Market Measurement and

Forecasting

By:Shakti Shukla

Introduction
Market measuring and forecasting requires an

analysis of the market with an aim of

expressing
it
in
quantitative
(numeric)
quantities both present and in the future.
The quantitative measurement and forecasting
of the market, together with its qualitative
characteristics, are used as a basis for decision
making by marketing management.
Market measurement and forecasting can be
seen as a subdivision of market research.
Once the research is complete, the company
must measure and forecast the size, growth,
and profit potential of each market opportunity

Definition of Market
Measurement

Usually applied to fundamental measurement of

market volume, value, brand shares and the

trends of all of these. Data for these may be
collected from secondary sources, from special
censuses or surveys, or from syndicated research
such as CONSUMER PANELS. The definition of the
market to be measured is often difficult, and
depends on the marketing or corporate objectives
involved.
-- The Westburn Dictionary of Marketing
Market measurement is management tool through
which the markets which is investigated is
expressed in quantitatively measurable entities.

Need for measurement and

forecasting
The main goal of market measurement and forecasting

is to serve as an aid in the decisions that marketing

management has to make
Knowledge of market sizes and probable growth
patterns provide the basis for the selection of attractive
markets
It helps in the formulation of appropriate marketing
strategies
It helps in taking decisions in a more objective and
scientific manner and to lessen the risk and uncertainty
that accompany subjective decisions and guesswork.
It helps evaluating the feasibility of entering new
segments
It helps organization to decide how best to allocate its
marketing resources and activities among market
segments in which it is already active.

Example
In

Coca Cola, When Roberto Goizueta

became CEO of Coca-Cola, many people
thought that Coke's sales were maxed out.
Goizueta, however, reframed the view of
Coke's market share. He said Coca-Cola
accounted for less than 2 ounces of the 64
ounces of fluid that each of the world's 4.4
billion people drank on average every day.
"The enemy is coffee, milk, tea, water," he
told his people at Coke, and he ushered in a
huge period of growth.

Levels of market
measurement
Consumer level
Product level
Geographic level
Time level

Consumer level
The

consumer
level
of
market
measurement is the most popular level
used as it provides information on the
number of final consumers defined in
different market segments
For example, the consumer level of the
market for potato chips would provide
measurement information on segments
such as schools, sports meetings and
private households.

Product level
As most markets are targeted by various

formats of the same product, the market

measurement can also be expressed in
terms of the total number of current buyers
for each product type.
For Example, Product types for potato chips
would, for example, be divided into all sales
of potato chips, sales of small packets (60
g) and sales of large bags (150 g).

Geographic level
The

total market can be divided into

geographical segments and it is thus
possible
to
express
the
market
measurement in geographic terms.
For example, Potato chips can, for instance,
be divided into sales for each of the
provinces of country or for certain climatic
regions.

Time level
A

market measurement should also be

specific in terms of the time of purchase
and provide information on the sales over
different time periods such as monthly
sales, seasonal sales and annual sales.
For example, Potato chips sales can be
divided into sales in different season in a
region

Relevant markets for

measurement Total Market (Eg. South
Potential market
Available

market
Target market
Penetrated

market

100%

Africa in total)
Available Market (Eg.
Metropolitan Areas)

60%

Target Market (Eg. Age

Group 15-35)

40%

Penetrated Market
(Actual Buyers)

20%

 The potential market is the set of consumers who

profess a sufficient level of interest in a market offer.

However, consumer interest is not enough to define a
market. Potential consumers must have enough
income and must have access to the product offer.
The available market is the set of consumers who
have interest, income, and access to a particular offer.
For some market offers, the company or government
may restrict sales to certain groups. For example, a
particular state might ban motorcycle sales to anyone
under 21 years of age. The eligible adults constitute
the qualified available marketthe set of consumers
who have interest, income, access, and qualifications
for the particular market offer.
The target market is the part of the qualified
available market the company decides to pursue. The
company might decide to concentrate its marketing
and distribution effort on the East Coast. The company
will end up selling to a certain number of buyers in its
target market.
The penetrated market is the set of consumers who
are buying the company's product.

