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

(1) (2) Number of Number of employees mines

(3) (4) (5) Potential Unit Dollar market Number of market potential (at instruments potential $1,000 each) per size class (2 x 3) 1 2 4 1 2 3 80 100 80 260 40 40 30 110

1042 (lode deposits)

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

80 50 20 150 40 20 10 70

$260,000

1043 (placer deposits)

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 men’s 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.

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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 nation’s total potential demand for dress shirts. Total potential equals $2 billion x .005935 = $11,870,000. Company’s 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:
What people say

Methods
Surveys of buyers’ intentions Composite sales force opinions Expert opinion Test markets Time-series analysis Leading indicators Statistical demand analysis

What people do What people have done

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
.1 .2 Slight .3 .4 Fair .5 .6 Good .7 .8 Strong .9 1.0 For certain

Do you intend to buy an automobile within the next six months?
0 No chance

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+6.46X1–2.37X2

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