Market and

Demand
Analysis
Market analysis concerned primarily
with 2 questions
What would be the aggregate
demand for proposed
product/service in the future?
What would be the market share of
the project under appraisal?
 Overview
• Situational Analysis & Specifications of Objective.
• Collection of Secondary Information.
• Conduct of Market Survey.
• Characterization of the Market.
• Demand Forecasting.
• Uncertainties in Demand Forecasting.
• Market planning.

4
 Key Step in Market & Demand Analysis
and Their Inter-relationship
Collection of Demand
Secondary Forecasting
Information

Characterization of
Situational
the Market
Analysis and
Specifications of
Objectives

Market Planning
Conduct of
Market Survey
 SITUATIONAL ANALYSIS AND
SPECIFICATIONS OF OBJECTIVES
 Get a “feel” for the relationship between the product and it’s market,
the project analyst may informally talk to customers, competitors,
middlemen and other in the industry.
 Look at the experience of the company to learn about the purchasing
power of customer, action & strategies of competitors.
 The objectives of market & Demand analysis, to answer the
following question : (for air coolers)
 Who are the buyers of air cooler?
 What is the total current demand for air coolers?
 What price will the customer be willing to pay for the improved
air cooler.
 What price & warranty will ensure its acceptance?
 What are the prospects of immediate sales? etc.
 Collection of Secondary
Information
Secondary Information is information that has been gathered in some
other context and is already available.
 Secondary
information
provides the
base and
starting point
for the
market & Demand analysis.
 Also discussed on :
 General Sources of Secondary Information
 Industry Specific Sources of Secondary Information 7
 Conduct of Market Survey
 The market survey may be a census survey or a sample
survey.
 Census survey are employed principally for intermediate
goods & investment goods when such goods are used by a
small number of firms.
• Steps in a Sample Survey
– Define the Target Population
– Select the Sampling Scheme and Sample Size
– Develop the Questionnaire
– Recruit and Train the Field Investigators
– Obtain Information as Per the Questionnaire from the
Sample of Respondents
– Scrutinizes the Information Gathered
8
– Analyze and interpret the Information
 Characterization of the Market
8

 Effective Demand in the Past and Present

Production + Imports – Exports – Change in stock level
 Breakdown of Demand
– Nature of Product
– Consumer Groups
– Geographical Division
 Price
 Methods of Distribution and Sales Promotion
 Consumers
 Supply and Competition
 Government Policy
 Forecasting

 Predicting the future

 Qualitative forecast methods
– subjective
 Quantitative forecast methods
– based on mathematical formulas
10
Demand Forecasting

 Qualitative Methods
– These methods rely essentially on the judgment
of experts to translate qualitative information into
quantitative estimates
– Used to generate forecasts if historical data are
not available (e.g., introduction of new product)
– The important qualitative methods are:
• Jury of Executive Method
• Delphi Method
Jury
11 of Executive Opinion Method

Rationale
– Upper-level management has best information on latest
product developments and future product launches
Approach
– Small group of upper-level managers collectively develop
forecasts – Opinion of Group
Main advantages
– Combine knowledge and expertise from various
functional areas
– People who have best information on future
developments generate the forecasts
Jury
12 of Executive Opinion Method

 Main drawbacks
– Expensive
– No individual responsibility for forecast quality
– Risk that few people dominate the group
– Subjective
– Reliability is questionable
 Typical applications
– Short-term and medium-term demand forecasting
 13 Delphi Method

 Rationale

– Eliciting the opinions of a group of experts with

the help of mail survey

– Anonymous written responses encourage honesty

and avoid that a group of experts are dominated by
only a few members
 14 Delphi
Method
 Approach

Coordinator Each expert writes Coordinator

Sends Initial response performs
Questionnaire (anonymous) analysis

Coordinator No
Coordinator
sends updated Consensus Yes
summarizes
questionnaire reached? forecast
 15 Delphi Method
 Main advantages
– Generate consensus
– Can forecast long-term trend without availability of
historical data
 Main drawbacks
– Slow process
– Experts are not accountable for their responses
– Little evidence that reliable long-term forecasts can be
generated with Delphi or other methods
 Typical application
– Long-term forecasting
– Technology forecasting
 Time Series Projection Methods
16

• These methods generate forecasts on the basis of an

analysis of the historical time series.
• Assume that what has occurred in the past will
continue to occur in the future
• Relate the forecast to only one factor - time The
important time series projection methods are:
– Trend Projection Method
– Exponential Smoothing Method
– Moving Average Method
 17
Trend Projection Method
Method involves determining the trend of consumption by
analyzing past consumption statistics and projecting future
consumption by extrapolating the trend
Yt = a + bt
Yt = demand for year t
a=intercept
b=slope of relationship
Advantages
• It uses all observations
• The straight line is derived by statistical
procedure
• A measure of goodness fit is available

