# 9. Estimating Market Demand

Overview

Estimating demand is a required task in almost all models. Here I show you one way of doing this for Zippy Airways, with some caveats attached.

Summary

1. Understanding Demand (00:04)

The first input to be calculated in our model is the demand for each flight. The demand is simply the number of tickets that the market wants to purchase for a particular flight.

If the number of tickets purchased is below capacity, then demand is equal to the number of tickets bought. However, for a fully booked flight, demand is higher than the number of bookings, as there are some people who wanted to buy a ticket, but were unable to do so. Therefore, for full flights we need to create a formula to estimate the demand for the flight.

2. Calculating the Conversion Rate (01:13)

Our data set tells us the number of people who searched for a price quote for each flight. We can use this to calculate the conversion rate, that is the percentage of people who searched for a particular flight and then purchased a ticket for that flight. We can calculate the conversion rate correctly for all flights that were not fully booked. We can then use this rate to estimate the demand for fully booked flights.

In our data set in Excel, we create a new column to calculate the conversion rate. We use an IF statement to identify flights that were not full, then calculate the conversion rate for those flights by dividing total bookings by total price quotes.

In our example, we find that the conversion rate is not constant across flights. This means we cannot assume a constant conversion rate when calculating demand. Instead, we take the average conversion rate as a representative value, and add the conversion rate to our control panel as a variable assumption.

3. Calculating Demand (04:22)

Once we have established the conversion rate, we can calculate the demand for each flight in the data set. We use an IF statement to test if the flight is full. If it’s not full, then demand is equal to the number of bookings completed. If it is full, demand equals the number of price quotes multiplied by the conversion rate.

Transcript

Contents

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03:06

03:56

02:29

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04:59

04:02

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05:56

05:33

04:13

03:23

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06:51

03:33

#### 18. Limitations of the Model

02:03

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