Definition: In Substitution Method or a Replacement Method, the management first works on the sales forecast of the existing product, using any methods of forecasting and then uses this data to forecast the sales of a new product that will be launched as a substitute for the old product.
Simply, the method used to forecast the sales of a new product on the basis of the sales forecast of the old existing product in the market is called as the substitution method. This method is based on the premise that the new product often displaces the old product, or old use patterns and hence the buying patterns of the old product can be studied thoroughly to estimate the demand for its substitute product.
Under this method, first of all, the marketing team works on the sales forecast of the existing products and then on the basis of that prepares the list of products and markets that are open for the substitution by the new product. The estimated demand for the existing product can help in determining the maximum limit for the demand for the new product in the same category. However, it has been seen in many cases that the new product might not displace the old product totally and in all the categories of uses. This can be substantiated through an example given below:
Example: Nylon was very new to the Indian markets and the promoters of such product knew that they will be able to displace the old use patterns of cotton, rayon, jute and the like but were not certain about its precise quantity that will bring such a change. By doing so, it was realized that however, the nylon was not able to take up the 100% share in either of the segments, but was able to grab a reasonable market share in the textile and tyre industries.
One of the prime advantages of the substitution method is the companies who are planning to launch a new product can use this method to forecast the sales of a new product on the basis of the sales of the existing product in the same category.
However, this method does have loopholes, firstly, it is not necessary that the demand forecasted for a new product on the basis of an existing product stand true in the real situations. Secondly, it has been seen that the new product does not totally displace the old product and hence the planned market share could not be achieved. Finally, the method requires a lot of study of the existing market and the old product before a new product could be launched and hence requires a team of experts for this.