MARKET AND DEMAND ANALYSIS

In most cases, the first step in project analysis is to estimate the potential size of the market for the
product proposed to be manufactured (or service planned to b offered) and get an idea about the
market share that is likely to be captured. Put differently, market and demand analysis is concerned with
two broad issues:

1) What is the likely aggregate demand for the product/service?

2) What share of the market will the proposed project enjoy?

Given the importance of market and demand analysis, it should be carried-out in an orderly and
systematic manner:

1) Situational analysis and specification of objectives,

2) Collection of secondary information,

3) Conduct of market survey,

4) Characterization of the market,

5) Demand forecasting,

6) Market planning.

1) Situational Analysis and Specification of Objectives: In order to get a “feel” of the relationship
between the product and its market, the project may informally talk to customers, competitors,
middlemen, and others in the industry. Wherever possible, he may look at the experience of the
company to learn about the performances and purchasing power of customers, actions and strategies of
competitors and practices of the middlemen.

If such a situational analysis generates enough data to measure the market and get a reliable handle
over projected demand and revenues, a formal study need not be carried- out, particularly when cost
and time considerations so suggest.

2) Collection of Secondary Information: Secondary information is the information that has been
gathered in some other context and is already available. Primary information, on the other hand,
represents information that is collected for the first time to meet the specific purpose on hand.
Secondary information provides the base and the starting point for the market analysis.

General Sources of Secondary Information

i) Census of India,

ii) National sample survey reports,

iii) Plan reports,

iv) Statistical abstract of the Indian union,

v) India year book,

vi) Statistical year book,

vii) Economic survey of industries,

viii) Annual survey of industries,

ix) Annual reports of the development wing, Ministry of Commerce and Industry, etc.

3) Conduct of Market Survey: Secondary information, though useful, often does not provide a
comprehensive basis for market and demand analysis. It needs to be supplemented with primary
information gathered through a market survey, specific to the project being appraised.

The market survey may be census survey or a sample survey. In a census survey, the entire population is
covered. The word ‘population’ is used here in a particular sense. It refers to the totality of all units
under consideration in a specific study.

The market survey, in practice, is typically a sample survey. In such a survey a sample of population is
contacted or observed and relevant information is gathered. On the basis of such information, inferences
about the population may be drawn.

The information sought in a market survey may relate to one or more of the following:

i) Total demand and rate of growth of demand,

ii) Demand in different segments of the market,

iii) Income and price elasticities of demand,

iv) Motives for buying,

v) Purchasing plans and intentions,

vi) Satisfaction with existing products,

vii) Unsatisfied needs,

viii) Attitudes toward various products,

ix) Distributive trade practices and preferences,

x) Socio-economic characteristics of buyers.

4) Characterization of the Market: Based on the information gathered from secondary sources and
through the market survey, the market for the product/ service may be described in terms of the
following:
i) Effective Demand in the Past and Present: To gauge the effective demand in the past and present, the
starting point typically is apparent consumption which is deemed as:

Production + Imports - Exports - Changes in stock level

The figure of apparent consumption has to be adjusted for consumption of the product by the producers
and the effect of abnormal factors. The consumption series, after such adjustments, may be obtained for
several years.

ii) Break-down of Demand: To get a deeper insight into the nature of demand, the aggregate (total)
market demand may be broken-down into demand for different segments of the market. Market
segments may be defined by:

a) Nature of product.

b) Consumer group, and

c) Geographical division.

iii) Price: Price statics must be gathered along with statistics pertaining to physical quantities. It may be
helpful to distinguish the following types of prices.

a) Manufacturer’s price quoted as FOB (Free on Board) price or CIF (Cost, Insurance and Freight) price,

b) Landed price for imported goods,

c) Average wholesale price and

d) Average retail price.

iv) Methods of Distribution and Sales Promotion: The method of distribution may vary with the nature of
the product. Capital goods, industrial raw materials or intermediates and consumer products tend to
have different distribution channels. Likewise, methods used for sales promotion (advertising, discounts,
gift schemes, etc.) may vary from product to product.

