What Is a Market Forecast? 5

A market forecast is a core component of a market analysis. It projects the future numbers, characteristics, and trends in your target market. A standard analysis shows the projected number of potential customers divided into segments.

This example of a simple market forecast defines two target market segments and projects the potential customers in each of those segments by years, for five years.

Market size forecast
Market Size Forecast

In the market forecast, the example numbers indicate that there are 25,000 home offices included in the market, and that number is growing at an estimated ten percent per year. There are also 10,000 small businesses in the area, and that number is growing at five percent per year.

These numbers are estimates. Nobody really knows, but we all make educated guesses. The developers of the plan researched the market as well as they could and then estimated populations of target users in their area and the annual growth rates for each.

You can use your market forecast numbers to draw a chart of projected market growth, like the one shown here below. It offers a visual view of the market forecast.

Market Forecast Graph

Market value
Normally you would also look at market value, not just market size. For example, although the high-end home segment is 2.5 times larger than the small business segment as measured by number of customers, the small business customer spends almost four times as much as the home office customer. Therefore, the small business market is a more important market in terms of dollar value.

Market Segments

The important numbers in this table are the average purchase per customer and the market value.

  • Average purchase per customer is an educated guess based on experience. Sales managers got together to make the estimate. Although they would have liked some external source of information to use for this, there was none available. Notice that the home office customer tends to purchase much less overall than the small business customer.
  • The market value is simple mathematics. Multiply the number of potential customers in the market by the average purchase per customer. In this case they took the average number of customers in each segment over the five-year forecast period, and multiplied that by the average purchase per customer, to calculate the market value.

The other items in this table are subjective qualities that help with marketing. The planners assign these points to people charged with preparing marketing materials.

Reality checks
A market forecast should always be subject to a reality check. When you think you have a forecast, you need to find a way to check it for reality. In this case if the total market is worth some estimate, you could estimate sales of all the competitors and see if the two numbers relate to each other. In an international market, you might check production and import and export figures to see whether your estimates for annual shipments appear to be in the same general range as published figures. You might check with vendors who sold products to this market in some given year to see whether their results check with your forecast. You might look for macro-economic data to confirm the relative size of this market compared to other markets with similar characteristics.

Review target focus
The market analysis should lead to developing strategic market focus. That means selecting the key target markets. This is the critical foundation of strategy. We talk about it as segmentation and positioning.

Under normal circumstances, no company will attempt to address all the segments in a market. As you select target segments, think about the inherent market differences, keys to success, competitive advantage, and strengths and weaknesses of your company. You want to focus on the best market, but the best one is not necessarily the largest one or the one with the highest growth. It will be the one that matches your own company profile.

About the Author Tim Berry is the founder of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry. Follow Tim on Google+ Read more »

RATE THIS ARTICLE 1 Star2 Stars3 Stars4 Stars5 Stars
Loading ... Loading ...

How LivePlan makes your business more successful

LivePlan: Online Business Planning Software

If you're writing a business plan, you're in luck. Online business planning software makes it easier than ever before to put together a business plan for your business.

As you'll see in a moment, LivePlan is more than just business plan software, though. It's a knowledgable guide combined with a professional designer coupled with a financial wizard. It'll help you get over the three most common business hurdles with ease.

Let's take a look at those common hurdles, and see how producing a top-notch business plan sets your business up for success.

Click to continue
  • James E. Matteson

    I’m interested if you have experience using a CRM program to create and use a strategic marketing forecast with a marketing campaign.

  • http://www.themarketforecast.com Market Timer

    80/20 rule applies here too…many business want to expand their markets into the 80 percent that provide little revenue, when better marketing to the 20 percent usually provides bigger and faster results.

  • Librarian

    Is a “market forecast” the same as a “market forecast estimate”? I am a translator, trying to explain to my client when to use “forecast” and when to use “estimate” and the client brought up this article as an example (mostly to confuse me!).

  • http://www.bplans.com Doc. Mgr, Palo Alto Software

    Tim’s use of the word ‘forecast’ in this article is interchangable with ‘estimate.’ The dictionary definition of forecast is “to estimate or calculate in advance…” Another phrase Tim uses often is ‘educated guess. ‘

    If you want to distinguish between forecast and estimate, you may want to think of the forecast as the span of time:

    The numbers are estimated based on research into the total potential market and which portion of that market is chosen as the target to reach. The estimated numbers are then projected to grow at a determined percentage (educated guess). The combined estimated numbers for the total year becomes the forecast for that year.

    The joys of translation? ;) I hope this helps…

    • michael kusotera

      you must have included methods of focusting ie qualitative and quantitative