Indicators for evaluating

companies competitive position
in the
market
Sales
potential

refers

to the quantitative indication of what the

organization's probable sales in a total market, available
market and/or target market should be in view of various
possible marketing efforts
Sales potential should not be confused with market
potential, which is an indication of the size of the total
demand for a product type at an infinite level of
marketing input from all participants (competitors) in the
market.
Market share
indicates the relationship of an organization's sales to
the sales of all participants (competitors) in the same
market
Market share can be expressed in volume as well as
monetary terms.
It must be noted that these two measures of market
share can differ for the same company

Methods of market
measurement
Total market potential
Area market potential
Total industry sales and market shares

Total market potential

The basic method
This is the most simple method of market
measurement and entails a calculation of the total
number of buyers, the average quantity
purchased per time period and the average price
of the product for the same time period. The
calculation is expressed in the following formula:
Q=nxqxp
where: Q = total market demand
n = total number of buyers in the market
q = average quantity purchased by a buyer per time
period
p = average price of the product per time period
The most difficult component to estimate is the

number of buyers for the specific product or

market

Total market potential

The chain ratio method
The chain ratio method involves a series of successive
calculations to a base quantity. The base quantity is often the
total economic productive population (or just the total
population).
The
following
calculations
are
percentage
breakdowns from the base quantity. The percentage calculations
can be obtained from marketing research or reliable secondary
sources. This method usually involves a percentage calculation of
the number of people who are expected to buy the product in the
future. This is called buying intention.
Suppose a brewery is interested in estimating the market
potential for a new light beer. An estimate can be made by the
following calculation:

Demand for the new light beer = Population x personal discretionary

income per capita x average percentage of discretionary income spent
on food x average percentage of amount spent on food that is spent
on beverages x average percentage of amount spent on beverages
that is spent on alcoholic beverages x average percentage of amount
spent on alcoholic beverages that is spent on beer x expected
percentage of amount spent on beer that will be spent on light beer.

Area Market Potential

Market build-up method
The method involves the determination of all
potential buyers of the product and the quantities
they will buy. These two figures are then multiplied
to obtain the market potential for the particular
product.
It usually involves the use of the Standard
Industrial Classification (SIC), which is available
from the Central Statistical Service.
The calculation of potential quantities to be
purchased can be based on aspects such as total
production, sales turnover, technology used and
number of employees.

Consider a machine-tool company that wants

to estimate the area market potential for its

wood lathe in the Boston area.
Its first step is to identify all potential buyers
of wood lathes in the area.
The
buyers
consist
primarily
of
manufacturing establishments that have to
shape or ream wood as part of their
operation, so the company could compile a
list from a directory of all manufacturing
establishments in the Boston area.
Then it could estimate the number of lathes
each industry might purchase based on the
number of lathes per thousand employees or
per $1 million of sales in that industry.

 An

efficient method of estimating area market

potentials makes use of the North American Industry
Classification System (NAICS), developed by the U.S.
Bureau of the Census
The NAICS classifies all manufacturing into 20 major
industry sectors. Each sector is further broken into a
six digit, hierarchical structure as follows

51
Industry
513
Industry
5133 Industry
51332
satellite)
513321

Sector (Information)
Sub sector (Broadcasting and telecommunications)
Group (Telecommunications)
Industry (Wireless telecommunications carriers, except
National Industry (U.S. Paging)

For each six-digit NAICS number, a company can

purchase CD-ROMs of business directories that provide

complete
company
profiles
of
millions
of
establishments, sub classified by location, number of
employees, annual sales, and net worth
The company's next task is to determine an
appropriate base for estimating the number of lathes
that will be used in each industry.
Once the company estimates the rate of lathe
ownership relative to the customer industry's sales, it
can compute the market potential.

Area Market Potential

The Multiple-factor index method
The method is based on a statistical index calculated from
the number of potential buyers that form part of a specific
market and should be used as a relative measure.
A market index can then be calculated from the various
applicable indices for that particular region or market.
The indices used to calculate the market index are
weighted according to their relative contribution to the
final measurement.
For example, suppose Virginia has 2.00 percent of the U.S.
disposable personal income, 1.96 percent of U.S. retail
sales, and 2.28 percent of U.S. population, and the
respective weights are 0.5, 0.3, and 0.2. The buyingpower index for Virginia would be 2.04 [0.5(2.00) +
0.3(1.96) + 0.2(2.28)]. Thus 2.04 percent of the nations
drug sales might be expected to take place in Virginia.

