As a product manager in any industry the method of how to estimate market demand for a product will be one of the critical skills to develop. Here are some tips on how to go about this…
From the ‘market based’ business perspective, a key question to consider is: ‘how many customers are interested in our product’. This is different to the traditional product based approach which is concerned only with product volume.
With the market based approach you will start with the maximum number of customers. For example let’s say you are selling Security Services into the business market and you are trying to work out your market demand for the next year.
- At the highest level your market is defined as all businesses (say 100,000 companies)
- At the next layer you may identify that some businesses are locked into contracts with other suppliers which are more than 12 months away from ending (this may reduce your number of customers to 30,000)
- At the next layer, from the remaining 30,000 customers for example, you may realise 10,000 are only interested in Web Applications Security (which is service you can not offer for example). This will then finally reduce your potential market to 20,000 businesses
While the above steps are illustrative, they are representative of the process you will undertake to identify market demand from the TOP DOWN perspective.
To further understand the demand you also need to identify and manage five market forces that impact and limit the market potential:
- Awareness (eg. this factor needs to also include comprehension of benefits in addition to product awareness)
- Availability (eg. product availablility in a geographical market)
- Ability to Use (knowledge & resources to make the product workable)
- Benefit Deficiency (certain benefits are not relevant to a subset of customers)
- Affordability (eg. product is just too expensive for some users)
Another factor to consider, which is very relevant to product planning and forecasting is market growth. This is a factor of growth of the whole market which you would usually source from market research companies.
When you get the whole of market growth statistics, you can compare those to your own business growth. For example you may find that the market is growing at 10% p/a while your business is growing at 5%. In this case, it’s clear you are losing market share to your competitors.
Another variation in demand estimation is what we call BOTTOM UP review. To estimate potential market demand for new products from the bottom up perspective, certain assumptions will need to be drawn, along with sound calculations, rationale and estimates.
The first question to be asked is who will be the first 5, 50, 500, 5000 customers. Good marketers and business planners understand their markets and customers at an intimate level, and test products before launching at a wholesale or mass production level. Determining market demand should be a precise as possible at each level. Good business planning involves specifically naming the first 5 customers that will adopt the new product and the reasons for doing so.
From there, the next 45 customers for example can be determined by good market analysis of customer industry types and consultation with your sales teams. The next 450 customers can be determined through market segmentation, with the final 4500 customers extrapolated from assessed market demand.
Once you have this view, we suggest you compare this bottom-up view with the earlier top-down analysis to ensure some level of alignment exists.
Also worth adding is that every market will have a floor and a ceiling. Knowing each of these is paramount, as this will assist in determining the economic feasibility of a new product. For this to be understood, we must be aware of all the parameters of market demand. The parameters are as follows:
- Total defined potential customer volume
- Geographical limitations
- Total time of product consumption
Total market demand is not a fixed number, but rather a function of the stated conditions. This function will depend on various factors including environmental, economical and other market forces.
From here, company demand can be defined. Company demand is the company’s estimated share of market demand at alternative levels of company marketing effort in a given time period.