Market Potential

A market potential is an estimate of the maximum possible sales opportunities for a commodity or group of commodities open to all sellers in a particular market segment for a stated period under consideration Before going to the stage of establishing market potential, commodity grouping must be established in such a way that the individual commodities concerned are uniform with respect to the demand function. Since most products do not greatly differ from others, consumers often resort to product substitution. So in order to accurately arrive at a market potential for a product the degree of product substitution and the conditions under which it takes place have to be considered. The decision as to include or exclude closely related substitutes would have a significant effect over the market potential. E.g. Furniture wood, leather, steel feather light etc. Several market potentials for a product can be arrived at by making different assumptions.E.g.tooth paste. Methods of calculating Market potentials: Direct Data Method: In this method the data on the actual product for which one wishes to estimate market potential is collected. Collecting data about the sales for a particular product in the entire market from the various retail outlets. Advantages: These are the actual sales for a year that are being collected to arrive at the market potential. (2) The method is straightforward when compared to other methods.

Disadvantages: (1) there are very few commodities on which total sales data is available. (2) Past sales are used to indicate the market potential. (3) Previous sales were made with the help of certain advertising and sales methods, so changes in these activities, as well as changes in price may shift demand and redistribute total sales. Corollary Data Method: This is based on the assumption that if a given series is related to another or to a group, the second series may be used as a measurement of the distribution of the first. Single Factor Index: This is the most simple of the corollary data method for analyzing market potentials. E.g. the sale of one product is taken to arrive at the market potential for another product when the product is having a closely related demand. Calculating market potential for automobile tyres. It is assumed that a new set of tires would last for 25,000 Kms. On an average an owner would be driving for 10,000 kms a year. Therefore, every vehicle that is 2.5 years old by the year for which we want to calculate the market potential is going to be a prospect for the replacement of tires. The number of vehicles that are going to be 2.5 years old can be got from the registration authorities. Multiple Factor Analysis: When the demand for the product is going to depend on more than one factor, then we take all the factors into consideration for the purpose of arriving at the market potential. E.g. the demand for soft drinks is going to depend on factors like the number of households, number of members in the household, their age, income, duration and intensity of summer etc. Sales Potential, Sales Volume and Sales Forecasting: Definition: Sales potentials are the quantitative estimates of the maximum possible sales opportunities present in a particular market segment open to a specific company for a particular product or a service during a specific future period under consideration. The sales potentials are usually and generally derived from market potentials after analyzing the previous market share relationships and

by making necessary adjustments in the companys and competitors selling strategies and policies. Sales volume is the quantitative expression of the actual sales of a product attained by a firm in a particular market segment during a specific period under consideration. It so happens that in most of the cases the sales potential is greater than the sales volume. Such a situation arises due to various reasons like (1) the firm might not have sufficient production capacity to capitalize on the full sales potential. (2) Where the firm might not have developed the distributive network to a stage where they are in a position to reach every potential customer. (3) The firm might not be able to realize the total potential due to its financial constraints. So the sales potential indicates how much a firm could have possibly sold, if it had all the necessary resources and utilized them for the purpose of realizing the sales potential. Purpose of calculating sales potentials: The firms intend to derive the following benefits by calculating the sales potentials. Assigning sales territories: The market of the firm is divided into different territories based on the sales potential. This is done so as to ensure that every salesmen of the company is given equal opportunity when compared to every other salesmen of the company. The firm assumes that salesmens territory has an optimum potential, this is so because if the potential is below the optimum level, he cannot use all his time to advantage, so the overheads will be increasing thus lowering the profitability. If the territory has a potential that is more than the optimum level, the salesmen will not have the time to handle all customers, so there is a possibility of the firm loosing some of its customers to its competitors. Allocation of Sales Effort: Sales effort consists of the money spent by the firm towards sales force, advertising and sales promotion.

The sales effort that is to be allocated to a territory by the firm will partly depend on the sales potential available in the territory. If a firm is distributing its products all over the nation, it will try to allocate greater funds in a particular market where it feels there is a wide potential for its products. Establishing Sales Quotas: Sales quotas set on the basis of sales potentials are better basis for measuring the efficiency of salesmen than quotas being set on unscientific basis. Performance Evaluation of Salesmen: The firm can be more professional in evaluating the performance of its salesmen if it can take sales potential as a base rather than just the sales volume generated by the salesmen. The following example illustrates the case.
Salesmen Potential wholesale Purchasing power (PWPP) Rs. 6,00,000 Rs.5,00,000 Rs.7, 00,000 Rs.8, 00,000 --------------Rs.6, 20,000 sales volume % of sales to PWPP

A B C D Average of 10 salesmen

2,00,000 (3) 2,10,000 (2) 1,75,000 (4) 2,40,000 (1) --------------2,10,000 42 (1)

33 (2)

25 (4) 30 (3) -------34

Sales forecasting: The success of a market plan of a firm to a very great extent depends on how accurately it is able to arrive at its sales forecast. Arriving at a reasonably accurate sales forecast is very important, as this is the basis for planning all the other operations of the firm.

