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DEMAND ANALYSIS
Introduction
Estimate the potential size of the market
Idea about the market share that is likely to be
captured
Likely aggregate demand for the
product/service
Likely market share
OUTLINE
Collection of Demand
Secondary Forecasting
Information
Situational
Analysis and Characterisation
Specification of the Market
of Objectives
Conduct of Market
Market Survey Planning
Situational Analysis
In order to get a “feel” of the relationship between the product and its
market, the project analyst may informally talk to customers,
competitors, middlemen, and others in the industry. Wherever possible,
he may look at the experience of the company to learn about the
preferences and purchasing power of customers, actions and strategies of
competitors, and practices of the middlemen.
Pros
• It is an expeditious method
• It permits a wide range of factors to be considered
• It appeals to managers
Cons
• The biases cannot be unearthed easily
• Its reliability is questionable
Delphi Method
This method is used for eliciting the opinions of a group of experts with the
help of a mail survey. The steps involved in this method are :
There are some question marks: What is the value of the expert opinion?
What is the contribution of additional rounds and feedback to accuracy?
Trend Projection Method
Linear relationship : Yt = a + bT
Exponential relationship : Yt = aebt
Polynomial relationship : Yt = a0 + a1t + a2t2 …….an tn
Ft+1 = Ft + et (4.7)
As per the moving average method of sales forecasting, the forecast for
the next period is equal to the average of the sales for several preceding
periods.
In symbols,
St + St-1 + … + St-n+1
Ft+1 = (4.8)
n
The consumption coefficients for these industries, the projected output levels for these
industries for the year X, and the projected demand for Indchem as shown in the
following slide.
Consumption Projected Output Projected Demand for
Coefficient * in year X Indchem in year X
Developed by Frank Bass, the Bass diffusion model seeks to estimate the pattern of
sales growth for new products, in terms of two factors:
p : The coefficient of innovation. It reflects the likelihood that a potential customer
would adopt the product because of its innovative features.
q : The coefficient of imitation. It reflects the tendency of a potential customer to
buy the product because many others have bought it. It can be regarded as a
network effect.
According to a linear approximation of the model:
nt = pN + ( q – p ) Nt-1 + ( q / N ) x ( Nt-1 )2
where nt, is the sales in period t, p is the coefficient of innovation, N is the potential
size of the market, q is the coefficient of imitation, and Nt is the accumulative sales
made until period.
Bass Diffusion Model - 2
A new product has a potential market size of 1,000,000. There is an older product that
is similar to the new product. p = 0.030 and q = 0.080 describe the industry sales of
this older product. The sales trend of the new product is expected to be similar to the
older product.
Applying the Bass diffusion model, we get the following estimates of sales in year 1
and year 2.
0.080
n1 = 0.03 x 1,000,000 + (0.08 – 0.03) x + x 02 = 30,000
1,000,000
= 31,572
Leading Indicator Method
Leading indicators are variables which change ahead of other variables, the
lagging variables. Hence, observed changes in leading indicators may be used
to predict the changes in lagging variables. For example, the change in the level
of urbanisation ( a leading indicator) may be used to predict the change in the
demand for air conditioners (a lagging variable)
Two basic steps are involved in using the leading indicator method: (i)
First, identify the appropriate leading indicator(s).(ii) Second, establish the
relationship between the leading indicator(s) and the variable to be forecast.
The principal merit of this method is that it does not require a forecast of
an explanatory variable. Its limitations are that it may be difficult to find
appropriate leading indicator(s) and the lead-lag relationship may not be stable
over time.
Econometric Method
GNPt = Gt + It + Ct (4.12)
It = a0 + a1 GNPt (4.13)
Ct = b0 + b1 GNP1 (4.14)
• Check assumptions
• Stress fundamentals
• Beware of history
• Watch out for euphoria
• Don’t be dazzled by technology
• Stay flexible
Uncertainties in Demand Forecasting
Demand forecasts are subject to error and uncertainty which arise from
three principal sources:
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 methods is available to the market analyst. These may
be divided into three broad categories, viz., qualitative methods, time series
projection methods, and causal methods.