v) Consumers: Consumers may be characterized along two dimensions as follows:

Demographic and Sociological Attitudinal

Age Preferences

Sex Intentions

Income Habits

Profession Attitudes

Residence Responses
Social background

vi) Supply and Competition: It is necessary to know the existing sources of supply and whether they are
foreign or domestic. For domestic sources of supply, information along the following lines may be
gathered;

a) Location,

b) Present production capacity,

c) Planned expansion,

d) Capacity utilization level,

e) Bottlenecks in production and

f) Cost structure.

Competition from substitutes and near-substitutes should be specified because almost any product may
be replaced by some other product as a result of relative changes in price, quality, availability,
promotional effort and so on.

vii) Government policy: Thee role of the government in influencing the demand and market for a product
may be significant. Governmental plans, policies, and legislations, which have a bearing on the market
and demand of the product under examination, should be spell-out. These are reflected in:

a) Production targets in national plans,

b) Import and export trade controls,

c) Import duties,

d) Export incentives,

e) Excise duties,

f) Sales tax,

g) Industrial licensing,

h) Preferential purchases,

i) Credit controls, financial regulations and

j) Subsides/ penalties of various kinds.

5) Demand Forecasting: On the basis of analysis and interpretation of information gathered about
various aspects of market and demand from primary and secondary sources, an attempt is made to
forecast the future demand of the proposed product or service. There are various methods of demand
forecasting available to the market analyst.

Methods of Demand Analysis

The various methods of forecasting demand may be grouped under the following categories:

1) Opinion Polling Method: In this method, the opinion of the buyers, sales force and experts could be
gathered to determine the emerging trend in the market. The opinion polling methods of demand
forecasting are of three kinds:

i) Consumers Survey Methods: The most direct method of forecasting demand in the short-run is survey
method. Surveys are conducted to collect information about future purchase plans of the probable
buyers of the product. Survey methods include:

a) Complete Enumeration Survey: Under the Complete Enumeration Survey, the firm has to go for a door
to door survey for the forecast period by contacting all the households in the area.

b) Sample Survey and Test Marketing: Under this method some representative households are selected
on random basis as samples and their opinion is taken as the generalized opinion. This method on
random basis as samples and their opinion is taken as the generalized opinion. This method is based on
the basic assumption that the sample truly represents the population. A variant of sample survey
technique is test marketing. Product testing essentially involves placing the product with a number of
users for a set period. Their reactions to the product are noted after a period of time and an estimate of
likely demand is mad from the result.

c) End–use Method: In this method, the sale of the product under consideration is projecting on the
basis of demand survey of the industries using this product and intermediate product. In other words,
demand for the final product is the end use demand of the intermediate product used in the production
of this final product.

ii) Sales Force Opinion Method: This is also known as Collective Opinion Method. In this method, instead
of consumers, the opinion of the salesman is sought. It is sometimes referred as the “grass roots
approach” as it is a bottom-up method that requires each sales person in the company to make an
individual forecast for his or her particular sales territory. These individual forecasts are discussed and
agreed with the sales manager. The composite of all forecasts then constitutes the sales forecast for the
organization.

iii) Delphi Method: This method is also known as Expert opinion method of investigation. In this method
instead of depending upon the opinions of buyers and salesmen, firms can obtain views of the specialists
or experts in their respective fields. Opinions of different experts are sought and their identity is kept
secret. These opinions are than exchanged among the various experts and their reactions are sought and
analyzed. The process goes on until some sort of unanimity is arrived at among all the experts. This
method is best suited in circumstances where intractable changes are occurring.
2) Statistical or Analytical Methods: Statistical methods are considered to be superior techniques of
demand estimation because:

i) The element of subjectivity in this method is minimum,

ii) Method of estimation is scientific,

iii) Estimation is based on the theoretical relationship between the dependents and independents
variables,

iv) Estimates are relatively more reliable and

v) Estimation involves smaller cost.

