Measuring and Forecasting

Demand

Muhammad Imran
Measuring Current Market Demand
 Marketers will want to estimate three
different aspects of current market
demand

o Total market demand

o Area market demand
o 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) (3) (4) (5)
Number of Number of Potential Unit Dollar market
employees mines Number of market potential (at
instruments potential $1,000 each)
per size class (2 x 3)

1042 Under 10 80 1 80
(lode 10 to 50 50 2 100
deposits) Over 50 20 4 80
150 260 $260,000

1043 Under 10 40 1 40
(placer 10 to 50 20 2 40
deposits) Over 50 10 3 30
70 110 110,000
$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.
 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: Methods

What people say Surveys of buyers’ intentions
Composite sales force opinions
Expert opinion

What people do Test markets

What people have done Time-series analysis

Leading indicators
Statistical demand analysis
 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

Do you intend to buy an automobile within the next six months?
0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1.0
No Slight Fair Good Strong For certain
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