Total industry sales and market

shares
The industry trade association will often collect and

publish total industry sales, although it usually does

not list individual company sales separately. With this
information, each company can evaluate its
performance against the whole industry
Suppose a company's sales are increasing by 5
percent a year, and industry sales are increasing by
10 percent. This company is actually losing its relative
standing in the industry.
Another way to estimate sales is to buy reports from a
marketing research firm that audits total sales and
brand sales. Nielsen Media Research audits retail sales
in various product categories in supermarkets and
drugstores and sells this information to interested
companies.

What is demand
Demand in economics means effective demand,

that is one which meets with all its three crucial

characteristics; desire to have a good, willingness
to pay for that good & ability to pay for that good.

In absence of any of these three characteristics,

there is no demand.

Demand forecasting
Demand forecasting means estimation of the

demand for the good in the forecast period.

It is a process of estimating a future event by

casting forward past data.

The past data are systematically combined in a

predetermined way to obtain the estimate of

future demand.

Why Demand forecasting..

Planning of a new unit or expansion of an existing

unit. A multi-product firm must ascertain not only

the total demand situation, but also the demand
for different items separately.
Planning long-term financial requirements. As
planning for raising funds requires considerable
advance notice, long term sales forecasting are
quite essential to assess long-term financial
requirements.
Planning man-power requirements. Training &
personnel development are long-term propositions,
taking considerable time to complete.

Why Demand forecasting..

Appropriate production scheduling so as to avoid

the problem of over-production & the problem of

short-supply.
Helping the firm to reducing costs of purchasing
raw materials.
Determining appropriate price policy.
Setting sales targets & establishing controls &
incentives.
Evolving a suitable advertising & promotion
programme.
Forecasting short-term financial requirements.

Concepts of Market Demand

Market

Demand:
Total
volume
that
would
be
bought
by
a
defined
customer group in a defined
geographical area in a
defined time period in a
defined
marketing
environment.
Market demand is not a
fixed
number rather a
function of stated conditions
called
market
demand
functions.
Market demand increases
with demand stimulating
expenditures upto maximum
level of Q2 i.e. Market
potential.

Concepts of Market Demand

Two extremes of the Market demand expansible
demand or nonexpansible demand.
Expansible market demand:- Market demand
which can be expanded to maximum potential
level by marketing expenditure. For example
Juices, mobile phones etc.
Nonexpansible
market demand:- Market
demand which can not be expanded to maximum
potential level by marketing expenditure For
example Garbage collection from homes, cooking
gas etc.

Concepts of Market Demand

Market Forecast

Only one level of the

marketing expenditure
will occur and the
market
demand
forecast
for
corresponding
marketing expenditure
is market forecast.

Concepts of Market Demand

Market Potential

It is the limit approached by

market demand as industry

marketing
expenditure
approaches infinity for a
given market environment.
For
a
given
market
environment means it is
different in different market
environments. For example
it
will
be
higher
in
prosperity
than
in
recession.

Concepts of Market Demand

Company demand
It is the companys estimated share of market
demand at alternative levels of company
marketing effort in given time period.
It depends how companys products, services,
prices are perceived relative to competitors.
If the above are equal then companys demand
will depend upon the relative scale and
effectiveness of its marketing expenditure.

Concepts of Market Demand

Company sale forecast
It is the expected level of company sales based on a
chosen marketing plan and an assumed marketing
environment.
Sales quota is the sales goal set for a product line,
company division or sales representative. It is
primarily managerial device and are set generally on
higher side.
Sale budget is a conservative estimate of expected
volume of sales, primarily for making current
purchasing, production and cash flow decision. It is
generally set slightly lower side.

