Question

In the chain ratio method of estimating demand, a base number is multiplied by a chain of adjusting percentages. The upper limit of market demand is called market potential. The % market that willing and able to buy is available market under the current conditions.

ZIVAGO sells HDTV and a recent marketing research survey found the following information: Number of US households: 230,000
Access to HD Internet = 65% of the households.

Among the households with access to HD internet, 33% of households are willing and able to buy HDTV. Each household can buy one HDTV. Average price: $ 500

ZIVAGO wants to get 5% of the available market in the first year.

Use the chain ratio method to estimate (in units and $)

a. Potential market for HD TV

b. Available market and first-year sales forecast for ZIVAGO in units

Answer 1

a. In order to find out the potential market for HDTV in the US market, we use the concept of market sizing, which essentially refers to the process by which companies estimate the future potential of selling products in the market. Using chain ratio method, market size is equal to 230,000 * 65% * 33% = 49,335.

This shows that out of 230,000 US households, only 65% have access to HD internet and out of them only 33% of them demand buying HDTV with their ability and willingness. Since each household would buy only 1 HDTV and the average price is $500, the potential market for HDTV stands at 49,335 * 1 * 500 = $ 24,667,500.

b. Available market for ZIVAGO stands at 49,335 units, out of which it is forecasting to cater up to 5% in the first year of its operation. Hence, assuming that ZIVAGO would be able to attain the predicted customer base, its first year's sales forecast equals 49335 * 5% = 2466.75 units.