Forecasting & Market Analysis Techniques

As a small-business owner, you may eventually need a market analysis to plan the growth of your business. Financiers will require a market analysis to evaluate your financing requests. A market analysis describes the current and future market demand for your products or services. Forecasting quantifies the size and growth of that demand. As a producer or consumer of market analysis data, you need confidence in the assumptions and techniques used to create the data.

A market analysis is integral to business and strategic plans. Unlike a sales forecast, which uses similar techniques to predict a company's future sales, a market analysis is a macro view of market demand in its entirety. The core elements of a market analysis generally include a description of the total market in terms of its size and growth, a description and growth assessment of key market segments or target markets, and the reasons why they are important. Markets are usually segmented by geographic, demographic, psychographic, and purchasing or behavioral characteristics. A comprehensive market analysis for external financing also informs about market profitability, distribution channels, industry cost structure, and a prognosis of factors likely to facilitate and hinder success.

Often, forecast data is available from government and industry sources. These include local Chambers of Commerce, trade organizations, the Statistical Abstract of the United States, the Bureau of Labor Statistics, the Census Bureau, the Bureau of Economic Analysis, Surveys of Consumers, Econostats, and the Federal Reserve Bank. Frequently, the need to create a forecast from scratch is unavoidable. In these instances, you can contract with a market research service or use one of numerous forecasting techniques that have been developed and refined through the years. Forecasting techniques generally fall into two broad categories: qualitative and quantitative.

Qualitative techniques are judgment-based. They allow for prognosticating about changes in market demand based on human input. As such, human bias can creep into the forecasting process. One common qualitative technique is Intentions forecasting, a handy tool for new products forecasting where data is absent, in which people are asked about their intentions to buy under different scenarios. Expert Opinion forecasting involves asking people who presumably are experts about expected market behavior. The Jury of Executive Opinion makes use of rich data embodied in the collective experience and judgment of thoroughly vetted executives. The Delphi Technique is a variation of the jury technique. Here, a panel of executives is polled individually to reduce the chances of "groupthink."

Regression analysis, moving averages, exponential smoothing and trend projections are common quantitative techniques, which generally fall into one of three categories: extrapolation, econometric and environmental forecasting. Extrapolation forecasting, such as exponential smoothing, uses historical data to make extrapolations about future possibilities. Econometric forecasting assumes strong causal relationships between sales and known sales-driving variables. As variables change, sales change. Environmental forecasting assumes that environment factors such as the state of the economy, population changes, social trends, technology, and government legislation influence market demand.

Because quantitative techniques are data driven, they are susceptible to the "garbage in - garbage out" syndrome based upon data errors and assumptions. Hence, apply common sense and caution to guide the use of quantitative techniques.