Disadvantages
• More complicated
• The results are valid only when certain
conditions are satisfied
 Exponential Smoothing

Sophisticated weighted moving average method

Requires three things this period’s forecast, the actual
demand for this period and α , refereed to as
smoothing constant and having a value between 0 and
1. The formula used is
Forecast= Previous period’s forecast+ α (actual
demand for previous period-Previous period’s
forecast)
 Ft = Ft - 1 + α (At-1 - Ft - 1 )
Solution of problem for
Exponential
Smoothing
 21 Moving Average
 Naive forecast
– demand in current period is used as next period’s forecast
 Simple moving average
– uses average demand for a fixed sequence of periods
– stable demand with no pronounced behavioral patterns
 Weighted moving average
– weights are assigned to most recent data
 According to the moving average method
St + S t – 1 +…+ S t – n +1
Ft + 1 =
n
where Ft + 1 = forecast for the next period
St = sales for the current period
n = period over which averaging is done
12-22
22 Weighted Moving Average

 Adjusts moving WMAn = 

n
Wi Di
i=
average 1

method to where
more closely Wi = the weight for period i,
reflect data between 0 and 100 percent
fluctuations
 Wi = 1.00

12-23
Weighted Moving Average
23

Example
MONTH WEIGHT DATA
August 17% 130
September 33% 110
October 50% 90
3
November Forecast WMA3 = 
i =1
Wi Di

= (0.50)(90) + (0.33)(110) + (0.17)(130)

= 103.4 orders

12-24
24 Causal Methods

Causal methods seek to develop forecasts on

the basis of cause-effects relationships
specified in an explicit, quantitative manner.
– Chain Ratio Method
– Consumption Level Method
– End Use Method
– Leading Indicator Method
– Econometric Method
25
Chain Ratio Methods

 Potential sales of a product may be estimated by

applying a series of factors to measure aggregate
demand.

 Example to be discussed
 26 Consumption Level Method

This method is used for those products that are

directly consumed. This method measures the
consumption level on the basis of elasticity
coefficients.
27 Consumption Level Method

 Income Elasticity: This reflects the responsiveness

of demand to variations in income. It is calculated
as:
E1 = [Q2 - Q1/ I2- I1] * [I1+I2/ Q2 +Q1]
• Where
E1 = Income elasticity of demand
Q1 = quantity demanded in the base year
Q2 = quantity demanded in the following year I1 =
income level in the base year
I2 = income level in the following year
28 Consumption Level Method

Price Elasticity: This reflects the responsiveness of

demand to variations in price. It is calculated as:
EP= [Q2 - Q1/ P2- P1] * [P1+P2/ Q2 +Q1]
• Where
EP= Price elasticity of demand
Q1= quantity demanded in the base year
Q2= quantity demanded in the following year P1
= price level in the base year
P2 = price level in the following year
 End Use Method
29

 Suitable for estimating demand for intermediate

products
 Also called as consumption coefficient method
Steps
1. Identify the possible uses of the products
2. Define the consumption coefficient of the product
for various uses
3. Project the output levels for the consuming
industries
4. Derive the demand for the project
 30
End Use Method

 This method forecasts the demand based on the

consumption coefficient of the various uses of the
product.

Projected Demand for Indchem

Consumption Projected Output Projected Demand for
Coefficient in Year X Indchem in Year X
Alpha 2.0 10,000 20,000
Beta 1.2 15,000 18,000
Kappa 0.8 20,000 16,000
Gamma 0.5 30,000 15,000
Total 69,000
 31 Leading Indicator Method

 This method uses the changes in the leading

indicators to predict the changes in the
lagging indicators. Leading indicators are
variables which change ahead of other
variables.
 Two basic steps:
1. Identify the appropriate leading indicator(s)
2. Establish the relationship between the leading
indicator(s) and the variable to forecast.
32 Econometric Method
An advanced forecasting tool, it is a mathematical
expression of economic relationships derived from
economic theory.
Economic variables incorporated in the model
1. Single Equation Model Dt = a0 + a1 Pt + a2 Nt
Where
Dt = demand for a certain product in year t. Pt = price of the
product in year t.
Nt = income in year t.
 33
Econometric Method
Advantages
•The process sharpens the understanding of
complex cause – effect relationships
•This method provides basis for testing
assumptions
Disadvantages
•It is expensive and data demanding
•To forecast the behaviour of dependant
variable, one needs the projected values of
independent variables
 34
Market planning
 Current marketing situation
- Market, Competition, Distribution, PEST.
 Opportunity and issue analysis - SWOT
 Objectives- Break even, % market share…
 Marketing strategy- target segment,
positioning, 4 Ps
 Action program- Quarter 1, Q2, Q3….
Thank You