Definition: A sales forecast is an estimate of sales, in monetary terms or physical units for a specific future period under a proposed marketing plan or a programme and under an assumed set of economic and other forces outside the unit for which the forecast is made. The forecast may be for a specific item of merchandise or for an entire product line. In the above definition the significant point to be stressed is that the sales forecast is influenced by the firms proposed marketing plan and a programme. Sales forecasting periods: The periods for which the forecasts are being made essentially depends on the nature of the product, and the economic conditions prevailing in the country. If the economic conditions in the country are fast changing, the sales forecasts need to be reviewed periodically to make them relevant and more meaningful. There are essentially two types of sales forecasts i.e. short range or operational sales forecast and a long-range sales forecast. The minimum period for the operational sales forecast is related to the length of the production cycle of the product for which the forecast is being made. Production cycle means the minimum time required to convert the raw material into a finished product. The long range forecast is relatively for a longer period and it depends on the technology being used, nature of raw material, etc. Methods of forecasting sales: Sales forecasting can be done is two ways (1) top down or Break down procedure or (2) Bottom up or Build up procedure. Top down or Break down procedure: 1. Forecast of general economic conditions is made as the basis to 2. Determine the market potential for the product 3. Sales potential is arrived from the market potential

4. Sales forecast is derived from the sales potential and sales forecast in turn forms the basis for all planning and budgeting operations of the firm.

Bottom up or Build up Procedure: In the build up procedure the firm gathers estimates of future sales from various territories and consolidates them to arrive at the sales forecast for the entire firm. Techniques for forecasting sales: There are basically three techniques for forecasting sales. They are (1) Unsophisticated (2) Partly sophisticated and partly unsophisticated and (3) the Sophisticated techniques.
Techniques for forecasting sales Unsophisticated partly sophisticated & Partly Unsophisticated Regression analysis Jury of executive Sales force Opinion composite Method Projection of Past sales Time series Analysis Exponential Smoothing Survey of Buyers opinion Sophisticated Econometric Model Building

Unsophisticated techniques: Jury of Executive opinion: This method involves the grouping of small number of high-ranking executives and seeking their individual opinions of future sales.

The sales forecast is arrived at by averaging the opinions of the executives. The effectiveness of this method depends on the experience of the executives. The executives who are selected for this job should be those who are well informed about the industry outlook and the firms relative market position and its capabilities. To increase the accuracy of this forecasting method the executives should be asked to support their estimates with as much factual information as possible and less of speculation. Advantages: It is a relatively easy way to determine the forecast in a short time. This is the only method of forecasting if the firm is new and has not got sufficient data to make use of the other methods. This method might have to be used when adequate sales and market statistics are not available. Disadvantages: The forecast is based much on opinion rather than on factual data or evidence. Using this method increases the workload of the high-ranking executives, who could use this time more effectively in their respective fields. A forecast made through this method is difficult to be broken down according to products, customers, markets, time, etc. If the forecast cannot be broken down into above categories; it looses its value as an effective control device. Sales force composite method: Sales force opinion method is the grass root approach.

8 Under this method the sales force forecast sales for their respective

territories and submit to their higher authorities.

The individual forecasts are combined and modified, as

managements thinks necessary and the overall forecast is finally determined.

Advantages: The forecasting responsibility is entrusted to the people who should produce results later. This method has the advantage of utilizing the knowledge of those personnel of the firm who are in close touch with the market conditions. The forecasts determined under this method can easily be broken down according to products, time etc. Since the salesmen are responsible for making forecasts, it becomes easy for the firm to gain the acceptance of the sales force in implementing the sales quotas, since quotas are based on forecasts. Disadvantages: As the salesmen are not totally trained for making sales forecasts, they heavily depend upon the current business conditions prevailing in their territories and are hence either over optimistic or over pessimistic. They are too close to the market and are unable to see the broad changes taking place in the economy and the business conditions outside their own territory. If the sales force is of the opinion that their quotas are going to be fixed depending on the sales forecast, they deliberately cut down the forecast to make their job easy. Partly sophisticated and partly unsophisticated techniques:

Projection of past sales: Forecasting under this method is in various forms. One way is to set the forecast for the next year at the same level as that of the actual sales for the current year.
In the second method the next years sales are forecasted by adding a

set percentage to the last years sales or to a moving average of the sales figure for past several years. In this it is assumed that the sales will increase by the same percentage as that of the previous years. Next years sales = This year sales X This year sales Last year sales Advantages: It is easy and less expensive to determine the forecast.
The forecast is made depending on a quantitative base.

