UNIT 4: MARKET AND DEMAND ANALYSIS

Contents
4.0 Aims and Objectives
4.1 Introduction
4.2 Situational Analysis & Specification of Objectives
4.3 Collection of Secondary Information
4.4 Conduct of Market Survey
4.5 Characterization of the Market
4.5.1 Effective Demand in the Past and Present
4.5.2 Breakdown of Demand
4.5.3 Price
4.5.4 Method of Distribution and Sales Promotion
4.5.5 Consumers
4.5.6 Supply and Competition
4.5.7 Government Policy
4.6 Demand Forecasting
4.0 AIMS AND OBJECTIVES
After reading this unit you should be able to:
- understand what market and demand analysis mean
- understand how to undertake market and demand analysis
- identify various elements of market and demand analysis
- identify the various techniques used for forecasting demand.
4.1 INTRODUCTION

In most cases, the first step in project analysis is to estimate the potential size of the market
proposed for to be manufactured. To put it differently, market and demand analysis is
concerned with two broad issues; what is the likely aggregate demand for the product? What
share of the market will the project enjoy?

These are very important questions in project analysis. Because it calls for in-depth study and
assessment of various factors like patterns of consumption, growth, income and price
elasticity of demand, composition of the market, nature of competition, availability of
substitute so on and so forth. Yet, in many cases project feasibility studies seems to make a
short shrift of market and demand analysis. It is not uncommon to find cursory statement like
"the market is attractive" or "the demand is expected to exceed supply".

Given the importance of market and demand analysis, it should be carried out in an orderly
and systematic manner. The key step in such analysis are as follows:
- Situational analysis and specification of objectives
- Collection of secondary information
- Conduct market survey
- Characterization of the market

BY TEWODROS MEKONNEN 42
 - Demand forecasting
4.2 SITUATIONAL ANALYSIS AND SPECIFICATION OF OBJECTIVES

In order to get a 'feel' for the relationship between the product and its market, the project
analyst may informally talk to customer competitors, middlemen, and others in the industry.
Wherever possible, he may look at the experiences of the company to learn about the
preferences and punishing power of customers, actions and strategies of competitors.

If such a situational analysis generate enough data to measure the market and enable us to
have a clear picture over projected demand and revenue, a formal study need not be carried
out, particularly when time and cost consideration so suggest. In most cases, of course a
formal study of market and demand is warranted.
To illustrate, suppose that a small but technological competent firm has developed an air
cooler based on a new principle that appears to offer several advantage over the conventional
(former) air cooler. The chief executive of the firm needs information about where and how to
market the new air cooler. The objectives of market and demand analysis in this case may be
to answer the following questions:
- Who are the buyers of air cooler?
- What is the total current demand for air cooler?
- How is the demand temporarily distributed (pattern of sales over the year) and
geographically?
- What is the break-up of demand for air coolers of different size?
- What prices will the customers be willing to pay for the improved air cooler?
- How can potential customers be convinced about the superiority of the new cooler?
- What price and warranty will ensure its acceptance?
- What channel of distribution are most suited for the air cooler? What trade margin will
induce distributors to carry it?
- What are the prospects of immediate sales?
4.3 COLLECTION OF SECONDARY INFORMATION
In order to answer the questions listed while delineating the objective of the market study,
information may be obtained from secondary and/or primary sources. Secondary information
is information that has been gathered in some other context and is already available. Primary
information, on the other hand, represents those information which are collected for the first
time to meet the specific purpose on hand. Secondary information provides the base and the
starting point for market and demand analysis. It indicates what is known and often provides
leads and cues for gathering primary information required for further analysis.

The important source of secondary information useful for market and demand analysis in
Ethiopia are mentioned below.

 census of Ethiopia
 national sample survey reports

BY TEWODROS MEKONNEN 43
  statistical abstracts
 annual survey of industries/agriculture and export
 economic survey
 annual report by national bank of Ethiopia
 bulletin on import and export
 other publications

4.4 CONDUCT OF MARKET SURVEY

For undertaking a market survey there is a need to have a sample, which represents the entire
market. Thus, sampling is the process of drawing a limited number of subjects from a larger
population or universe. Since, the researcher cannot survey the entire universe or population
that they are interested, they usually draw a sample of subjects from the population for
investigation.

