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Practical Steps to Forecasting Your Market Share

Depending on the industry, forecasting the total market for a particular product may be as easy as obtaining the market potential from externally syndicated sources. And it may be complex to the point of estimating the market by extrapolation based on your own point-of-sale data

We can forecast our retail sales independently and derive the market share as a ratio of our own retail sales forecast over the forecasted market potential. This is the base case share forecast. For example, if we observe the share to be 25% over the last few years, we can assume a stable forecast of 25% for the next year

We can then come up with an objective or a target market share estimate based on the promotional plans and budgets. If we estimate additional advertising investment can produce a 3% gain in share, our forecast will be a 28% share

When the total market potential is increasing, our retail sales forecast may be growing even with constant market shares.

Market share forecasts are important in order to understand the return on investment of advertising dollars and the budget needed to retain versus grow market share. But truly, market share forecasts tell us the long-term demand for our products. They are early warnings of what and how much to produce and distribute to be successful in the marketplace.

In practice, large CPG companies use share forecasts to guide their demand planning and supply chain operations. This gives them a competitive advantage in running a lean operation, controlling inventories, and maximizing customer service.

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How can you retain or increase your market share?

The Marketing Plan is an outline of your strategy to increase your market share. It may cover a number of marketing and brand building techniques as well as the budget dollars allocated to each activity. Generally, the following tools are used to retain/gain market share:

Advertising and Sales programs to increase unit share while keeping prices constant

Building Brand Value to move to the high-end segment of the market. This will result in higher selling prices without hurting unit sales. (In our example, you may be able to sell the same basic seat for $45 because consumers are willing to pay a premium price for your brand)

Sales Promotions through discounts and coupons will increase unit share but may compromise the dollar share

Aggressive Price cutting may also be used as a strategy to capture a higher market share from your competitors

The last and perhaps the most often used strategy in the Consumer Packaged Goods sector is to capture market share through new product introductions

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Estimating the Total Market

If you are a baby seat manufacturer, you need to understand the total market potential of infant car seats in both units and dollars. In this case, the entire population of infants is your market. If two million babies are expected in a year, the market for infant seats is 2m units. However, some of the households may be two car households and decide to buy two seats. If 50% of the households buy two seats, then the market is really 3m units.

Now what is the market potential for infant car seats in dollars? It depends on the price segments of car seats. There may be different types of car seats with different features commanding varying prices. Let us assume that there are two kinds of seats one being a simple no-frills car seat and the other a fancier seat with additional features like a cup holder, sun shade, diaper holder, etc. Different consumer segments may demand these car seats at different price ranges.

We can apply several market analysis techniques to understand price points and calculate the average price of these two market segments. Let us say our studies show the average prices to be $40 for the basic seat and $50 for the fancy seat.

The total market potential in dollars is the sum of the basic seat segment and the fancy seat segment. Suppose the basic seat segment is 2m units. At a price of $40, this potential is $80m. The fancy seat has 1m units at a price of $50 and a market potential of $50m. The total dollar market potential is then $130m.

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Market Planning vs. a Marketing Plan

Market Planning is the process of sizing up your market and calculating your share versus your competitors. A Marketing Plan is the tool used to increase your share of the market through marketing activities such as advertising, branding, and promotions.

A key component of Market Planning is market share forecasting. In the manufacturer to retailer to consumer model, what matters most is the shelf take-away or sales at retail. Marketing Strategies aim to maximize shelf consumption (and usage) and thus increase your share of that consumption.

The first step is calculating the total market potential for your products. The second step is to estimate your retail sales and derive your share of the total market. The third step is to forecast your base case market share as well as target market share given your advertising budget and your marketing plan. Let us use the case of an infant car seat manufacturer to illustrate this process.

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Planning is a critical function in any business. Banks need a business plan outlining your plan for profitability before lending capital. 

So do venture capitalists when they seed new start-ups. Business planning is not just a one-off process; it needs to be done annually.

