HOW TO FORECAST NEW PRODUCT/SERVICE DEMAND
One of the most difficult tasks facing the entrepreneur is forecasting the demand for new product or service, particularly if that product or service has never existed previously in the marketplace. Much of this difficulty is due to the lack of historical data and to issues of seasonality and price discounts. Because entrepreneurs often overestimate the level of sales they will achieve in the early stages of the company, it is important to triangulate demand from three different points of view: historical analogy, prospective end-users and intermediaries, and the entrepreneur’s own perspective, gleaned from going into limited production or doing a formal test market.
A number of different techniques can help entrepreneurs arrive at a realistic forecast of demand.
Use a Historical Analogy or Substitute Products
If the new product is an extension of a previously existing product, it may be possible to extrapolate from the product’s adoption rate and demand to the new product. In other cases, it may be possible to turn to another product in the same industry for an indication of demand potential and the rate at which customers will purchase, assuming that the target markets are the same.
Interview Prospective End-Users and Intermediaries
No one knows the market better than the men and women who work in it every day. They are typically very astute at predicting trends and patterns of buyer behavior. Spending time in the field talking to with customers, intermediaries (distributors, or wholesalers, sometimes referred to as “middlemen”), retailers, and the like can provide a fairly good estimate of demand.
Go Into Limited Production
Sometimes the only way to test the reaction of potential customers is to produce a small amount of products and put them in the hands of people to test. This is also an appropriate next step if the first two techniques have produced positive results. Not only will limited testing of the product gauge customer satisfaction, it may also suggest possible modifications to improve the product. These samples of the product are called prototypes. Prototypes are generally associated with product companies, but service businesses must also develop a prototype of the operation or procedures involved in delivering the service.
Prototyping permits the testing of a product or service in the actual environment in which it will be used. It is difficult to conduct meaningful market research without a working prototype, because most potential customers need to see and use the actual product before they can become enthusiastic about it. Construction of a prototype will also facilitate estimating the costs to produce the product for distribution later on.
Do a Formal Test Market
When a product is fairly complex and expensive to produce, a formal test market in a selected geographic area can provide valuable information about demand for and acceptance of the product before substantial capital is spent for a major product roll-out. The movie industry regularly introduces new movies with a “limited release” in a few strategic theatres. In this way, film companies can gauge audiences’ reaction and make changes based on them before releasing the film nationwide. Major product companies such as Procter and Gamble often put a new product into certain geographic test markets such as Denver, Colorado, to get feedback from customers. Many a new product has met early death as a result of these test market studies.
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