MARKET APPRAISAL

[SUBJECT: PROJECT FINANCE]

Learning Objectives:
 Provide a conceptual understanding on Market Appraisal
 List the importance of Market Appraisal
 Provide familiarization on Aspects of Market Appraisal
 Understand Demand Analysis
 Explain the various methods of Demand Forecasting
 Understand Market Analysis
 Shed light on Market Segmentation
 Provide insight on Product Positioning and Pricing
 Provide insight on Distribution and Promotional Strategies
 Explain on Managerial Appraisal

Chapter 5 Market Appraisal 1

 5.1 Market Appraisal

 Market Appraisal is the review carried out by financial institutions to ascertain that the
products manufactured by the project can be sold and its value realized.
 It asks following 5 critical questions
1) Whether the unit has competent sales force and distribution network to sell the
products manufactured?
2) How the unit is going to capture its share of the feasible market?
3) Whether the unit can sell its products at the desired price points?
4) Is there a sizeable potential market for the products and whether the unit has a
suitable marketing strategy ?
5) Is the unit in a position to deliver marketable products from the resources
deployed?
6) Is the Return on Investment sufficient to service the cost of loan/equity and leave
a reasonable amount for the unit to carry out sustainable operations?

Chapter 5 Market Appraisal 2

 5.2 Importance of Market Appraisal

1) It ensures that the project has the competent sales force and distribution
network to sell the products manufactured.

2) It can sell the products at the price points such that it can service the
interest on loans taken. Even after servicing the loan, there is sufficient
surplus for the unit to carry out sustainable operations.

3) It ensures that there is a potential market which can be met by the

production capacity of the unit.

4) There is a well thought of sales and marketing strategy favorable for long
term operations.

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 5.3 Sales & Marketing - birth of a Project
 While launching a new product / model, a promoter or CEO or project In-charge will delve on the
following questions:
 How many units can be sold in first year, its expected selling price, its cost? Also, sales in further few
years down the line. Then he will estimate the costs and profits generated. An example is depicted
in the chart as shown:
Sr Particulars Year 1 Year 2 Year 3
1 No of Units Sold 50,000 55,000 60,000
2 Sales Rate per piece (Rs) 250 250 250
3 Sales (Rs) 12,500,000 13,750,000 15,000,000

4 Cost price per piece (Rs) 175 175 175

5 Cost Price (Rs) 8,750,000 9,625,000 10,500,000

6 Profit (Rs) 3,750,000 4,125,000 4,500,000

 Next he will ask what are the indirect costs such as the Cost of Capital, interest costs, sales costs,
salaries, etc associated with the project. The other costs will have to be lower than the Profit
generated per year. Else, he will have to go to scratch and work out the numbers again.
 Usually corporations go about on a new project in a systematic and well-defined manner. There is a
detailed study on the market, demand for the product, technical aspects of the project, financial
estimates, ways to raise the funds, etc.

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 5.4 Aspects of Market Appraisal
 Two main aspects:
o Demand Analysis
o Market Analysis
 Suppose a company wants to launch a new brand of high quality kitchenware in the
domestic market. Important questions that should be asked to get a correct Market
and Demand Analysis will be:
1) Who are the buyers of the kitchenware?
2) What is the total current demand for this new kitchenware?
3) How is the demand distributed temporarily (pattern of sales over the year
geographically)?
4) What is the break-up of demand of kitchenware of different types?
5) What price will the customers be willing to pay for the improved range of
kitchenware?
6) How can potential customers be convinced about the superiority of the new
kitchenware?
7) What price and warranty will ensure its acceptance?
8) What channels of distribution are most suited for the kitchenware? What trade
margins will induce distributors to carry it?
9) What are the prospects of immediate sales?
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 5.5 Demand Analysis
 Demand Analysis for the product proposed to be manufactured requires collection of data and
preparation of estimates.
 Market appraisal requires
o description of the product,
o applications
o market scope
o market competition from similar products/substitutes
o areas of competitive advantage,
o pricing, etc.
 In a highly competitive environment, customized products with short lifespan are vital.
 Customer needs are foremost to be kept in the manufacturers mind.
 Functionality, costs, delivery, service, physical appearance, etc are some of the key parameters to be
attended to.
 Physical distribution and manufacturing are a part of the supply chain.
 Reasonable Estimates have to be made regarding existing and future demand of the product.
 After gathering the information, the existing position has to be assessed to ascertain whether
unsatisfied demand exists.
 Since cash flow projections are to be made, possible future changes in the volume and pattern of
supply and demand have to be estimated.

Chapter 5 Market Appraisal 6

 5.6 Methods of Demand Forecasting
 Demand Forecasting can be classified into 3 broad categories as under:
1) Trend
2) Regression
3) End-use Method
1) Trend Method
o It assumes that the demand in the number of units / sales increases by the same
proportion as earlier
o The behavior follows a linear equation or an exponential trend as in the past few
years. In a linear trend, it would increase by a constant amount whereas in an
exponential trend, it would increase by a constant percentage
o Graphing the data will help to decide which period to choose and what type of form
to be used for forecasting.
o Only after analysis of past data, the trend line should be fitted
2) Regression Method
o It follows a concept of various dependent and independent factors or variables.
o The dependent variable is the one subject to forecasting. The independent variable
is the ones that cause changes in the dependent variable.
o If rate of inflation is to be forecast, the independent variables may be money supply,
per capita availability of food grains and rate of monetization of the economy.
o Specification of identification of factors is crucial in forecasting by regression
approach. In multiple regressions, we have more than one independent variable.