Steps in a Sample Survey

Typically a sample survey consists of the following steps:
1. Define the target population: in defining the target population the important terms
should be carefully and unambiguously defined. The target population may be divided
into various segments which may have differing characteristics. For example, all
television owners may be divided into three to four income bracket.
2. Select the sampling scheme and sample size: there are several sampling schemes,
simple random sampling, cluster sampling, sequential sampling, stratified sampling,
systematic sampling and non-probability sampling. Each scheme has its advantage and
limitations. The sample size, other things being equal, has a bearing on the reliability
of the estimates – the larger the sample the greater reliability.
3. Develop the questionnaire: the questionnaire is the principal instrument for eliciting
information from the sample of the respondent. The effectiveness of the questionnaire
as a device for eliciting the desired information depends on its length, the type of
questions, and the wording of questions. Developing the questionnaire require a
thorough understanding of the product, and its usage, imagination, insights into human
behavior, appreciation of subtle linguistic nuances, and familiarity with the tools of
descriptive and inferential statistics to be used later for analysis.

Since the quality of the questionnaire has an important bearing on the results of market
survey, the questionnaire should be tried out in a pilot survey and modified in the light
of problems/ difficulties noted.
4. Recruit and Train the Field Investigators: recruiting and training of field
investigators must be planned well since it can be time consuming. Great care must be
taken for recruiting the right kind of investigators and imparting the proper kind of
training to them.

BY TEWODROS MEKONNEN 44
 5. Obtain information as per the questionnaire from the sample respondent:
respondent may be interviewed personally, telephonically, or by mail for obtaining
information. Personal interview ensure a high rate of responses. They are, however,
expensive and likely to result in biased responses because of the presence of the
presence of the interviewer. Mail survey are economical and evoke fairly candid
responses. The response rate, however, is often law. telephonic interview, common in
western countries have very limited applicability in Ethiopia because telephone tarrifs
are high and low telephone connection.
6. Scrutinize the information gathered: information gathered should be thoroughly
scrutinized to eliminate data which is internally inconsistent and which is of dubious
validity. Sometimes data inconsistencies may revealed only after some analysis.
7. Analyze and Interpret the Information: information gathered in the survey need to be
analyzed and interpreted with care and imagination. After tabulating it as per a plan of
analysis, suitable statistical investigation may be conducted, wherever possible and
necessary. For the purpose of statistical analysis, a variety of methods are available.
They may be divided into two broad categories; parametric and non parametric
methods.

Parametric methods assumes that the available or the attribute under study conforms to
some unknown distribution. Non-parametric methods do not presuppose any particular
participation.

Results of data based on sample survey will have to be extrapolated to the target population.
Here it should be noted that the results of the market survey can be affected by:
i) non representative ness of sample
ii) imprecision and inadequacies in the questions,
iii) failure of the respondent to comprehend the questions
iv) deliberate distortion in the answer given by the respondent
v) checking on the part of the investigators
vi) slip shod scrutiny of data
vii) incorrect and inappropriate analysis and interpretation of data.
4.5 CHARACTERISTICS OF THE MARKET
Based on the information gathered from secondary sources and through the market survey, the
market for the product may be described in terms of the following:
 Effective demand in the past and present
 Breakdown of demand
 Price
 Methods of distribution and sales promotion
 Consumers
 Supply and competition
 Government policy

BY TEWODROS MEKONNEN 45
4.5.1 Effective Demand in Past and Present
To gauge the effective demand in the past and present, the starting point typically is apparent
consumption which is defined as:
Production + Imports – Exports – Changes in Stock Level
In a competitive market, effective demand and apparent consumption are equal. however, in
most of the developing countries, where competitive markets do not exist for a variety of
products due to exchange restrictions and controls on production and distribution. The figure
of apparent consumption may have to be adjusted for market imperfections.
4.5.2 Breakdown 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 good and (c) geographical division.

