Entrepreneurs want to have an idea about how big the demand could be for their product so that they can plan how much to invest for their operations, logistics, and working capital requirements. But if the entrepreneur only has a limited pool of capital to invest, then a practical alternative will be to simply start small initially and then build up capacity as needed.
The process can be outlined as follows:
- Start small, producing small quantities of the product at first.
- Test the market’s reaction and if the demand has the potential to grow.
- If a favorable market response is detected, scale fast by immediately investing in additional production capacity in incremental and manageable steps.
The advantage of the above strategy is that financial risks are minimized since a failed product would mean minimal capital exposure. The disadvantage, however, is that if the product turns out to be a huge success, the firm may not be quick enough to generate a capacity size that can maximize cost advantages or, worse, the firm may be crippled by an innate inability to satisfy demand (which is an opening for competitors to come in).
In the end, regardless of what the forecasts say, an effective marketing manager is someone who manages demand proactively: if plant capacity is too big, then the marketer’s job is to find ways to increase the demand for the product.