Performing an underestimation of demand levels can also be disastrous for your company. When you introduce a new product into the market, you have to market it in order to generate demand for the product. In case you are incapable of delivering just the right amount of product as demanded by the market, then your market share is in danger of being snatched away from you by your competitors. If your competitors’ products can match or exceed yours in quality, then you might never be able to recover your market share.
Your marketing department has to do a lot more than simply generate sales forecasts. Their forecasts have to be a little more elaborate because there will be many factors that will determine how much your company will be able to sell. These factors, such the reaction of your competitors, the cost of the products, and others should be considered to determine how much you are likely to sell. As the factors change over time, you will also have to change your forecasts. A sales forecast is therefore really a special forecast that is the composite of a variety of estimates and it has to be dynamic enough to change.
Usually, the first step to take is to determine something called market potential. This is an estimate of the total sales expected across the industry for a given product category within a certain time frame. It could be a month, a quarter, a year, and so on. The key idea here is the market potential is an estimate of what the market can take in total, from all the companies within it, so it includes both you and your competitors.
Once you have a good idea of what the market potential is, you can estimate the sales potential. This is an estimate of the maximum revenue you are likely to generate from the sale of a product. Alternatively, you can estimate it as the maximum number of units of the product that your company can hope to sell in a given market over a given time period. The sales potential is typically represented in percentage terms, where it is a percentage of the market potential. It is also the same as the estimate of the markets total market share in a given time period. Any method that forecasts sales potential is therefore also a market share forecasting method.