 Nature of product: one generic name of subsumes many different products: for
example, commercial vehicles covers trucks and buses of various capacities and so on
and so forth.
 Consumer groups: consumers of product may be divided into industrial consumers
and domestic consumers. Industrial consumers may be sub divided industry wise.
Domestic consumers may be further divided into different income groups.
 Geographical divisions: a geographical breakdown of consumers, particularly for
products which have a small value to weight relationship and products which require
regular, efficient after sales services is helpful.
Why is segmental analysis required? Segmental information is helpful because the nature of
demand tends to vary from one segment to another (the demand form consumers in high
brackets may not be sensitive to price variation) and different marketing strategies may be
appropriate to different market segments.
4.5.3 Price
Price statistics must be gathered along with statistics pertaining to physical quantities. It may
be helpful to distinguish the following types of prices.
i) manufacturer's price quoted as FOB (Free on board) price or CIF (Cost, insurance
and freight) price
ii) landed price for imported goods
iii) average wholesale price, and
iv) average retail price
4.5.4 Method of Distribution and Sales Promotion
The method of distribution may vary with the nature of product. Capital goods, industrial raw
materials or intermediates, and consumer products tend to have differing distribution
channels. Further, for a given product, distribution methods may vary. Likewise, methods
used for sales promotion (advertising, discount gift schemes etc) may vary from product to
product.

BY TEWODROS MEKONNEN 46
The method of distribution and sales promotion employed presently and their rationale must
be specified. Such a study may explain certain patterns of consumption and highlight the
difficulties that may be encountered in marketing the proposed products.
4.5.5 Consumers
Consumers may be categorized along two dimensions as follows:
Demographic and Sociological Attitudinal

Age Preference
Sex Intentions
Income Habits
Profession Attitudes
Residence Responses
Social background
4.5.6 Supply and Competition
It is necessary to know the existing source of supply and whether they are foreign or
domestic. For domestic sources of supply, information along the following lines may be
gathered location, present production capacity, planned expansion, capacity utilization level,
bottlenecks in production and cost structure.

Competition from substitute and near substitute should be special because almost any product
may be replaced by some other product may be replace by some other product as a result of
relative charges in price, quality, availability, promotional effort and so on.
4.5.7 Government Policy
The role of government in influencing the demand and market for a product may be
significant. Governmental plans, policies, legislation and fiats which have a bearing on the
market and demand of the product under examination should be spelt out. These are reflected
in: production target in national plans, import and export trade controls, import duties, export
incentives, excise duties, sales tax, industrial licensing, preferential purchase, credit controls,
financial regulation and subsidies/penalties of various kinds.
4.6 DEMAND FORECASTING

After gathering information about various aspects of the market and demand from primary
and secondary sources, an attempt may be made to estimate future demand. A wide range of
forecasting method is available to the market analyst. This may be broadly divided into two
categories: qualitative and quantitative methods.
A. Qualitative Methods
These methods rely essentially on the judgment of experts to translate qualitative information
into quantitative estimate. The important qualitative methods are:
 Jury of executive opinion method: very popular in practice, this method calls for the
pooling of views of a group of executive on expected future sales and combining them
into sales estimates.

BY TEWODROS MEKONNEN 47
  Delphi method: this method involves converting the views of a group of experts, who
do not interact face to face into a forecast through an iterative process.
B. Quantitative Methods
This method broadly comprises of two techniques of forecasting demand: these are time
series projection and causal methods.
 Time series projection methods: this method generates forecasts on the basis of an
analysis of the historical time series. The important time series projection methods are
as follows:
o Trend projection method: very popular in practice, this method involves in
extrapolating the past trend on to the future.
o Exponential smoothing method: in exponential smoothing, forecasts are
modified in the light of observed phenomena.
o Moving average method: according to this method, the forecast for next period
represents a simple arithmetic, average or a weighted arithmetic average of the
last few observation.
 Causal methods: more analytical than the preceding method, causal method seeks to
develop forecast on the basis of cause-effect relationships specified in an explicit,
quantitative manner. The causal method comprises of:
o Chain ratio method: a simple analytical approach, this methods calls for
applying a series of factors for developing a demand forecast.
o Consumption level method: useful for a product that is directly consumed, this
method estimate consumption level on the basis of elasticity coefficient, the
important ones being the income elasticity of demand and the price elasticity
of demand.
o End use method: suitable for intermediate products, the end use method
develops demand forecasts on the basis of the consumption coefficient of the
product for the various uses.
o Leading indicator method: according to this method, observed changes in
leading indicators are used to predict the change in lagging variables.
o Economic methods: perhaps the most sophisticated forecasting tool, the
econometric method involves estimating quantitative relationship derived from
economic theory.

BY TEWODROS MEKONNEN 48