Some people like Steve Jobs were known for saying that they didn’t believe in market research because customers don’t know what they want. “Our job is to figure out what customers are going to want before they do”. Whether it is true or not, one reason why this has worked out well for Apple is that they have been excellent at copying and (immensely) improving things that had been invented by other people or companies, and focus on the end-user experience above all. Apple did not invent the graphical user interface, Xerox did. Apple did not invent the MP3 player. Nor did it invent the table PC.

Understanding customer needs, translating these into products and generating accurate forecasts of market demand are real challenges that keep legions of market researchers, marketing experts and consultants busy. Demand forecasting is a mixture of art and science. Substantial experience pays off, but a share of luck will always remain. It is also a wide topic, and unsurprisingly, there is a large divide between the theory, often complex and difficult to implement, and the level of simplicity required in business practice. The deeper you dig into the forecasting instruments available, the more sophisticated they become, while often adding only marginal improvement to the forecasting quality.

For example, forecasting revenue is – on paper – easy, whether you use a bottom-up or top-down approach:

  • Bottom-up
    • Revenues = (Customers) x (Frequency of purchase) x (Revenue per Unit) x (Market share)
  • Top-down
    • Revenues = (Total Market) x (Addressable share) x (Market share of addressable)

So the issue becomes: how many customers will there by? What’s our market share going to be? How much will customer be ready to pay? And also a question key to your business survival: will we have enough customers before we run out of cash?

To help structure your demand forecasting, you can ask yourself the following questions:

  • Is this an existing or a new market? If this is a new market i.e. if you don’t know whether there is a market at all, you have a big market risk!
    • If this is a new market: is it going to remain a niche or become mainstream?
    • How long will it take to become mainstream?
  • Are we in a vertical or horizontal market?
    • Vertical market examples:
      • Selling network planning software
      • Selling electromechanical parts to the automotive industry
      • Selling game software
    • Horizontal market examples:
      • Selling budgeting software (to company of all size and in all industries)
      • Selling Excel or Oracle databases
  • In which countries or regions are our customers?
    • Is there demand wordwide?
    • How can we scale our business in order to reach demand worldwide?