Concepts of Market Demand

Company sale potential
It is the sales limit approached by company
demand as marketing efforts increases relative to
that of competitors.
Absolute limit of company is equal to market
potential.
However it is not possible inspite of
infinite
marketing expenditure. As competitors has a hard
core of loyal buyers.

Forecasting methods

Market Forecasting Methods

Forecasting methods broadly derive from:Judgmental sources
Statistical sources

Methods Based on Judgment

Intentions
With intentions surveys, people are asked to predict how they
would behave in various situations. Intentions surveys are
widely used when sales data are not available, such as for new
product forecasts. There is much empirical research about the
best way to assess intentions and Morwitz (2001) draws upon
this to develop principles for using intentions in forecasting.
Role playing
A person's role may be a dominant factor in some situations,
such as in predicting how someone in a firm would behave in
negotiations. Role playing is useful for making forecasts of the
behavior of individuals who are interacting with others, and
especially when the situation involves conflict. The key
principle here is to provide a realistic simulation of the
interactions. It is a method that has considerable potential for
forecasting although, currently, it is seldom used (Armstrong,
2001b).

Expert opinions
Expert opinion studies differ substantially from

intentions surveys. When an expert is asked to

predict the behavior of a market, there is no
need to claim that this is a representative
expert. Quite the contrary, the expert may be
exceptional.
One principle is to combine independent
forecasts from a group of experts, typically 5 to
20
The preferred procedure is to weight each
expert's forecast equally.
The accuracy of expert forecasts can be
improved through the use of structured
methods, such as the Delphi procedure.

Conjoint analysis
Intentions can be explained by relating consumers'
intentions to various factors that describe the
situation. For example, by asking consumers to state
their intentions to purchase for a variety of different
product offerings, it is possible to infer how the
factors relate to intended sales. This can be done by
regressing intentions against the factors, a procedure
which is known as conjoint analysis.
Judgmental bootstrapping
As with conjoint analysis, one can develop a model of
the expert. This approach, known as judgmental
bootstrapping, converts subjective judgments into
objective procedures. Experts are first asked to make
predictions for a series of conditions. For example,
they could make forecasts for next year's sales in
various geographical regions. This process is then
converted to a set of rules by regressing the forecasts
against the information used by the forecaster
Once developed, judgmental bootstrapping models
offer a low-cost procedure for making forecasts

Methods Based on Statistical

Sources
Extrapolation
Extrapolation methods use historical data on the series of
interest. Exponential smoothing is the most popular and cost
effective of the extrapolation methods. It implements the
principle that more recent data should be weighted more
heavily and also seeks to smooth out seasonal and/or
cyclical fluctuations to predict the direction in which the trend
is moving.
Rule-based forecasting
Quantitative extrapolation methods make no use of
managers' knowledge of the time series. The basic
assumption is that the causal forces that have affected a
historical series will continue over the forecast horizon. This
assumption is sometimes false. Rule based forecasting is a
type of expert system that allows one to integrate managers'
knowledge about the domain with time series data in a
structured and inexpensive way.

Analogies
Experts
can
identify
analogous
situations.
Extrapolation of results from these situations can
be used to predict the situation of interest (Duncan,
Gore and Szczypula, 2001). For example, to assess
the loss in sales when the patent protection for a
drug is removed, one might examine results for
previous cases, especially if the drugs are similar.
Expert systems
As the name implies, expert systems use the rules
of experts. These rules are typically created from
protocols, whereby the forecaster talks about what
he is doing while making forecasts. The real
promise, however, is for expert systems to draw
upon empirical results of relationships that come
from econometric studies. In fact, this is a common
way to construct expert systems. Expert opinion,
conjoint analysis and bootstrapping can also aid in
the development of expert systems

Econometric methods
Econometric

methods use prior knowledge

(theory) to construct a model. This involves
selecting causal variables, identifying the
expected directions of the relationships,
imposing constraints on the relationships to
ensure that they are sensible, and selecting
functional forms. In most marketing problems,
one can also make reasonable prior estimates
for the magnitude of the relationships, such as
for price or advertising elasticities. Data from
the situation can then be used to update the
estimates, especially if one has sufficient
amounts of relevant and reliable data.

Thanks