Estimating Market Contributions

1
Estimating Market Contributions

• David Forlani
• University of Colorado at Denver and Health
  Sciences Center

2
How Much Will We Make?

• The answer to this question is a function of
• The size of the market in units.
• Our anticipated share of market.
• How much each unit will sell for.
• How much each unit will cost to produce.
• The marketing budget needed to generate the
  desired share.
• The items in bold are addressed in this
  presentation.

3
The Estimating Function Is

• Size of Market (Units) x Desired Share (Percent)
  x Gross Margin Per Unit Average Unit Selling
  Price (Dollars) Average Unit Cost (Dollars)
• Equals
• Contribution Before Marketing (CBM s)
• Less
• Marketing Expense (Dollars)
• Equals
• Contribution After Marketing (CAM s)

4
Forecasting Market Size The Anchoring and
Adjusting Method

• The anchor is the markets sales last year (if
  anomalous, take a 3 year average).
• The adjustment is the expected difference between
  last year and the coming year (e.g., from the
  Situation Analysis of your Marketing Plan),
  expressed as a percent increase or decrease.
• Multiply the anchor by (1 adjustment) to get
  the projected size of the market next year.
• E.g., 10M units t x (1 .10) 11M units t1.

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Forecasting Market Size in Well Defined Markets

• Draw a probability sample of adequate size from
  the target population.
• Get a valid assessment of the samples intention
  to buy a product of the type you are offering.
• Deflate the intention measure to get an estimate
  of the percent of the sample who will actually
  buy.
• Multiply this percentage by the size of the
  target population. This is the markets expected
  size.
• If the target population is the 2M registered
  vehicle owners in CO.
• You sample 1000 and find that 200 will spend 25
  to improve their vehicles gas mileage.
• The market then is (200/1,000)(2M), or 400,000.

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Forecasting Market Size in Poorly Defined Markets

• Find a related product-market of known size.
• Draw a large sample from this population.
• Collect classification data (demos and psychos)
  and an intention to buy (or switch) measure.
• Develop and apply a deflator to this measure, and
  identify the percent overlap in characteristics
  between this sample and the target market.
• Unit sales volume equals the product of
• size of the related market,
• percent of sample who will buy, and
• percent overlap in key characteristics between
  the related market and the target market.

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Estimating Marketing Costs Existing Products

• Required Marketing Budgett1
• Marketing Dollars Spent / Share Achieved
• x 1 Markets' Expected Growth Rate)t1
• x (Share Desired).
• Adjust for anticipated changes (inflation,
  competitor actions).
• Adjust for efficiency (ratio of your spending per
  share point versus key competitors or overall
  industry).

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Estimating Marketing Costs New Products

• Required Marketing Budgett1
• Marketing Dollars Spent in Total Market /
  Total
• Industry Sales in Units t
• x Your Projected Unit Salest1
• Adjust for anticipated changes (inflation,
  competitor actions).
• Adjust for efficiency (ratio of your spending per
  share point versus key competitors or overall
  industry), especially if your desired share is
  relatively small.

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New Product in a Poorly Defined Market
(Cell-phone Gadget)

• Size of Market (Units) x 20 (desired share) x
  SP 25 Cost 15 (gross margin)
• Equals
• Contribution Before Marketing (CBM s)
• Less
• Marketing Expense (Dollars)
• Equals
• Contribution After Marketing (CAM s)

10
Estimating Market Size for a Cell-phone Gadget

• Find a related market of known size.
• 10M users of applicable Nokia Kyocera cell
  phones.
• Draw a large sample from this population.
• Sample 850 users.
• Collect intention to buy data.
• 50 definitely would buy and 150 would buy the
  gadget.
• Apply a deflator to this measure.
• 80 of the definites and 30 of the woulds
  actually will buy 50.8 150.3 85
• Forecasted market size is
• 85/850 10 10M 1 M potential buyers of a
  gadget like the one you plan to offer.

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New Product in a Poorly Defined Market
(Cell-phone Gadget)

• 1 million potential units x 20 expected share x
  10 (gross margin per unit)
• Equals
• 2 M (CBM s)
• Less
• Marketing Expense (Dollars)
• Equals
• Contribution After Marketing (CAM s)

12
Estimating Marketing Expenses for a Cell-Phone
Gadget

• Required Marketing Budgett1
• Marketing Dollars Spent in Total Cell phone
  Gadget Market (6M) / Total Gadget Sales in
  Units (2M units) t
• x Your Projected Unit Sales (1M.2)
  200,000t1
• Any Adjustments?
• If not 6M/2M units 200,000 units 600,000.

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New Product in a Poorly Defined Market
(Cell-phone Gadget)

• 1 million units x 20 x SP 25 Cost 15
• Equals
• 2 M (CBM s)
• Less
• 600,000 Marketing Expense
• Equals
• Contribution After Marketing, or 1,400,000 (to
  cover fixed costs and profits).

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A Final Thought on Forecasting

• IF ALL FORECASTS ARE WRONG,
• Why Bother?