Market Demand Estimation

The marketing opportunities of a company are basically identified by conducting marketing research. After the research identifies opportunities, target markets should be selected very carefully, evaluating the identified opportunities.

To begin with, the size, growth, and profit potential of each of the opportunities must be measured and forecasted by the management.

Several departments in the company use the sales forecasts for which finance, manufacturing, purchasing, and human resources departments are important. Each has its special interest in forecasts for sales.

For example, the manufacturing department uses it to establish capacity and output levels, purchasing needs it to acquire the appropriate amount of supply, human resources to hire the needed number of workers, and finance uses it to raise the needed cash for investment and operations. The marketing department prepares sales forecasts.

A company must make forecasts as real as possible to get rid of the problems of either stockpile up or markets being underserved. In both of these situations company loses money.

Demand estimates are used as a basis in sales forecasts. It is necessary to define market demand very carefully.

Estimates of Market Demand

A company can make many different types of demand estimates or measurements. There are 90 different types of demand estimates that a company can make, as Dr. Kotler identified. The diagram on the next page shows this.

It can be measured for five different space levels, six different product levels, and three different time levels, and thus a company can have 90 types of demand estimates (5 x 6 x 3). Why a company goes for so many different types of demand measurement?

The answer is: since each serves a specific objective. To order raw materials, planning production, and borrowing cash, a company may forecast short-run demand (time level) for a specific product.

Again, to decide whether to set up a regional distribution network, it may forecast regional demand for its major product line.

Ninety Types of Demand Measurement

Demand can be measured along several dimensions, as you see in the above figure.

With respect to the product level, demand can be estimated for specific product items (such as frozen orange juice) or for a product line (such as frozen foods). With respect to geographic level, demand can be measured for a neighborhood, town, district, division, or nation.

In relation to time, demand measurement can be a short-range (one year or less), medium-range (one to five years), or long-range (longer than five years). If you make permutation and combination calculation using three different demand levels, you will come up with 90 different types of demand estimates.

Deciding on Which Market to Measure

There are many different market terms discussed in marketing literature, such as potential markets, available markets, served markets, and penetrated markets. It is imperative to understand the term ‘market‘ in its true perspective to understand these terms.

The market is a set of all actual and potential buyers of a product. This definition suggests that the size of a particular product’s size depends on the number of people who may accept the said product’s offer.

On the other hand, the potential market is the set of consumers who show a sufficient level of interest in the product’s offer. The mere interest of people does not serve the purpose of marketers. People must have sufficient income to buy the product as well as access to the offer.

To have access to the product offered by a certain group of people, the product must be distributed or made available to the area where these people live. This gives rise to the concept of the available market.

It is the set of consumers who have interest, income, and access to a specific market offer. Every individual in the available market of a particular product may not qualify to buy it either because the company may discourage some of them or the law may restrict some to buy.

Individuals excluding the above-mentioned groups qualify to buy the product that constitutes the qualified available market.

The company may decide to target a part of it or the whole available market from the qualified available market. If it decides to go for a part of the total qualified available market, it is called the target or served market.

There is no guarantee that everybody in the target market will buy the company’s product.

The set of customers who have already bought the company’s product is called the penetrated market. Understanding the above-market terms may help a company plan its market planning activities efficiently.

Demand Measurement – Useful Vocabulary

Two major concepts in demand measurement with which you should be familiar are total market demand and company demand. Here we shall take up discussion on these two concepts at some length :

Total Market Demand

Philip Kotler defines total market demand for a product as the total volume that would be bought by a defined consumer group in a defined geographical area in a defined time period in a defined marketing environment under a defined level and mix of industry marketing effort

Total Market Potential

Should all other market factors remain unchanged (time period, geographical area, economic conditions, and so forth). At the same time, each competitor makes a maximum marketing effort, and we can estimate a total market potential – the total possible sales of the product by all competitors.

The total market potential is rarely realized or sought. The additional expenditures necessary to reach marginally interested buyers would be very likely to lower the profits on such sales (between estimated demand and total market potential) to an unattractive level.

Using the following formula, the total market potential may be measured:

Q = nqp; where:

  • Q = total market potential
  • n = number of buyers in the specific product/market under the given assumptions
  • q = quantity purchased by an average buyer
  • p = price of an average unit

Company Demand

Company demand is the company’s estimated share of market demand at alternative levels of company marketing effort. Company demand for a particular company may be shown symbolically as Qi = siQ

Qi = siQ

Where:

Qi = company i’s demand

si = company i’s market share

Q = total market demand

People’s perception of several things relative to the competitors determines a company’s market demand. They are the product itself, services offered by the company, prices, communications, etc.

Company Sales Forecast

A company sales forecast represents realistic expectations of a company’s sales of a particular product or product line to the chosen target market, over a specified time, in a chosen geographic area, and under a defined marketing program.

Forecasts are basically the projections used to formulate the action plans for the implementation of marketing strategies. These forecasts are most often short-term and quite specific.

Marketing managers and statisticians have developed several techniques for making sales forecasts. About the company sales forecast, you should be familiar with two other relevant concepts. They are sales quota and sales budget. Let us now define them.

Philip Kotler defines a sales quota as the sales goal set for a product line, company division, or sales representative. To define and stimulate sales effort, managements use sales quota as a device. Based on sales forecasts, management sales quota by adding a percentage to it to stretch the sales force to put some extra efforts.

On the other hand, a sales budget is defined as a conservative estimate of the expected volume of sales. It is used primarily for making current purchasing, production, and cash-flow decisions. The usual practice is to set sales budgets slightly lower than the sales forecasts.

Company Sales Potential

Company sales potential may be defined as the sales limit approached by company demand as company marketing effort increases relative to competitors. A company’s sales potential may be equal to the company market potential if it can achieve cent percent of the market.

Methods of Estimating Current Market Demand

There are several methods of estimating current demand;

  1. estimation of total market potential,
  2. estimation of area market potential, and
  3. estimation of industry sales and market shares.

Hence, the estimation of total market potential is discussed before, and we will focus here on the estimation of area market potential and estimation of industry sales and market shares.

Estimation of Area Market Potential

Characteristics of the market vary from area to area. And, in order to be successful, a company needs to pursue different strategies in different areas. To decide on strategies, a company needs to estimate market potential area-wise. There are two methods available to estimate area market potential;

  1. Market-buildup method

In this method, the potential buyers in a particular area are identified first, and then potential purchases by them are estimated. But it is very difficult to identify the potential buyers, particularly in a country like Bangladesh, Nigeria, India, and hence the use of this method here is very uncommon.

  1. Multiple-factor Index Method

This method measures market potential along with different factors such as population, per capita income, age, gender, and so on. For each factor, specific weight is assigned, and the marketing manager estimates the market potential of a particular area by taking into account the factors and their corresponding weights.

Estimation of industry sales and market shares

To estimate industry sales and market shares, a company first identifies its competitors and then estimates sales of them. The sum of competitors’ sales estimates and that of the company constitute industry sales.

It helps a company to assess its performance with that of the industry average. Here, a company may take help from publications of different trade associations as well as reports of different research organizations.

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