An independent flame-grilled chicken restaurant started up at a corner site in a suburb where a large chain closed down its outlet selling similar product. The owner of the business ran it well, gave good service and served a delicious product but closed within six months.
The problem was that the small business owner did not accurately estimate market demand in the suburb. Perhaps he should have been more cautious knowing that the large flame-grilled chicken group was exiting the retail space where he wanted to open an outlet. It seems that the small business owner pinned his hopes on attracting enough customers to his business to make it viable. Hope is not a strategy. The larger chain group new something about customer demand in the area that the ever-hopeful small business owner did not know.
Estimating customer demand can be a hit-and-miss affair. Yes, you can do so-called desk research by obtaining the number of households in the area where you want to trade, find out about average monthly purchases on a particular product or service and find out how many competitors are in the same neighbourhood.
But you could get hold of all these research numbers and calculate the total market demand (number of households x average values spent per month or year) x your estimated market share (depending on the number of competitors in the area) and end up with your estimated sales for your small business. This will give you a sales number but how accurate will it be? Can you rely on it? Would you invest money and other resources to chase after your estimated sales?
You may also want to do some direct primary research such as observation or surveys. For example, you could observe a retail store during the day and see how many customers frequent the store and find out their average purchase expenditure. Another way would be to run a survey among consumers in the suburb to find out their average monthly expenditure on whatever product or service you intend to sell. It doesn’t mean you have to do this survey research yourself. You can hire a market researcher to do it for you. Before you balk at the cost involved, think about how much you will lose if your market demand and sales forecasts are unrealistic or based on nothing but a vague idea or on hearsay from friends and family.
It’s important that you do some preplanning before you venture into a market. You need to know whether your the local market demand will be sufficient to sustain your business. Optimistic estimates of present or future demand can result in costly overcapacity or excess inventories but also premature business closure. If you underestimate demand, you may miss sales and profit opportunities by not taking advantage of the real demand that exists in your local market.