Measuring and Forecasting Demand

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Measuring and Forecasting Demand

• Muhammad Imran

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Measuring Current Market Demand

• Marketers will want to estimate three different
  aspects of current market demand
• Total market demand
• Area market demand
• Actual sales and market shares

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Estimating Total market demand

• Q n x q x p
• 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

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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
• Market buildup method used primarily by
  business goods firms
• Market-factor index method used primarily by
  consumer goods firms.

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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).

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SIC (1) Number of employees (2) Number of mines (3) Potential Number of instruments per size class (4) Unit market potential (2 x 3) (5) Dollar market potential (at 1,000 each)
1042 (lode deposits) Under 10 10 to 50 Over 50 80 50 20 150 1 2 4 80 100 80 260 260,000
1043 (placer deposits) Under 10 10 to 50 Over 50 40 20 10 70 1 2 3 40 40 30 110 110,000 370,000
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Market-Factor Index Method

• Identifies market factors that correlate with
  market potential and combines them into weighted
  index.
• A manufacturer of mens 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.

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• 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
  nations total potential demand for dress
  shirts.
• Total potential equals 2 billion x .005935
  11,870,000.
• Companys sales (NY) 1,100,000/11,870,000 9.3
  percent. Which is quite high than company
  national share i.e. 7 percent.

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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
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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
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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.

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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.

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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.

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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.

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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.

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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 -145.56.46X12.37X2