Market-Factor Index Method

 Consumer goods companies also have to estimate area market potentials. Consider the following example: A manufacturer of men’s dress shirts wishes to evaluate its sales performance relative to market potential in several major market areas, starting with Vancouver. It estimates total national potential for dress shirts at about $200 million per year. The company’s current nationwide sales are $14 million, about a seven percent share of the total potential market. Its sales in the Vancouver metropolitan area are $1 200 000. It wants to know whether its share of the Vancouver market is higher or lower than its national seven percent market share. To determine this, the company first needs to calculate market potential in the Vancouver area.

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. An excellent example of this method is called the market rating index, which is published each year by The Financial Post in its Canadian Markets  publication. This survey estimates the market rating for each province and metropolitan area of Canada. The market rating index is based on two factors: the area’s share of Canada’s population, and retail sales. 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.

Using this index, the shirt manufacturer looks up the Vancouver metropolitan area and finds that this market has 5.77 percent of the nation’s population, and 7.03 percent of the nation’s retail sales. Thus, the market rating index for Vancouver is

MRI = 7.03/5.77 = 122

 

Vancouver has a market rating index that is 22 percent higher than the national average. Because the total national potential is $200 million nationally each year, total potential in Vancouver equals $200 million × 1.22 × .0577 = $14 078 000. Thus, the company’s sales in Vancouver of $1 200 000 amount to a

$1 200 000 $14 078 800 = 8.5 percent share of area market potential. Comparing this with its seven percent national share, the company appears to be doing better in Vancouver than in other areas of Canada.

The weights used in the buying power index are somewhat arbitrary. They apply mainly to consumer goods that are neither low-priced staples nor high-priced luxury goods. Other weights can be used. Also, the manufacturer would want to adjust the market potential for additional factors, such as level of competition in the market, local promotion costs, seasonal changes in demand, and unique local market characteristics.

Many companies compute additional area demand measures. Marketers now can refine province-by-province and city-by-city measures down to census tracts or postal codes. Census tracts are small areas about the size of a neighbourhood, and postal code areas (designated by Canada Post) can be used to identify particular streets, neighbourhoods, or communities within larger cities.