The business plan derives from a market plan, an understanding of the market you are in and your position in that market. The profitability and the feasibility of your business largely depend on the following things:

The size of the market and its rate of growth

Your share of the market

The effectiveness of your marketing plan to keep or grow your share

The efficiency of operations to generate a healthy margin on your sales.

Market Planning vs. Marketing Plan

Market Planning is the process of sizing up your market and calculating your share versus your competitors. A Marketing Plan is the tool used to increase your share of the market through marketing activities such as advertising, branding, and promotions.

A key component of Market Planning is market share forecasting. In the manufacturer to retailer to consumer model, what matters most is the shelf take-away or sales at retail. Marketing Strategies aim to maximize shelf consumption (and usage) and thus increase your share of that consumption.

The first step is calculating the total market potential for your products. The second step is to estimate your retail sales and derive your share of the total market. The third step is to forecast your base case market share as well as target market share given your advertising budget and your marketing plan. Let us use the case of an infant car seat manufacturer to illustrate this process.

Estimating the Total Market

If you are a baby seat manufacturer, you need to understand the total market potential of infant car seats in both units and dollars. In this case, the entire population of infants is your market. If two million babies are expected in a year, the market for infant seats is 2m units. However, some of the households may be two car households and decide to buy two seats. If 50% of the households buy two seats, then the market is really 3m units.

Now what is the market potential for infant car seats in dollars? It depends on the price segments of car seats. There may be different types of car seats with different features commanding varying prices. Let us assume that there are two kinds of seats one being a simple no-frills car seat and the other a fancier seat with additional features like a cup holder, sun shade, diaper holder, etc. Different consumer segments may demand these car seats at different price ranges.

We can apply several market analysis techniques to understand price points and calculate the average price of these two market segments. Let us say our studies show the average prices to be $40 for the basic seat and $50 for the fancy seat.

The total market potential in dollars is the sum of the basic seat segment and the fancy seat segment. Suppose the basic seat segment is 2m units. At a price of $40, this potential is $80m. The fancy seat has 1m units at a price of $50 and a market potential of $50m. The total dollar market potential is then $130m.

Estimating Market Share

In simple terms, your market share equals total retail take-away of your products divided by the total market potential. This is just a calculation of your share of the total retail sales.

Your total retail sales depend on which segment you participate in and who the other players are in that segment. Retaining and growing your share depends on a number of marketing factors including product differentiation, advertising, brand value, etc. The size and the marketing budget of your competitors also are key determinants of your market share.

In the infant car seat manufacturer example, let us say, you compete in the basic seat segment of the market. If you own 50% of the basic seat market, which is 2m units, then your total annual retail sales is 1m units compared to a total market of 3m units. Your share of the infant car seat market is then 33.3%.

We can calculate the dollar share using the following steps:

Your retail dollars equal your retail unit sales x your average price. In this case your dollar retail sales is given by (1m units x $40) which gives $40m

The total dollar market potential is $130m (calculated above)

Your dollar market share is then $40m over $130m which is 31%

Although your unit share is 33.3%, the dollar share is 31% because you play in the low-price segment of the market.

How can you retain or increase your market share?

The Marketing Plan is an outline of your strategy to increase your market share. It may cover a number of marketing and brand building techniques as well as the budget dollars allocated to each activity. Generally, the following tools are used to retain/gain market share:

Advertising and Sales programs to increase unit share while keeping prices constant

Building Brand Value to move to the high-end segment of the market. This will result in higher selling prices without hurting unit sales. (In our example, you may be able to sell the same basic seat for $45 because consumers are willing to pay a premium price for your brand)

Sales Promotions through discounts and coupons will increase unit share but may compromise the dollar share

Aggressive Price cutting may also be used as a strategy to capture a higher market share from your competitors

The last and perhaps the most often used strategy in the Consumer Packaged Goods sector is to capture market share through new product introductions

