New Product StrategySales ForecastingFebruary 27, 2007

Estimating Sales Potential

Sales Potential EstimationOften used to interpret concept test results

The Concept Statement

Sales Potential EstimationOften used from concept test resultsAssumes awareness and availabilityTranslating Intent into sales potential:Develop the norms carefully for a specific market and for specific launch practicesExamples:Services: 45% chance that the definitely would buys actually will buy; 15% for the probably willsConsumer Packaged Goods: 70-80% chance that the definites will buy; 33% chance for the probably wills

Sales Potential Estimation

Sales Potential EstimationTranslating Intent into Sales PotentialExample: Aerosol Hand Cleaner After examining norms for comparable existing products, you determine that:90% of the definites40% of the probables10% of the mights0% of the probably nots and definitely nots will actually purchase the productApply those %age to Concept Test results:

Sales Potential EstimationTranslating Intent into Sales PotentialApply those %age to Concept Test results:90% of the definites (5% of sample) = .04540% of the probables (36%) = .14410% of the mights (33%) = .0330% of the last 2 categories = .000Sum them to determine the %age who would actually buy: .045+.144+.033= .22Thus, 22% of sample population would buy (remember: this % is conditioned on awareness & availability)

From Potential to ForecastWith Sales Potential Estimates:To remove the conditions of awareness and availability, multiply by the appropriate percentages:If 60% of the sample will be aware (via advertising, etc.) and the product will be available in 80% of the outlets, then:(.22) X (.60) X (.80) = .1111% of the sample is likely to buy

Sales ForecastsWith Sales Potential EstimatesA-T-A-R ModelsBest used with incremental innovationsBased on diffusion theory:Awareness, Trial, Availability, Repeat

ATAR

An A-T-A-R Model of Innovation DiffusionProfits = Units Sold x Profit Per Unit

Units Sold = Number of buying units x % aware of product x % who would try product if they can get it x % to whom product is available x % of triers who become repeat purchasers x Number of units repeaters buy in a year

Profit Per Unit = Revenue per unit - cost per unitFigure 8.5

The A-T-A-R Model: DefinitionsBuying Unit: Purchase point (person or department/buying center).Aware: Has heard about the new product with some characteristic that differentiates it.Available: If the buyer wants to try the product, the effort to find it will be successful (expressed as a percentage).Trial: Usually means a purchase or consumption of the product.Repeat: The product is bought at least once more, or (for durables) recommended to others.Figure 8.6

A-T-A-R Model Application10 million Number of owners of Walkman-like CD playersx 40% Percent awareness after one yearx 20% Percent of "aware" owners who will try productx 70% Percent availability at electronics retailersx 20% Percent of triers who will buy a second unitx $50 Price per unit minus trade margins and discounts ($100) minus unit cost at the intended volume ($50)= $5,600,000 Profits

Points to Note About A-T-A-R Model1. Each factor is subject to estimation. Estimates improve with each step in the development phase.2. Inadequate profit forecast can be improved by changing factors. If profit forecast is inadequate, look at each factor and see which can be improved, and at what cost.

Why Financial Analysis for New Products is DifficultTarget users dont know.If they know they might not tell us.Poor execution of market research.Market dynamics.Uncertainties about marketing support.Biased internal attitudes. Poor accounting.Rushing products to market.Basing forecasts on history.Technology revolutions.

Getting the Estimates for A-T-A-R Modelxx: Best source for that item.x: Some knowledge gained.

Figure 8.7

Item

Market Research

Concept Test

Product Use Test

Component Testing

Market Test

Market Units

XX

X

X

X

Awareness

X

X

X

X

Trial

XX

X

X

Availability

X

XX

Repeat

XX

X

Consumption

X

X

X

XX

Price/Unit

X

X

X

X

XX

Cost/Unit

X

XX

Forecasters Are Often RightIn 1967 they said we would have:Artificial organs in humans by 1982.Human organ transplants by 1987.Credit cards almost eliminating currency by 1986.Automation throughout industry including some managerial decision making by 1987.Landing on moon by 1970.Three of four Americans living in cities or towns by 1986.Expenditures for recreation and entertainment doubled by 1986.

FuturistsConsumer insightEthnographiesTrend reports

Forecasters Can Be Very WrongThey also said we would have:Permanent base on moon by 1987.Manned planetary landings by 1980.Most urbanites living in high-rises by 1986.Private cars barred from city cores by 1986.Primitive life forms created in laboratory by 1989.Full color 3D TV globally available.

Source: a 1967 forecast by The Futurist journal.Note: about two-thirds of the forecasts were correct!

Forecast: Generational ShiftsCivic(Millennials)(GI Generation)Adaptive(Silent)Correct ills of ReactiveEra of prosperity and strengthPervasive optimismUplifting patriotic sentimentFollow trends from CivicMore complacentHead down hard work and life enjoymentIdealist(Boomers)Change agents as tired of / rebel against status quo of AdaptiveEra of volatility (economic, political, social, etc.)Reactive (GenX)Left reacting to changes initiated by IdealistsOften era of economic downturnFeelings of negativity and disenfranchisement ubiquitous

Trends!

Handling Problems in Financial AnalysisImprove your existing new products process.Use the life cycle concept of financial analysis.Reduce dependence on poor forecasts.Forecast what you know.Approve situations, not numbers Commit to low-cost development and marketing.Be prepared to handle the risks.Dont use one standard format for financial analysis.Improve current financial forecasting methods.

Bass Model Forecast ofProduct DiffusionFigure 11.4

Hurdle Rates on Returns and Other MeasuresExplanation: the hurdles should reflect a products purpose,or assignment. Example: we might accept a very lowshare increase for an item that simply capitalized on ourexisting market position.

Hurdle Rate

Product

Strategic Role or Purpose

Sales

Return on Investment

Market Share Increase

A

Combat competitive entry

$3,000,000

10%

0 Points

B

Establish foothold in new market

$2,000,000

17%

15 Points

C

Capitalize on existing markets

$1,000,000

12%

1 Point