By Dr. Bruce Isaacson, Senior Managing Director of Litigation Surveys & Consumer Science at IMS Legal Strategies
New markets and new products, or services provide the engine of growth for many companies. Faced with sluggish demand in existing markets, the need for continued innovation, and investors who require ongoing growth, companies find themselves entering new markets, taking on new products in new markets, and developing very new and different products for existing customers.
When considering a new category or a potential product, one of the most important tasks is estimating the size of the category or projecting possible buyer interest for the new product. The problem is that many managers are unsure how to size a new product or marketing opportunity. Some rely on their intuition, while others push forward R&D-driven projects without a clear projection of customer acceptance or potential revenues. Both methods can succeed at times, but they miss the opportunity to gather feedback directly from the marketplace early in a project’s progress and to use it to focus resources where they matter most.
You may have heard the cliché that consumers could never have predicted demand for radical innovations, such as the microwave oven or the iPod. This advice oversimplifies the true picture, which is that nearly all projects entering new markets or developing new products can benefit from a series of powerful tools to forecast demand and market share. This article describes some of those tools and explains how to estimate the potential of a new category or product, even when there is no historical precedent.
How to Classify New Markets and New Products
To begin, it is important to understand how products and markets interact. Although this may seem theoretical, the background is useful because the difficulty of estimating demand for a new market or a new product depends on the type of new product and the market in which it is introduced.
Figure 1: The Relationship Between New Products and Markets
As shown by Figure 1 above, new products can be classified into two categories. Incrementally new products are improvements on existing products, such as a new flavor of ice cream, an updated car model, or the next generation of an antivirus software program. By contrast, radically new products are entirely different from what exists, such as a new category of food, a completely new type of car, or a new type of software program. Estimating demand for radically new products is more difficult because there is no historical data to rely on, unlike with incrementally new products, where past performance can provide guidance.
Markets can also be classified. Figure 1 organizes markets into those that a company currently serves versus those that are new to the company. When a company already serves a particular market, the company typically has pre-existing information about who customers are, their buying behaviors, and their preferences.
The two axes of the matrix in Figure 1 provide four quadrants. The easiest demand estimation task is Quadrant 1, where the company knows the market and has a history of product introductions. The most difficult is Quadrant 4, where both the product and the market are entirely new. Quadrant 2 and Quadrant 3 fall somewhere in between.
Predicting Demand for a Very New Product
This section addresses the task of predicting demand for a product that is entirely new. We begin with an example in which historical data is available, which corresponds to Quadrant 1 in Figure 1.
Using History to Predict Demand for a New Product
The easiest situation for predicting demand occurs when we have a history of introductions with similar products. Prior history can provide standards that researchers call “norms,” which can be used to estimate the potential size of a new product.
For example, imagine testing a new flavor of ice cream. If previous flavors have been introduced and tested, those results can serve as benchmarks. Because we know how earlier flavors performed in tests, and we know how those flavors went on to perform in the marketplace, we can use those scores to predict volume. If the new flavor performs similarly to flavors that were moderate successes, we can reasonably expect a similar outcome.
This approach works well when, as with our ice cream example, companies have a history of product testing and marketplace experience. What happens when there is no history because there were no similar products introduced, or the market is entirely new? In these cases, we create our own benchmarks. “Internal benchmarks” compare the new product against existing products or services offered by the same company. “External benchmarks” compare the new products or services to those offered by other companies in the new market.
Developing Benchmarks to Estimate Demand for a New Product
The best way to predict demand for a very new product or service is to develop benchmarks. The following example, drawn from a travel industry client project, illustrates how benchmarks work.
Our client, a cruise line operator, wanted to establish a new type of service. They had never operated this type of service before and were uncertain about how many ships they could fill. The investment in ships involves hundreds of millions of dollars, so determining how many ships to operate in the new market, or whether to operate at all, was a critical question.
To address this challenge, our marketing research experts developed projections for demand using two sets of benchmarks: internal benchmarks based on the client’s existing cruises in other markets, and external benchmarks based on cruises operated by competitors.
To create each benchmark, we conducted a survey where consumers reviewed a description of the new cruise. Respondents were asked how likely they would be to go on the cruise, the size of the party that would accompany them, and their expectations about key attributes such as on-board entertainment and food. We then applied two methods, described below.
Figure 2: Two Benchmarks to Estimate Demand
Estimating Demand by Comparing Proposal with Existing Products
As shown in Figure 2, internal benchmarks estimate demand by comparing the new cruise with our client’s existing services. Respondents to the survey that provided the data for this model saw either a brochure for our client’s existing cruise or the new cruise under consideration. Respondents were asked to evaluate the service they saw by indicating their purchase interest, which measured how likely they would be to book that cruise.
We developed a calibration ratio to account for the difference between stated intent and actual behavior, as a larger percentage of people say they will go on the cruise than actually do so. The calibration ratio was based on a comparison with the client’s existing services. Using purchase interest scores for the new service and the calibration ratio, we predicted demand for the new cruise.