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3) End-Use Method
o It is appropriate for predicting demand of intermediate industrial products such as
steel and caustic soda
o The industries using these materials are identified. An intensive study of the past and
thorough assessment of the future prospects of the various end-user industries is
made
o An expected production level of the various end-user industries is made and based
on that the product use forecasts are made
o Provisions have to be made for competition from substitute products and changes
due to technological changes
o Hence, the End-Use method should be used judiciously
o The end use approach enable preparation of industry-wise customer demand
forecasts and it is easy to evaluate any discrepancy in the forecasts with the actual
value
 Comparison of Trend, Regression and End-Use methods
o The Trend method simply assumes that the demand follows the pattern as it has
done so in the past. It cannot predict the turning points
o Regression method is more accurate than the trend method because it takes into
account causal factors.
o In actual practice forecasts by both methods may be attempted
o The End-Use Method has limitations as it may be difficult to estimate the projected
output levels of consuming industries. More important, the consumption coefficients
may vary from one period to another in the wake of technological changes and
improvements in the methods of manufacturing

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 5.7 Market Analysis

 Market analysis deals with the study of the segmented market, product positioning,
product promotion and distribution strategies and analysis of the competition

 Market analysis defines the target customer, the resultant market in terms of size,
structure, growth prospects, trends and sales potential

 Various private companies also carry out market surveys for a fee

 Further, good information relating to the market is available from various

manufacturer/trade associations, trade journals and related Government
Organizations

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5.8 Market Segmentation
 After the target market is defined, the feasible market
has to be defined by identifying the various produce
gaps.
 The unit’s share in the total feasible market is tied to
the structure of industry, the impact of competition,
strategies for market penetration and continued
growth and advertisement budget.
 Market share depends on industry growth which will
increase the total number of users of the product and
conversion of users from the total feasible market
during a sales cycle.
 A sales cycle has four distinct stages,
o early pioneer users
o early majority users
o late majority users
o late users.

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5.9 Product Positioning and Pricing
 Product Positioning will help place the product
as a differential identity in the eyes of the
potential buyer.
 The strategy used for product positioning is
usually the result of an analysis of customers
and competition.
 Product Pricing decision is very important
because it has a direct effect on marketing and
financial success of the business.
 The basic rules of pricing are that they must
cover costs and should be reduced only
through lower costs.
 Prices may be determined on a cost plus basis
as practiced by manufacturers to recover all
costs, both fixed and variable and realize a
desired profit percentage.
 Mark-up pricing is used by all retailers which
are calculated by adding desired profit to the
cost of the product.
 Finally, competitive pricing as in the case of
markets where there is an established price
and the product is more or less homogeneous.

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 5.10 Distribution and Promotional Strategies

 Choice of distribution channel to move the product from the factory to the end user depends on
channels being used by competitors and the strategic advantage it would confer
 The company may choose direct sales, O.E.M. (original equipment manufacturer) sales,
manufacturer’s representative, wholesale distributors, brokers, retail distributors or direct mail
 Choice of distribution strategy is based on factors such as channels used by similar units, pricing
method and internal resources
 A promotion plan consisting of controlled distribution to sell the product has to be formulated
after the distribution strategy is formulated. It encompasses every marketing tool utilized in
communication efforts. These are advertising, packaging, public relations, sales promotion and
personal sales
 Once the market has been researched and analyzed in terms of defining it, positioning the
product and pricing, distribution and promotional strategies - financial projections can be made
for three or five years
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 5.11 Competitive Analysis

 The purpose of competitive analysis is to determine the strengths and weaknesses of

competitors
 Strategies that will confer a distinct advantage, barriers that can be raised in order to
prevent competition from entering the market and any weaknesses that can be
exploited within the product development cycle
 The criteria employed to judge what constitutes a key asset or skill within an industry or
market segment may be identified from any analysis of reasons behind successful as
well as unsuccessful companies, prime customer motivators, major component costs
and barriers to mobility
 Through the competitor analysis, a marketing strategy that will generate a unique asset
or skill to provide a distinct and enduring competitive advantage has to be framed
 The results of market research which have helped in defining the distinct competitive
advantage have to be communicated in a strategic form that will attract market share as
well as defend it
 Competitive strategies usually fall into product, distribution, pricing, promotion and
advertising
 The competitive advantage has to be clearly established so the appraiser of the project
understands not only how the goals will be achieved but why the company’s strategy
will work

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 5.12 Managerial Appraisal

 In order to judge the managerial capability of the promoters, the following

questions are raised:

 How resourceful are the promoters?

 How sound is the understanding of the project by the promoters?

 How committed are the promoters?

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