Practical Steps to Forecasting Your Market Share

Depending on the industry, forecasting the total market for a particular product may be as easy as obtaining the market potential from externally syndicated sources. And it may be complex to the point of estimating the market by extrapolation based on your own point-of-sale data

We can forecast our retail sales independently and derive the market share as a ratio of our own retail sales forecast over the forecasted market potential. This is the base case share forecast. For example, if we observe the share to be 25% over the last few years, we can assume a stable forecast of 25% for the next year

We can then come up with an objective or a target market share estimate based on the promotional plans and budgets. If we estimate additional advertising investment can produce a 3% gain in share, our forecast will be a 28% share

When the total market potential is increasing, our retail sales forecast may be growing even with constant market shares.

Market share forecasts are important in order to understand the return on investment of advertising dollars and the budget needed to retain versus grow market share. But truly, market share forecasts tell us the long-term demand for our products. They are early warnings of what and how much to produce and distribute to be successful in the marketplace.

[demandplanning-forecasting-techn]

Market Share Forecasting involves forecasting the total market and your own consumption, and estimating the share of the market. In the retailer to consumer model, what matters most is the shelf take-away.

Marketing Strategies aim to maximize shelf consumption (and usage) and increasing own share of that consumption.

Depending on the industry, forecasting the total market for a particular product may be as easy as obtaining it from the external sources to estimating and validating market estimates through a series of forecasts involving syndicated data and POS data.

Determining Market Share

Share estimates of the total market can be done as an objective or a target market share estimate based on the promotional plans and budgets committed to achieving that share.

 The other option is to forecast consumption independently and derive the share through two different estimations, namely the market and the consumption.

For a detailed discussion on POS data and coverage factors, please click here

Read More about Share Analysis.

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Causal Modeling is the use of independent explanatory variables to predict your demand. Software packages also refer to this as econometric modeling or advanced modeling or structural models. Most forecasting and demand planning software rely on simple time series models that leverage past demand observations to forecast future demand. This is a time-tested proven method.

However, there may be external factors that drive the demand in a systematic fashion. If your business experience indicates that there are indeed factors that drive demand, then you need to explore the data availability and predictability of these external factors.

The most common mistake is to look for a very obvious external variable that explains your business demand and potential such as the GDP, interest rates, or even the price of oil. Although the historical data for these entities are easily available, it is impossible to forecast them. You can obtain external expert forecasts but then you are complicating a simple forecast problem and perhaps making it less forecastable.

The best situations to use causal modeling can be some of the following:

You expect the average price of your product to go up in Q2 and Q4 of next year. Although you made a forecast about price, it is still a policy variable and under control. Perhaps very accurately forecastable.

The company always promotes the products at the end of the quarter. To understand structural modeling or multiple regressions and Discrete variable modeling, the following sources will be helpful

Discrete Variable Regression Models

An interesting theoretical approach to Linear Regression Models

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The basic ingredient of any demand plan is a statistical forecast. Statistical models and resulting forecasts are the building blocks of the planning process.

Although consensus and collaboration are key ingredients of a successful demand management program, statistical forecasting is the first step to creating the baseline plan. To this end, a good processes and software technologies become important. One of the key things you look for when you prepare a Request for Proposal (RFP) is to ensure that you cover all of the modeling algorithms and techniques which are relevant to your process. This depends on your industry and your specific business model.

Forecasting techniques can be broadly classified as:

Time Series Forecasting models consisting of exponential smoothing, Holt-Winters Multiplicative Smoothing, ARIMA models and Box-Jenkins Models, Logarithmic regression models

Promotional Planning Models that typically use event modeling methodologies and indicator variable models

Causal models that include a variety of Multiple Linear Regression Models and transfer function models

Probabilistic Models that often forecast the probability of a particular event happening in the future and these include Logit, Probit, and Tobit, models

Croston's Models to forecast intermittent demand. Here is a link to a semi-technical explanation of Croston's Method.