Figure 3 shows a disguised version of the calculations. The calculations start with the total market size (the number of households that would consider this type of cruise) and then apply purchase interest and the calibration factor to predict demand for the new service.
Figure 3: Calculations for Internal Model, Based on Comparisons with Our Client’s Existing Service
Estimating Demand by Comparing with Competitors
A second model used external benchmarks by comparing the new cruise with competitive brands already operating in the market. The survey for this model presented materials similar to the survey to develop the internal benchmarks, except that respondents evaluated two types of cruises: competitive brands already operating in the new market, and our client’s proposed cruise.
As shown in Figure 3, calculations for the external benchmarks followed a slightly different process. We calculated a calibration factor by comparing purchase intent for the competitor’s cruises with actual demand for the competitor’s cruises. We then applied this calibration factor to purchase interest scores for our client’s new cruise. Figure 4 shows a simplified version of the calculations.
Figure 4: Calculations for External Model, Based on Comparisons with Competitive Services
Other Benefits of Using Benchmarks to Estimate Demand for a New Product
This method for using internal or external benchmarks to estimate demand for a new product not only provides an estimate of demand but delivers a range of diagnostics that can be used to fine-tune the new product. In the survey, we can also gather feedback about issues such as whether consumers view the client’s brand as credible in the new market and provide insights into anticipated purchase behaviors and processes.
In short, internal and external benchmarks provide a practical way to estimate demand and supply feedback to improve a product’s chance of success.
Sizing a New Market
In some cases, the goal is not just estimating demand for a specific new product, but to determine the potential demand or size of an entire market. This situation often arises when a company is considering offering multiple products to that new market. In these cases, the benchmark method described previously is not practical.
Instead, market sizing in this situation relies on two types of data: syndicated data and survey data. Both approaches are described below.
Sizing a New Market Using Syndicated Data
Figure 5 shows an example of the output that results when sizing a market with syndicated data. The example is based on an actual project for a client that produced a specific category of frozen food sold to both retail consumers and foodservice operators.
To estimate this model, we gathered data from a variety of sources, including syndicated data reports, government studies, and the judgment of the client’s sales force. Our experts triangulated these data sources to analyze the market across a series of segments, such as fresh versus frozen, retail versus foodservice, and raw versus cooked.
Figure 5: Sizing a Market with Syndicated Data, From the Frozen Foods Project
After calculating the total size of the US market, we worked through a series of data sources and estimates to calculate the size of each part of the market. The project also included price and profitability estimates to understand the market by volume (pounds), revenues, and profits, as well as estimates for different marketing channels. The client used this information to identify the best opportunities for growth in the near term.
Sizing a New Market Using Survey Data
A new market can also be sized using survey data. Figure 6 provides an example from a client project that estimated potential demand for a household appliance used in a relatively small percentage of US households. The figure shows that only 3% of households currently have this appliance.
Note: Numbers and calculations have been modified and simplified.
Figure 6: Sizing a Market Using Consumer Survey Data, From the Appliance Project
To size the market, we used consumer survey data to estimate key components of the market, including:
- The percentage of households that have this appliance
- The market share of major brands in the market
- The percentage of respondents who may not own the appliance but qualify as prospects
- The percentage of prospects who have high versus moderately high purchase intent
The figure shows how a model based on survey data can estimate the percentage and number of households that would potentially be in the market for this appliance. The actual model also provided estimates in units and dollars. In addition, the survey delivered several other important diagnostics, such as the attributes consumers most desired in this appliance, as well as purchase and usage behaviors.
Key Takeaways for Estimating Market Potential
Regardless of your project goals or the method you use, keep these best practices in mind:
- Customize the estimation: Tailor your estimation method to the specific goals of the project and the data available. Every estimate depends on situation-specific factors such as products, consumers, distribution channels, and others.
- Dig deeply into the data: The source and interpretation of data can make a big difference in the estimates. To ensure accuracy, review how figures were gathered and what they measure.
- Collaborate across functions: Your estimates are only as good as the data and expertise behind them. Seek out managers with experience who can help ensure that your methods are sound. If the head of sales, customer service, or engineering thinks your estimates are way off, find out why.
- Plan before gathering data: Build your model in a blank format before you gather any data. This ensures that you will collect the data you need to complete the model. Adjustments may be necessary, but starting the process with a solid initial plan is essential.
- Iterate until you get it right: Plan on many iterations of building your model, getting feedback, and improvement. Estimating the potential of a new product or new market usually takes more than one attempt to get it right.
About the IMS Consumer Science Team
IMS Legal Strategies is a full-service consulting firm with a specialized advisory team dedicated to market research and strategic analysis. Our expert advisors help clients grow by leveraging customer insight to develop effective marketing and sales strategies. To support critical business decisions, we combine the data-gathering capabilities of a research firm with the analytical expertise of a strategic consultancy.
Whether your business is expanding, refining, or rethinking its approach, IMS provides the consumer intelligence needed to design successful marketing strategies. Please contact us for more information.