The statistical methods, which are frequently used, for making demand projections are:

i) Thread Projection Method: An old firm can use its data of past years regarding its sales in past years.
These data are known as time series of sales. A trend line can be fitted by graphic method or by algebraic
equations. Equations method is more appropriate. The trend can be estimated by using any one of the
following methods.

a) Graphical Method: A trend line can be fitted through a series graphically. Old values of sales for
different areas are plotted on a graph and a free hand curve is drawn passing through as many points as
possible. The direction of this free hand curve shows the trend. The main draw back of this method is
that it may show the trend but not measure it.

b) Least Square Method: The least square method is based on the assumption that the past rate of
change of the variable under study will continue in the future. It is a mathematical procedure for fitting a
line to a set of observed data points in such a manner that the sum of the squared difference between
the calculated and observed value is minimized. This technique is used to find a trend line which best fit
the available data. The trend is then used to project department variable in the future. This method is
very popular because it is simple and in expensive.

c) Time Series Methods: Time series forecasting methods are based on analysis of historical data (time
series; a set of observations measured at successive times or over successive periods). They make the
assumption that past patterns in data can be used to forecast future data points.

Moving averages (simple moving average, weighed moving average); forecast is based on arithmetic
average of a given number of past data points.

Components of Time series Demand

• Average: The mean of the observations over time.

• Trend: A gradual increase or decrease in the average over time.

• Seasonal Influence: Predictable short-term cycling behavior due to time of day, week, month, season,
year, etc.

• Cyclical Movement: Unpredictable long-term cycling behavior due to business cycle or product/service
life cycle.

• Random Error: Remaining variation that cannot be explained by the other four components.

d) Exponential Smoothing: It is one of the methods of trend projection methods. Exponential smoothing
is distinguishable by the special way it weights ach past demand. The pattern of weights is exponential in
form. Demand for the most recent period is weighted most heavily; the weights placed on successively
older periods decrease exponentially. In other words , the weights decrease in magnitude the future
back in time the data are weighted ; the decrease is non-linear (exponential).

ii) Regression method: This is a very common method of forecasting demand. Under this method a
relationship is established between quantity demanded (dependent variable) and independent variables
such as income, price of the good, prices of the related goods etc. Once the relationship is established,
we drive regression equation assuming relationship between dependent and independent variables.
Once the regression equation is derived the value of Y i.e. quantity demanded can be estimated for any
given value of X.

iii) Simultaneous equations Methods of Forecasting: The econometric model forecasting involves
estimating several simultaneous equations, which are, generally, behavioral equations, mathematical
identities and market-clearing equations.

The econometric model technique is also known as simultaneous equations method and complete
system approach to forecasting. This technique uses sophisticated mathematical and statistical tools.

iv) Barometric Method: It is also known as ‘leading indicators forecasting’. National bureau of Economic
Research of U.S.A. has identified three types of indicators, coincidental indicators and Lagging indicators.

The analyst should establish relationship between the sales of the product and the economic indicators
to project the correct sales and to measure to what extent these indicators affect the sales. To establish
relationship is not easy task especially in case of new product where there is no past record.

6) Market Planning:The market plans usually have the following components:

i) Current Marketing Situation: This part of the marketing plan deals with the different dimensions of the
current situation. It examines the market situation, competitive situation, distribution situation and the
macro-environment. In other words, it paints a pen-picture of the present.

ii) Opportunity and Issue Analysis: In this section a SWOT (Strength, Weakness, Opportunity, Threat
Analysis) is conducted for Alpha and the core issues before the product are identified.
iii) Objectives: Objectives have to be clear cut, specific and achievable.

iv) Marketing Strategy: The marketing strategy covers the following: target segment, positioning, product
line, price, distribution, sales force, sales promotion and advertising.

v) Action Programme: The last component of market planning is the action programme. Action
programmes operationalize the strategy.