Estimate the Market Demand

 Marketers will want to estimate three aspects of current market demand- total market demand, area market demand and actual sales & market shares.

The total market demand for a product or service is the total volume that would be bought by a defined consumer group in a defined geographic area in a defined time period in a defined marketing environment under a defined level and mix of industry marketing effort.

Total market demand is not a fixed number, but a function of the stated conditions. It will also depend on many environmental factors, ranging from the level of consumer health concerns to the weather in key market areas.

 Figure A2-1 shows the relationship between total market demand and various market conditions. The horizontal axis shows different possible levels of industry marketing expenditures in a given time period. The vertical axis shows the resulting demand level. The curve shows the estimated level of market demand at varying levels of industry marketing effort. Some minimum level of sales would occur without any marketing expenditures. Greater marketing expenditures would yield higher levels of demand, first at an increasing rate, and then at a decreasing rate. Marketing efforts above a certain level would not cause much more demand. This upper limit of market demand is called market potential. The industry market forecast shows the expected level of market demand corresponding to the planned level of industry marketing effort in the given environment.

Companies have developed various practical methods for estimating total market demand. We will illustrate two here. Suppose Warner Communications Company wants to estimate the total annual sales of recorded compact discs. A common way to estimate total market demand is as follows:

Q=n x q x p

Where

Q = Total Market Demand

n= Number of buyers in the market

q = quantity purchased by an average buyer per year.

p = price of an average unit.

 

Thus, if there are 100 million buyers of compact discs each year, the average buyer buys six discs a year, and the average price is $17, then the total market demand for discs is $10.2 billion = (100 000 000 x 6 x  $17).

A variation of this approach is the chain ratio method. This method involves multiplying a base number by a chain of adjusting percentages. This simple chain of calculations would provide only a rough estimate of potential demand. However, more detailed chains involving additional segments and other qualifying factors would yield more accurate and refined estimates.

ESTIMATING AREA MARKET DEMAND

Companies face the problem of selecting the best sales territories and allocating their marketing budget optimally among these territories. Therefore, they need to estimate the market potential of different cities, provinces, and countries. Two major methods are available: 1) Market-buildup method, which is used primarily by business goods firms, and 2) Market-factor index method, which is used primarily by consumer goods firms.

 

Market-Factor Index Method

Consumer goods companies also have to estimate area market potentials. A common method for calculating area market potential is the market-factor index method, which identifies market factors that correlate with market potential and combines them into a weighted index. The Market Rating Index(MRI) for a specific area is given by MRI = percentage of national retail sales in the area / percentage of national population in the area.

 

ESTIMATING ACTUAL SALES AND MARKET SHARES

Besides estimating total and area demand, a company will want to know the actual industry sales in its market. Thus, it must identify its competitors and estimate their sales.

Industry’s trade associations often collect and publish total industry sales, although not individual company sales. In this way, each company can evaluate its performance against the industry as a whole.