Disadvantages: The sales of a particular product depend on the interaction of various factors. So there is no guarantee that the forces that operated last year are likely to operate with the same intensity for the future period to come. This method does not take into consideration the changes in the various forces that influence the sales of the product. Time series Analysis: This does not greatly differ from that of the simple projection of the past sales. Time series analysis is a statistical procedure for studying historical sales data.
The procedure in this method involves isolating and measuring the

four chief types of sales variations; they are (1) long term trends (2) cyclical changes (3) seasonal variations and (4) irregular fluctuations.

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After this a mathematical model describing the past behavior of the series is selected and assumed values for each type of sales variation are inserted and the sales forecast is arrived at. The time series analysis is of more practical importance in making long-range forecasts. Only when sales patterns are clearly defined and relatively stable from year to year is time series analysis used successfully for making short term operating sales forecasts. The greatest disadvantage of this analysis is that it is extremely difficult to predict the changes in trends. Only when the trend is predicted sufficiently in advance, it can be of use to the firm to enable it to maximize sales opportunities when the trend is favorable and minimize losses when the trend is unfavorable. Exponential smoothing: This is a statistical technique for short-range sales forecasting, which has received much attention in recent years. Exponential smoothing is a type of moving average, which represents a weighted sum of all past numbers in a time series, with the heaviest weight being placed on the most recent data. Next year sales = a (this year sales) + (1-a) (this years forecast)
`A` in the equation is called the smoothing constant and is set at a

value between 0 to 1. Determining the value of `a` is the main problem in this technique.
If the series of sales data changes slowly, the value of `a` should be

small to retain the effects of earlier observations. If the series changes rapidly the value of `a` should be large so that the forecasts respond to these changes. Limitations of projection of past sales methods:

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The main limitation of all forecasting methods involving projection of past sales is that past sales history is assumed to be the only factor influencing future sales. No allowance is made for rapid ups and downs in business activity. Another difficulty is that the accuracy of the forecast may depend largely upon how close the company is to the market saturation point. If the market is entirely saturated this method can be of use, for instance, a certain percentage figure, which is equivalent to the annual replacement demand, can be added to past sales. Survey of customers opinions: This is largely made use of by firms marketing industrial products rather than consumer products. This method is used where the potential market consists of (1) small number of customers and prospects (2) where substantial sales are made to individual customers (3) where manufacturers sell direct to users and (4) where customers are concentrated in few geographical areas.
The two main assumptions underlying this forecasting method are (1)

the customers know what they are going to do and (2) that buyers plans once made, will not change.
Both these and at least the second assumption are somewhat

unrealistic. Although this method is generally classified as an unsophisticated forecasting method it can be made sophisticated in the marketing research sense, if the selection of respondents is made by probability sampling technique. Sophisticated Techniques: Regression Analysis: This is a statistical process used for forecasting sales.

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This method basically determines and measures the association between company sales and other variables. This method involves the formulation of an equation to explain the fluctuations in sales in terms of related and cause variables and substituting for these variables values considered likely during the period to be forecasted and solving for the value of sales. The three major steps involved in forecasting sales by using regression analysis are (1) identifying variables that have cause relationship to company sales (2) estimating the values of these variables related to sales and (3) deriving the sales forecast from these estimates.
We can use simple or multiple regressions. Multiple regressions are

used when two or more independent variables influence the sales of a product. E.g. Sales of domestic electric appliances is influenced by (1) consumer price of the product (2) Disposable personal income (3) the changes in the total number of households. Limitations: Forecast made by this technique is based on assumptions that relations which the variables have to each other in the past, will also hold for the future this is rarely true. The greatest danger in using regression analysis for forecasting is that forecasters may put too much faith in statistical output and they may be tempted to abandon independent appraisals of future events in favor of a forecast developed entirely by a computer. Econometric Model Building: This is a forecasting technique made use of by firms marketing durable goods. This is a technique that uses a mathematical model in the form of an equation to represent a set of relationships among different demanddetermining independent variables and sales. By assigning values for each independent variable a sales forecast is produced.

13 An Econometric Model is based upon an underlying theory about the

relationships that exist among a set of variables and parameters are estimated by statistical analysis of past data. E.g. the sales equation for a durable product can be written as S = R + N. Where S = Total Sales, R = Replacement demand and N = New Demand.