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Reliably estimating the business potential of a new product or service is a complex, multi-step process. First, the maximum potential volume for the product or service must be determined. This step provides a direct measure of the attractiveness of the idea and the opportunity it presents. Knowing the maximum potential volume permits you to evaluate a new idea relatively quickly and easily, before proceeding with more in-depth analysis. |
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In the second step, the limiting factors that determine the likely attainable sales volume must be considered and quantified. These limiting factors are the constraints that you would actually face when implementing the idea. This step takes into account your company's level of commitment and funding, the competitive environment, and distribution realities in the industry. These limiting factors help you determine what level of success to expect in pursuing this opportunity. |
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Maximum Potential Volume |
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The maximum volume potential of a new product or service is a function of three variables: Trial, Repeat, and Usage Rate. Each of these three variables can and should be measured directly. Multiplying each factor together allows marketers to determine the largest possible potential for a new idea. |
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Trial |
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In order to estimate maximum potential volume for a product, we assume that all potential buyers are aware of the brand name, the concept and the price. Thus, for this calculation, potential trial is defined simply as the purchase interest of people who are aware of the product. |
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Concept research must be conducted to give accurate and reliable measures of the maximum potential trial for a product or service. This concept research is designed to determine levels of interest in the benefits provided by the product or service. The measures obtained from a concept test should include, but not be limited to: |
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> Purchase Interest (Definite and Probable) |
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> Strength of Preference |
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> Reasons for Preference |
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> Dislikes/Concerns |
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> Relative Strength at Different Price Levels |
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> Relative Strength versus Other Concepts |
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> Credibility/Believability |
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> Uniqueness |
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Repeat |
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Repeat measures the portion of customers who try a product or service who become regular users. The way to do this is with a concept-and-use test that measures product or service satisfaction among people who like the concept. This measures the portion of triers who want to buy again after trying the product or service for the first time. Next, it is important to determine how many initial repeaters will become regular users. Ideally, each new iteration of repeat would be measured separately; in practice, this is prohibitively expensive. Thus, it is often best to model repeat purchase as a decay curve to predict an average sustained repeat rate. |
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The shape and slope of the repeat purchase pattern is determined by several factors. Of course, product satisfaction is the variable that most profoundly influences the rate of repeat purchase. In order to estimate repeat purchase, it is important to measure the following among triers: |
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> Product satisfaction |
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> Reasons for that satisfaction |
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> Perceived effectiveness of the product or service |
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> Strength of commitment to buy again |
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> What the product or service is being substituted for |
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Usage Rate |
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Finally, an average usage rate must be established, based on the probable frequency and size of purchase for the product or service. To calculate this usage rate, it is necessary to understand how the product is consumed. It is also important to explore factors which influence consumption levels. |
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Research must be conducted to determine when, how, and in what quantities the product or service is used. Extended home-use tests or test market tracking studies can provide specific information about usage rates. This research typically includes: |
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> Frequency of product usage |
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> Size of average purchase |
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> Rate of substitution |
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> Usage by region |
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> Usage by demographics |
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Likely Attainable Sales Volume |
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Once the maximum potential volume for a new product or service is established, the likely attainable sales volume can be calculated. Determining the likely attainable volume is the process of reducing the maximum potential volume to reflect the limiting factors of your particular business situation. The maximum potential volume is a theoretical number which assumes that everyone will be aware of the product and have access to it. In the real world, limited resources and competitive responses mean that such volumes cannot realistically be achieved. |
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Limiting Factors |
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There are a number of factors which influence the likely sales volume a product or service will achieve. The factors which must be considered will depend on your specific product and selling situation. However, these limiting factors can generally be grouped into three major categories: Awareness, Availability, and Competitive Environment. |
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Awareness |
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It is important to calculate the level of awareness of your promise. Who is aware of your product and promise, and how do they compare to the total sample from your concept-and-use test? Awareness is a function of the strength of the brand name and the benefits associated with your product or service. The persuasiveness of your sales message can be a limiting factor. The absolute and relative size of your media budget has a direct impact on awareness. Trade support, including features, ads and promotions, can also influence awareness. In business to business situations, the coverage and effectiveness of your sales force often limits customer awareness of your promise. |
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Availability |
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The second major factor affecting the likely attainable sales volume is availability. Is your product or service readily available to those who seek it? Availability is a function of the number of locations that offer your product or service, the convenience of these locations, and the prominence of your offering at the point of sale. In addition, the willingness of retailers to recommend your product can have a big impact on availability. |
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Competitive Environment |
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The competitive environment is the final category of limiting factors. The absolute size of competitive media and marketing budgets within your category must be considered, and compared with the marketing resources available for your product or service. In addition, the likely competitive response must be considered. What actions might be taken by competitors in the areas of pricing, advertising and/or promotion in response to your offering, and what resources will they allocate to protect/build their market share? |
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How to Apply Limiting Factors |
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A numeric value is assigned to each limiting factor that represents the attainable portion of potential volume that can be captured. Then, each factor must be multiplied together to yield a composite limiting factor. This composite factor represents the portion of the maximum potential volume which can be attained given the constraints of the selling situation. |
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For example, assume that: |
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70% of the market is aware of your product. Since only those who are aware of your product will buy it, the potential volume is reduced to 70% of the maximum. |
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100% (maximum potential volume) × 70% (awareness) =70% |
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Your product is only available to 80% of the people who are aware of its promise. Thus, only 80% of the people who are aware of your product will be able to buy it, bringing the likely attainable volume down to 56% of the maximum potential volume. |
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70% (awareness) × 80% (availability) = 56% |
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Competitive response is likely to cost you 10% of the volume you might otherwise expect. Thus, only 90% of the people who are aware of your product, and have access to it, will choose your product over competitors'. This will result in a likely attainable volume of 50% of the maximum potential volume. |
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56% (awareness/avalability) × 90% (effect of competition) = 50% |
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In this example the likely attainable volume is half the maximum potential volume. While this is significantly smaller than the maximum potential volume, it is a realistic sales target based on a marketing plan that achieves 70% awareness and 80% effective distribution. Once this volume has been calculated, a judgement must be made as to whether the expected volume is sufficient to pursue as a business opportunity. The basis for this decision is the marketing plan. |
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All material copyright © 1995-2010 by Urban Wallace Associates. |