth. For example, the 13 million WAP (Wireless Access Protocol) users in Japan lead to a serious overestimation of WAP adoptions in Europe – the actual figure of 2 million was less than the 10 million forecasted. Or, consider the relevance of the adoption rate of personal computers or cell phones in the United States as they help predict adoption rates in the other four countries listed. How might Apple Computer use the American data to help predict demand in Japan? Despite the apparent drawbacks to analogy, it can be useful where data are limited.

All the methods for market demand estimation described are no substitute for original market research when it is economically feasible and time permits.

Finally, it should go without saying that forecasting demand is one of the most difficult and important business activities. All business plans depend entirely on forecasts of a future that no one can see. Even the best companies make big mistakes.