Module 2. Consumer behaviour and market intelligence

Lesson 7

MARKET DEMAND ASSESSMENT- PRESENT AND FUTURE DEMAND

7.1 Introduction

Demand forecasting and sales forecasting are important for any marketing planning and control as it serves the basis for comparison over a period of time. Forecasting helps in identifying and solving marketing and sales problems. Further, they are also used for setting performance standards. If the market knows the different tools and their application and is familiar with the market forces, most often, 90 to 95% of the forecast is good.

Sales forecasts are used by finance department to raise the required cash for investment and operations, by production departments to establish capacity and output levels, by purchasing department to procure right amount of supplies in quantity and quality terms, by human resource department to hire the required number of manpower. Marketing is responsible for preparing sales forecasts. If its sales forecasts are far off the mark the organization will face excess or inadequate inventory. Sales forecasts are based upon estimates of demand.

Sales forecasting serves as the starting point for all actions of the organization and provides direction to all activities. It helps organization to decide which products are to be continued, which are to be dropped, which are to be added and which needs modifications. Sales forecasting forms backbone of marketing. It not only provides the numbers regarding sales but also provides vital clues about tastes, preferences and needs. Based upon proper sales forecasting, the organization can properly handle its marketing planning and marketing strategy formulations. It also helps the organization to know its precise position in the market which then facilitates optimum utilization of resources, optimum penetration of markets and optimum gains from marketing opportunities.

The sales forecast is the foundation for all marketing activities for all organisations. For organization handling milk and milk products, the sales forecasting function assumes higher importance owing to perishable nature of the product, fluctuation in supply due to flush and lean season of milk production, large number of milk products, geographical variations in tastes and preferences of milk products etc.

Demand forecasting is one of the most important aspects of managing a business. Finding the right balance of supply and demand allows a organization to produce enough to meet the demand of its customers. If the organization overestimates demand, it runs the risk of producing too much, leaving it with unsold merchandise. If the organization produces too little, it runs the risk of not meeting demand and losing sales.

7.2 Common Marketing Terms Used in Market Forecasting

7.2.1 Market

Traditionally market was considered as a place/location/area where buyers and sellers come together and exchange goods and services and money transfer takes place between them. In modern era of internet this traditional concept of market does not hold. In today’s competitive world, market is considered as a set of existing and potential buyers of a product/service.

7.2.2 Potential market

It consists of all the consumers who show interest in a specific product/service of an organization.

7.2.3 Available market

This consist of all the consumers who show interest, have sufficient income to purchase the product/service of an organization

7.2.4 Qualified available market

This consist consumers from available markets who fulfill all the qualifications laid down or stipulated by laws or as social norms. For example, sale of tobacco products is banned for consumers below 18 years of age. Thus only those consumers who are above 18 years from available market will be part of qualified available market.

7.2.5 Target market

This is part of qualified available market to which the organization intends to sale their products.

7.2.6 Penetrated market

This consists of consumers who are already purchasing organizations products.

7.2.7 Market demand

It is the total quantity of products or services that is bought by a specified customer group in a specific geographical area in a specified time period in a specified marketing environment under a specified marketing programme.

7.2.8 Company demand

It is share of company in total market demand.

7.2.9 Market forecast

At a particular point of time, only one level of marketing expenditure will be incurred. The market demand corresponding to this level is referred to as market forecast.

7.2.10 Company forecast

This is estimated company’s sales corresponding to a particular marketing expenditure by the company.

7.2.11 Market potential

This is the maximum limit of market demand which can be achieved in a particular marketing environment corresponding to a particular level of marketing expenditure.

7.2.12 Company sales potential

It is the maximum limit of company demand in comparison to its competitor with increase in company’s marketing expenditure.

Characteristics and examples of various demand states are described in Table - 7.1

Table 7.1 Various demand states

Sr. No.	Demand state	Characteristic	Example
1.	Negative demand	Consumer does not like the product and even prepared to pay a price to avoid it.	A strict vegetarian person will not take non vegetarian food and may even skip the meal and remain hungry.
2.	No demand	Consumers are not interested in the product or not aware about the product.	A farmer may not be interested to adopt new farming technique for one or the other reason or might not be aware about the same.
3.	Latent demand	A strong need which cannot be satisfied by existing products.	A single dose of drug which cure deadly disease like AIDS or cancer.
4.	Declining demand	Reduction in demand of organizations product/service due to less purchase.	All organizations may face such a situation for their products or services.
5.	Irregular demand	Variation in demand is observed on a seasonal, monthly, weekly, daily, or hourly basis.	Demand of ice cream.
6.	Full demand	Market demand is in accordance with organizations capacity.	Many organizations experience such a demand state. Cooperative dairy plants of Gujrat have full demand.
7.	Overfull demand	Demand for organizations product are more than which it can handle.	Some religious places experience more devotees on some particular day then on other days.
8.	Unwholesome demand	Demand of products undesirable from societies point of view	Drugs e.g. marijuana

7.3 Methods of Estimating Current Demand

For estimating current demand, marketing professionals desire to estimate total market potential, area market potential and total industry sales and market shares.

