Measuring and Forecasting

Demand
Muhammad Imran

Measuring Current Market Demand

Marketers will want to estimate three

different aspects of current market
demand
o
o
o

Total market demand

Area market demand
Actual sales and market shares

Estimating Total market demand

Q=nxqxp
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

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 available

o Market buildup method used primarily by
business goods firms
o 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

1042
(lode
deposits)

1043
(placer
deposits)

(1)
Number of
employees

Under 10
10 to 50
Over 50
Under 10
10 to 50
Over 50

(2)
Number
of mines

(3)
Potential
Number of
instruments
per size
class

(4)
Unit
market
potential
(2 x 3)

80
50
20
150

1
2
4

80
100
80
260

40
20
10
70

1
2
3

40
40
30
110

(5)
Dollar
market
potential
(at $1,000
each)

$260,000

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 mens 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

nations total potential demand for dress shirts.

Total potential equals $2 billion x .005935 =

$11,870,000.

Companys 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 intentions

Composite sales force opinions
Expert opinion

What people do

Test markets

What people have done

Time-series analysis
Leading indicators
Statistical 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 scale

Do you intend to buy an automobile within the next six months?

0
No
certain
chance

.1

.2
Slight

.3

.4
Fair

.5

.6
Good

.7

.8
Strong

.9

1.0
For

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+6.46X12.37X2