Measures of Market Demand
Marketers are often confused about which measure to use for the purpose of forecasting. Many marketers take decisions on the scope of forecast depending on the nature and size of the targeted product markets. Companies can have different types of forecasts depending on the unit or measure.
The decisions can be taken at different time levels, i.e. short, medium, and long term; decisions can be on the space level, i.e. national, state, the local market, and at product level also, i.e. category level, product line level, and individual product/brand level. This kind of nomenclature makes market measurement and demand estimation a complex decision for many large organizations.
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The commonly used notions or units of market measure include measurement of market potential, market demand, market forecast, sales forecasts, sales budget, and above all demand estimation. The beginning point of the discussion should start with a working definition of a market. In the conventional definition, a market is a place where buyers and sellers meet.
But due to both mass marketing and e-marketing initiatives, the scope of market definition is no more confined to a geographic place of location of customers and sellers. In modern terminology, a market is a set of existing and potential buyers of a potential offer. So, the size of the market depends on the number of customers available for a product or service.
The potential market is a set of consumers who have an interest to buy products and services from the market within a stipulated period. Their interest in a product or service makes them eligible to be called a potential market.
However, only having interest does not augur effective demand patterns, hence both buying intention and buying power are necessary preconditions to define a market, known as Available Market (AM). The set of customers who have interest, income, and access and qualify to become buyers of products and services is called Qualified Available Market (QAM).
While the available market is the set of customers who have interest and buying power, members of the qualified available market need to qualify to become customers. For example, for a cigarette, though a child may have an interest in smoking and access to the distribution of cigarettes, the marketer does not consider him as a target market member.
Typically, a company may go after the whole available market or a part of the market. A commodity marketer does not make any distinction between categories of consumers and sells to everyone in the market, whereas a brand marketer may decide to exclude some part of the market and concentrate only on a portion of the market. T
here may be various reasons for such a decision, for example, the selected part of the market may have comparatively more purchasing power or have an immediate demand or the company may be looking for effective utilization of the marketing pie. Limitations in resources to build and serve the market very often force marketers to concentrate on a specific part of the market.
This market is called Target Market (TM). It is that part of the market, which the company decides to pursue to achieve its marketing objectives. Over a period of time, the company will be able to sell to a specific part of the target market. This market is popularly known as Penetrated Market (PM). It is the set of customers who are buying the company’s current products.
Forecasting exercise involves an understanding of the market potential. Consider the example of the purchase of a newspaper. To estimate the market potential for newspapers in India, we have to know the number of householders, libraries, and other establishments. If we want to know about the market potential of the household sector only, we can assume that each household is subscribing to a newspaper.
Thus, we can say that the market potential for newspapers is equal to the number of households in the country. Again, if we assume that six people constitute a household, we have about 145 million households. Ideally, this is the household market for newspapers. But then, we know that 25 percent of the Indian population is below the poverty line and hence will not be able to buy newspapers.
Besides, almost 40 percent of Indians fall under the low-income group and given the prices of newspapers, they too may not be able to afford one. So, one is left with only 35 percent of the total population which is the real market that needs to be targeted.
The market potential is the limit approached by the market demand as the industry’s marketing expenditures approach infinity, for a given environment. In other words, market potential refers to the upper limit of market demand.
It is important for us to understand that there are three key terms involved in defining the market potential. These include market demand, market expenditure by the industry, and a defined market environment. We will discuss these concepts in the following paragraphs.
Market demand is always defined with reference to a price and a time period. It is meaningless to specify demand without reference to price and time period. The statement that the demand for cars is 100,000 is meaningless.
The price at which these cars are demanded is to be mentioned, as with the change in price, the quantity demanded may also change, depending upon the time period under consideration. Demand for a commodity may be defined as the ‘quantity of a commodity that will be bought at a particular price and during a given period or point of time.’
Market demand means the demand of all the consumers in the market for a commodity at a particular price. The market demand schedule shows the total demand of all the consumers in the market at various prices.
Market forecast refers to the estimates of future sales of a company’s products in the market. It is a core component of market analysis. It projects the future numbers, characteristics, and trends in your target market.
Accurate sales forecasting is essential for a firm to enable it to produce the required quantities at the right time and arrange well in advance for the various factors of production, viz., buildings, equipment, machine accessories, raw materials, labor, etc.
Some firms may as a policy produce order but, generally, firms produce in anticipation of future demand. Sales forecasting helps a firm to assess the probable demand for its products and plan its production accordingly. It can also help management in reducing its dependence on chance.
Sales forecasting is also helpful in better planning and allocation of various resources. Planning is always based on certain assumptions about the future course of events. In a world of uncertainty, future conditions can never be predicted perfectly. Yet, the marketer or the administrator must plan and take decisions using whatever, in his judgment, constitutes the best estimate about future developments.
Sales forecasting is very popular in industrially advanced countries where demand conditions are always more uncertain than supply conditions. In developing countries, however, instead of demand, supply is often the limiting factor. High prices and black markets point to supply bottlenecks.
A sales budget is a program designed for a stipulated time frame that highlights the selling expenses and the anticipated sales – quantitatively and in value terms. This helps in making an objective estimate of net profit on the selling operations. In a real sense, it is a statement aimed at comparing the revenue, net profits, sales volume, and selling expenses relating to a product or entire business.
Since the volume of sales and selling expenses have their bearing on personal selling strategy, it becomes important to consider rather seriously the two key issues, viz.,
- The quality of sales force
- The size of the sales force
The sales volume for the period in question is estimated by using the sales forecast. The sales volume derived through sales forecast is classified to highlight the quantities of products that are to be sold, sales personnel who would handle their sales and the respective sales districts, the prospective buyers, and the quantities to be sold during different time periods during the plan periods.
After arriving at such a wide-based classification, the likely selling expenses that would be incurred in the implementation of the year-round sales program are then estimated. The first point in designing a sales budget is the anticipated sales volume. The top sales executives would be involved to the extent of their participation in the sales forecast.