Another common judgmental technique used to forecast sales of start-up businesses is through population analysis. The methodology follows:
- Estimate a radial distance within which area customers would patronize the shop.
- Estimate the number of households within the defined distance likely to require the products or service. Through various methods such as market surveys, data available with the Chamber of Commerce and trade journals, etc.
- Estimating the annual amount customers would spend on the product or service.
- Multiplying the per capital household expenditure on the product annually with the number of potential customers in the area.
- Dividing the resultant figures with the number of shops selling the same products or services in the determined area.
The distance factor remains guesswork, and usually market analyzers do several estimates of this nature by varying the distance. The major drawback of this model is that it does not consider the possibility of competitors already entrenched in the area.
To illustrate, a start up travel agency selling holiday packages might define its geographical area as a particular city. To forecast sales, the travel agency requires the number of people or households in the city most likely to go on holidays, and the average per capita expenditure on holidays. Information such as volume and turnover of other travel agents in the city, statistics of flight and train movements from the city, and market surveys help obtain these figures.
Assuming 1,000 families from the city went on holidays in the previous year out of a population of one million and the present population of the city is 1.1 million, an estimated 1,100 families would partake in holiday travel in the estimated year. Assuming the presence of eleven travel agents in the city, the sales forecast for the travel agency in question would be 1,100/11 = 110. Assuming a per capita spending of $1,000 per family, the forecasted annual sales forecast for the travel agency is 110 x 1,000 = $110,000.