Measuring and Forecasting Demand

Muhammad Imran

Measuring Current Market Demand

Marketers will want to estimate three different aspects of current market demand

o Total market demando Area market demando Actual sales and market shares

Estimating Total market demand

Q = n x q x pWhere,

Q = total market demandn = number of buyers in the marketq = quantity purchased by an average

buyer per yearp = price of an average unit

Estimating Area Market Demand

Companies face the problem of selecting the best sales territories and allocating their marketing budget optimally among these territories.

Two major methods are availableo Market buildup method – used primarily by

business goods firmso Market-factor index method – used

primarily by consumer goods firms.

Market-Buildup Method

Calls for identifying all the potential buyers in each market and estimating their potential purchases.

Mining instruments that test the actual proportion of gold content in gold-bearing ores.

Price of instrument $1,000. The company wants to determine the market potential.

To estimate the market potential the manufacturer can consult the Standard Industrial Classification (SIC).

SIC (1)Number of employees

(2)Number of mines

(3)Potential

Number of instruments

per size class

(4)Unit

market potential

(2 x 3)

(5)Dollar market

potential (at $1,000

each)

1042(lode deposits)

Under 1010 to 50Over 50

805020

150

124

8010080

260 $260,000

1043(placer deposits)

Under 1010 to 50Over 50

40201070

123

404030

110 110,000$370,000

Market-Factor Index Method

Identifies market factors that correlate with market potential and combines them into weighted index.

A manufacturer of men’s dress shirts wishes to evaluate its sales performance relative to market potential in several major market areas.

Total national potential $2 billion per year.

The company current nationwide sales are $140 million, about 7% of the total potential market.

Its sales in New York are $1,100,000.

The buying power index (BPI) for a specific area is given by

BPI = .2 x percentage of national population in the area .5 x percentage of effective buying income in the area .3 x percentage of national retail sales in the area

New York should account for .5935 percent of the nation’s total potential demand for dress shirts.

Total potential equals $2 billion x .005935 = $11,870,000.

Company’s sales (NY) $1,100,000/$11,870,000 = 9.3 percent. Which is quite high than company national share i.e. 7 percent.

Common Sales Forecasting Techniques

Based On: Methods

What people say Surveys of buyers’ intentionsComposite sales force opinionsExpert opinion

What people do Test markets

What people have done Time-series analysisLeading indicatorsStatistical demand analysis

Survey of Buyers’ Intentions

One way to forecast what buyers will do is to ask them directly.

Surveys are especially valuable if the buyers have clearly formed intentions, will carry them out, and can describe them to interviewers.

Purchase probability scaleDo you intend to buy an automobile within the next six months?

0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1.0

No Slight Fair Good Strong For certainchance

Composite of Salesforce Opinions

The company typically asks its salespeople to estimate sales by product for their individual territories.

It then adds up the individual estimates to arrive at an overall sales forecast.

Salespeople are biased observers. They may understate demand so that the company will set a low sales quota.

After participating in the forecasting process, the salespeople may have greater confidence in their quotas and more incentive to achieve them.

Expert Opinion

Experts include dealers, distributors, suppliers, marketing consultants, and trade associations.

Dealer estimates are subject to the same strengths and weaknesses as salesforce estimates.

Delphi method – Experts may be asked to supply their estimates individually, with the company analyst combining them into single estimate.

Finally, they may supply individual estimates and assumptions that are reviewed by a company analyst, revised, and followed by further rounds of estimation.

Test Marketing

Where buyers do not plan their purchases carefully or where experts are not available or reliable, the company may want to conduct a direct test market.

A direct test market is especially useful in forecasting new-product sales or established product sales in a new distribution channel or territory.

Time-Series Analysis

Breaking down past sales into its trend, cycle, season, and erratic components, then combining these components to produce a sales forecast.

Trend is the long-term, underlying pattern of growth or decline in sales resulting from basic changes in population, capital formation, and technology.

Cycle captures the medium-term, wavelike movement of sales resulting from changes in general economic and competitive activity.

Season refers to a consistent pattern of sales movements within the year.

Erratic events include fads, strikes, snow storms, earthquakes, riots, fires, and other disturbances.

Leading Indicators

Many companies try to forecast their sales by finding one or more leading indicators – other time series that change in the same direction by in advance of company sales.

For example, a plumbing supply company might find that its sales lag behind the housing starts index by about four months.

The housing starts index would then be a useful leading indicator.

Statistical Demand Analysis

A set of statistical procedures used to discover the most important real factors affecting sales and their relative influence.

The most commonly analyzed factors are prices, income, population, and promotion.

Q = f(X1, X2, … ,Xn), where sales Q is dependent

Using multiple regression technique, various equation forms can be statistically fitted to the data in the search for the best predicting factors and equation.

Soft-drink company: Q = -145.5+6.46X1–2.37X2