7.3.1 Total market potential

This refers to maximum total aggregate sale of all the organizations in an industry for a specified time period, for a specified geographical area and under organizations specific marketing expenditure and environmental conditions.

Total market potential = (Total number of potential consumers) x (Average quantity of products/services purchased by a consumer) x (The price paid by the consumer)

A variation of this approach is the chain ratio method.

7.3.1.1 Chain ratio method

This method employs multiplying several proportions by a base number. For example, a dairy marketing federation is interested to know the market potential of probiotics ice creams among rural people between 20-30 years.

Potential for probiotic ice-cream among rural people between 20-30 years = A x B x C x D x E x F

A = Rural population between 20-30years.

B = Per capita personal discrenary income of rural people between 20-30 years.

C = Average percentage of discretionary income spent on food.

D = Average percentage of amount spent on food that is spent on frozen foods.

E = Average percentage amount spent frozen foods that is spent on ice cream from total amount spent on frozen food.

F = Expected percentage amount spent on ice creams that will be spent on probiotic ice cream

7.3.2 Area market potential

 For appropriate allocation of marketing resources to different geographical territories so that maximum profit can be earned, it is essential to know the individual market potential of different areas. Area market potential can be known by following three methods.

7.3.2.1 Market build up method

This method involves finding out all the potential consumers in each market area and knowing their potential purchases. For example, if an organization producing overhead projector for classrooms wants to estimate its market potential in Ahmadabad city of Gujarat, it will first of all determine the list of all educational institutes in Ahmadabad city which have adopted and which may adopt the teaching method through overhead projector. Then it will estimate the number of overhead projector each educational institute will purchase based upon number of classrooms.

7.3.2.2 Multiple factor index

This method is most suitable for consumer goods. For consumer goods many consumers are there and it is difficult to list them all. In this method certain weights are assigned to factors affecting sales of consumer goods. It is mainly dependent upon population of the geographic area, average personal income of people of that area, number of retail outlets in the area etc. For example, a pharmaceutical company may assume that potential for drugs in a particular geographical market will be a function of, say, (i) population of the area, (ii) per capita income, and (iii) number of physicians in the market. Using econometric methods the company can develop a multi-factor index for estimating potential for drugs as shown here:      The drug-buying index (i.e., percent of national drug sales that might be expected) for, say, Mumbai = a x population of Mumbai as a percentage of national population + b x Per capita income of Mumbai as a percentage of national per capita income + c x number of physicians in Mumbai as a percentage of the number of physicians in India.

Note: a, b, and c, are determined using past sales and other data. (Source: Marketing Management: A south Asian Perspective by Philip Kotler et.al, 13 th edition Pearson education)

7.3.2.3 Brand development index

Percentage of brand sales in particular area in relation to the percentage of country’s population in that area. It indicates where significant groups of brands customer live and helps direct marketing efforts. Suppose a brand has 10 percent of sales in an area where the country’s 20 percent of population live than is brand development index will be (10/20) x 100 = 50.

7.3.3 Industry sale and market share

Apart from estimating market demand for one’s own marketing organization, it is also essential to know the sale and market share of competitors in the same industry. Secondary data sources are used to obtain and know industry sale and market share.

7.4 Estimating Future Demand

The methods of estimating future demand are divided into qualitative and quantitative methods.

7.4.1 Survey of buyers

Under this method buyers are asked about their future purchase intentions for a product. The answers are suitably arranged on a scale indicating options from complete certainty to not at all and in between them.

7.4.2 Aggregate sales force opinion

When it is difficult to estimate market demand based upon buyers survey, the organizations may resort to sales force estimation. In this method, salespersons are asked to give future sales estimate in their territory. Although simple, but the method is not widely used as there are possibility of providing very pessimistic or optimistic estimate by salesperson without considering company policies and larger economic trends.

7.4.3 Expert opinion

Expert’s opinion may be obtained in number of ways. They can be interviewed separately or called at one place and opinion asked for in the form of a group discussion, (focus group) or may be sent as a questionnaire and then responses are revised by moderator (Delphi method). In Delphi method anonymity of experts is maintained wherein one or two rounds of sending questionnaires may be undertaken until a final common figure is obtained. Under these method dealers, large buyers, marketing consultants and persons from trade associations may be considered as experts.

7.4.4 Quantitative techniques

This includes many mathematical and statistical techniques which take in to consideration past data combine them and by using suitable formulas, future estimates are worked out. The major quantitative methods are exponential smoothing, time series analysis, correlation, econometric models etc.