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Principles of Marketing

Forecasting Market Demand for a New Product

A common technique for predicting demand for a new product is through the use of the chain ratio method. It is a method with a very simple operational logic and requires simple math abilities.

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Predicting the demand for a new product is far more challenging than predicting for an existing or established product. In fact, to be very candid, there is no clear way to predict the demand for a product that has never yet seen the light of the market day.

To be even more candid, forecasting demand for a new product can be seen by skeptics as an exercise in futility. There simply is no way to predict the future, so this is where educated guesswork becomes stretched to its limits.

A common technique for predicting demand for a new product is through the use of the chain ratio method. It is a method with a very simple operational logic and requires simple math abilities. The premise here is that if you define your target market well enough, then you can calculate how big this market can be.

Example
Estimate the demand for a new toothpaste, Powerglow. Powerglow is initially targeted to appeal to males aged 13 to 18, residing in Metro Manila, and who want to feel like real men already.

A = Number of teenagers aged 13 to 18 in the Philippines. (based on Census)
B = Percentage of the population residing in Metro Manila (based on Census)
C = Percentage of males in the population (based on Census)
D = Percentage of teenagers who want to feel like adults (this one is tricky and will have to be based on a survey research)

Multiply A x B x C x D to produce an estimate of the potential market.

As seen in the example, the chain ratio method relies on simple multiplication to fine-tune a market size based on available data.

Generally, the best way to predict demand for a new product is to first set up a test market for it—launching the product in a smaller location and conducting an exact but smaller-scale market strategy in order to assess the actual sales that will occur. These figures can then be extrapolated towards the larger market as a whole. However, not all firms can afford test marketing.

Will expert opinion work for predicting new product demand? Again, experts will offer the added advantage of experience into their analysis, but even then they are not necessarily reliable.

“There is no chance that the [Apple] iPhone is going to get any significant market share. No chance,” said Microsoft CEO Steve Ballmer in 2007. Microsoft was competing with Apple on several product categories. The iPhone went on to become the best-selling smartphone in history.

There are many reasons why expert opinion cannot be reliable, two of which are:

  • The expert is already emotionally invested in an outcome that he or she wishes for. Therefore, even when all indicators show otherwise, the expert will refuse to believe these and instead making a prediction based on what was hoped for.
  • The expert is unaware of shifting industry or market trends. The expert may base all analyses on a status quo perspective when, in fact, the environment has been shifting and changing all along, rendering the expert’s experiences irrelevant for the prediction.

So, if predicting future demand is such an impossible task, why even bother doing so in the first place?

The answer: you need to justify the product’s existence. Most likely, you will need to justify why the product can be a good business to invest in, so that you can raise sufficient financing from potential investors. The dark side of this approach, of course, is that product proponents may zealously seek to overestimate the size of the potential demand (on purpose), seeking experts who agree with them (and ignoring those who do not), and “fudging” the data in order to make it appear as if the product has a huge potential demand.

There is an alternative approach to relying on forecasted market demand. It is an approach that is best summed up by the following slogan: “Start small, scale fast, think big.” It can also be referred to as the strategy of incremental growth.

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