Demand estimation

Production of a good or supplying of product to

the market depends on correct estimation of
demand in case of incorrect estimation of demand
firm would decrease the profit
Similarly excess supply of product to the market
tends to fall the price of good, and profit margin
of a firm would decline
Direct Methods of Demand Estimation
Consumer interviews
Range from stopping shoppers to speak with
them to administering detailed questionnaires
Potential problems
 Selection of a representative sample, which is a sample
(usually random) having characteristics that accurately
reflect the population as a whole
 Response bias, which is the difference between responses

given by an individual to a hypothetical question and the

action the individual takes when the situation actually
occurs
 Inability of the respondent to answer accurately
 Direct Methods of Demand Estimation

Market studies & experiments

Market studies attempt to hold everything constant
during the study except the price of the good
Lab experiments use volunteers to simulate actual
buying conditions
Field experiments observe actual behavior of
consumers
Demand estimation through marketing
Research
 We can estimate demand through the following
techniques
Consumer surveys and observational Research
Consumer Clinics
Market Experiments
Consumer surveys and observational
Research
•The survey conducted at a big shopping centers by trained
interviewers with sophisticated questions

•Consumers questionnaires provide useful information to

the firm
Sample questionnaire for survey
Do you know how much your monthly consumption of
Coke would change if

price of Coke rose by 10%

your income increase by 20%

Coke producer doubled its advertising expenditures

caffeine content of Coke were reduced by 1% point

price of competitor product (Coke) reduced by 2%

Demand estimation through marketing Research
approach (cont….
•Through giving answer of these questions manager can
get a rough idea about the market demand
•Some time consumers are unable or unwilling to provide
accurate information
•In this case manager is not able to estimate the market
demand, so consumer survey is replace by observational
research
Observational research:

This refers to the gathering of information on consumer

preferences by watching them buying and using goods

However consumer survey is useful and is the only way

to obtain information about possible consumer response

Especially if a firm is thinking of introducing a new

product or changing the quality of an existing one

The only way that the firm can test consumer reaction is
to directly ask them, since no other data are available
Consumer Clinics
•Another approach to estimate demand is consumer
clinics
These are laboratory experiments in which the
participants are given a sum of money and asked to
spend it in a simulated stores to see the react , but
Change the price of product in different stores
Different product packing in different stores
Different product displays in different stores
Different price of competing product in different
stores etc
•Disadvantages of this method:
•In order to keep costs down, the experiment is likely to be conducted on
too limited a scale
•The experiment is conducted for short period of time
•So inference or results about entire market and or more extended period
of time are questionable
•Irregular factors such as strike or bad weather seriously effect the result
•Demand estimation through marketing Research approach (cont….)
Advantages of the Methods

Participants have the incentive to purchase the

commodities they want the most

This method is more realistic than consumer survey,

because in this method we are observing the actual market
behavior
Shortcomings of this method

The results are questionable because participants know

that they are in an artificial situation and that they are being
observed

So they are not likely to act normally

The sample of participants must necessarily small

because of the high cost of running the experiment

Inference or results from small sample are dangerous

Market Experiments

Market experiments are conducted in the actual market

place

There are many ways of performing market experiments

One way is to select several markets with similar

socioeconomic characteristics
Market experiments can be conducted by

Changing the commodity price in some markets or stores

Packing in other markets or stores

Different amount of promotion in the markets and stores

Then record the response (purchase) of consumers in the

different markets

By using census data or survey for various markets, a firm

can also determine the effect of age ,sex, level of education,
income, family size and so forth on demand for the
commodity
•Advantages of this method

We can ensure the validity of the results by conducting on

a large scale

Consumers act /behavior is normal as consumers are not

aware that they are part of an experiment
Disadvantages of this method:

In order to keep costs down, the experiment is likely to be

conducted on too limited a scale

The experiment is conducted for short period of time

So inference or results about entire market and or more

extended period of time are questionable

Irregular factors such as strike or bad weather seriously

effect the result

(Continue)
Competitors could try to sabotage the experiment by changing
prices and other determinants of demand under their control

Competitors also monitor the experiment and gain useful

information that the firm would prefer not to disclose

Firm might permanently lose customers in the process of

raising prices in the market where it is experimenting with a
high price
Demand estimation through marketing Research
approach (cont….)

Competitors could try to sabotage the experiment

by changing prices and other determinants of
demand under their control
Competitors also monitor the experiment and
gain useful information that the firm would prefer
not to disclose
Firm might permanently lose customers in the
process of raising prices in the market where it is
experimenting with a high price