Measuring and Forecasting Demand

1. Measuring and Forecasting Demand Muhammad Imran

2. 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

3. 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

4. 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.

5. 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).

7. Market-Factor Index Method • Identifies market factors that correlate with market potential and combines them into weighted index. • A manufacturer of men’s 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.

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

9. Common Sales Forecasting Techniques

10. 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?

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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 = -145.5+6.46X1–2.37X2