New Product Strategy

Sales Forecasting February 27, 2007

Estimating Sales Potential

Sales Potential Estimation

Often used to interpret concept test results

The Concept Statement

Sales Potential Estimation

Often used from concept test results

Assumes awareness and availability Translating Intent into sales potential:

Develop the norms carefully for a specific market and for specific launch practices Examples:

Services: 45% chance that the definitely would buys actually will buy; 15% for the probably wills Consumer Packaged Goods: 70-80% chance that the definites will buy; 33% chance for the probably wills

Sales Potential Estimation

Sales Potential Estimation

Translating Intent into Sales Potential

Example: Aerosol Hand Cleaner

After examining norms for comparable existing products, you determine that: 90% of the definites 40% of the probables 10% of the mights 0% of the probably nots and definitely nots will actually purchase the product

Apply those %age to Concept Test results:

Sales Potential Estimation

Translating Intent into Sales Potential

Apply those %age to Concept Test results:

90% of the definites (5% of sample) = .045 40% of the probables (36%) = .144 10% of the mights (33%) = .033 0% of the last 2 categories = .000

Sum them to determine the %age who would actually buy: .045+.144+.033= .22 Thus, 22% of sample population would buy
(remember: this % is conditioned on awareness & availability)

From Potential to Forecast

With 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) = .11 11% of the sample is likely to buy

Sales Forecasts

With Sales Potential Estimates A-T-A-R Models

Best used with incremental innovations Based on diffusion theory:

Awareness, Trial, Availability, Repeat

ATAR

An A-T-A-R Model of Innovation Diffusion

Profits = Units Sold x Profit Per Unit

Figure 8.5

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 unit

The A-T-A-R Model: Definitions

Figure 8.6

Buying 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.

A-T-A-R Model Application

10 million x 40% x 20% x 70% x 20% x $50 Number of owners of Walkman-like CD players Percent awareness after one year Percent of "aware" owners who will try product Percent availability at electronics retailers Percent of triers who will buy a second unit 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 Model

1. 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 Difficult

Target 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 Model

Item Market Units Awareness Trial Availability Repeat Consumption Price/Unit Cost/Unit Market Research XX Concept Test X X XX Product Use Test X X X XX X X Component Testing X X X X XX X XX XX XX

Figure 8.7

Market Test

X X X X X

X X

xx: Best source for that item. x: Some knowledge gained.

Forecasters Are Often Right

In 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.

Futurists

Consumer insight Ethnographies Trend reports

Forecasters Can Be Very Wrong

They 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 Shifts

Civic (Millennials) (GI Generation) Correct ills of Reactive Era of prosperity and strength Pervasive optimism Uplifting patriotic sentiment

Reactive (GenX) Left reacting to changes initiated by Idealists Often era of economic downturn Feelings of negativity and disenfranchisement ubiquitous

Idealist (Boomers) Change agents as tired of / rebel against status quo of Adaptive Era of volatility (economic, political, social, etc.)

Adaptive (Silent) Follow trends from Civic More complacent Head down hard work and life enjoyment

Trends!

Handling Problems in Financial Analysis

Improve 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 of Product Diffusion

Figure 11.4

Hurdle Rates on Returns and Other Measures

Product A B C Strategic Role or Purpose Combat competitive entry Establish foothold in new market Capitalize on existing markets Sales $3,000,000 $2,000,000 $1,000,000 Hurdle Rate Return on Investment 10% 17% 12% Market Share Increase 0 Points 15 Points 1 Point

Explanation: the hurdles should reflect a products purpose, or assignment. Example: we might accept a very low share increase for an item that simply capitalized on our existing market position.