Market Measurement and Forecasting

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Market Measurement and Forecasting : 

Market Measurement and Forecasting By:- Balvinder Kumar Rochit Balhotra

Introduction : 

Introduction Market measuring and forecasting requires an analysis of the market with an aim of expressing it in quantitative (numeric) quantities both present and in the future. The quantitative measurement and forecasting of the market, together with its qualitative characteristics, are used as a basis for decision making by marketing management. Market measurement and forecasting can be seen as a subdivision of market research. Once the research is complete, the company must measure and forecast the size, growth, and profit potential of each market opportunity

Definition of Market Measurement : 

Definition of Market Measurement “Usually applied to fundamental measurement of market volume, value, brand shares and the trends of all of these. Data for these may be collected from secondary sources, from special censuses or surveys, or from syndicated research such as CONSUMER PANELS. The definition of the market to be measured is often difficult, and depends on the marketing or corporate objectives involved.” -- The Westburn Dictionary of Marketing Market measurement is management tool through which the markets which is investigated is expressed in quantitatively measurable entities.

Need for measurement and forecasting : 

Need for measurement and forecasting The main goal of market measurement and forecasting is to serve as an aid in the decisions that marketing management has to make Knowledge of market sizes and probable growth patterns provide the basis for the selection of attractive markets It helps in the formulation of appropriate marketing strategies It helps in taking decisions in a more objective and scientific manner and to lessen the risk and uncertainty that accompany subjective decisions and guesswork. It helps evaluating the feasibility of entering new segments It helps organization to decide how best to allocate its marketing resources and activities among market segments in which it is already active.

Example : 

Example In Coca Cola, When Roberto Goizueta became CEO of Coca-Cola, many people thought that Coke's sales were maxed out. Goizueta, however, reframed the view of Coke's market share. He said Coca-Cola accounted for less than 2 ounces of the 64 ounces of fluid that each of the world's 4.4 billion people drank on average every day. "The enemy is coffee, milk, tea, water," he told his people at Coke, and he ushered in a huge period of growth.

Levels of market measurement : 

Levels of market measurement Consumer level Product level Geographic level Time level

Consumer level : 

Consumer level The consumer level of market measurement is the most popular level used as it provides information on the number of final consumers defined in different market segments For example, the consumer level of the market for potato chips would provide measurement information on segments such as schools, sports meetings and private households.

Product level : 

Product level As most markets are targeted by various formats of the same product, the market measurement can also be expressed in terms of the total number of current buyers for each product type. For Example, Product types for potato chips would, for example, be divided into all sales of potato chips, sales of small packets (60 g) and sales of large bags (150 g).

Geographic level : 

Geographic level The total market can be divided into geographical segments and it is thus possible to express the market measurement in geographic terms. For example, Potato chips can, for instance, be divided into sales for each of the provinces of country or for certain climatic regions.

Time level : 

Time level A market measurement should also be specific in terms of the time of purchase and provide information on the sales over different time periods such as monthly sales, seasonal sales and annual sales. For example, Potato chips sales can be divided into sales in different season in a region

Relevant markets for measurement : 

Relevant markets for measurement Potential market Available market Target market Penetrated market

Slide 12: 

The potential market is the set of consumers who profess a sufficient level of interest in a market offer. However, consumer interest is not enough to define a market. Potential consumers must have enough income and must have access to the product offer. The available market is the set of consumers who have interest, income, and access to a particular offer. For some market offers, the company or government may restrict sales to certain groups. For example, a particular state might ban motorcycle sales to anyone under 21 years of age. The eligible adults constitute the qualified available market—the set of consumers who have interest, income, access, and qualifications for the particular market offer. The target market is the part of the qualified available market the company decides to pursue. The company might decide to concentrate its marketing and distribution effort on the East Coast. The company will end up selling to a certain number of buyers in its target market. The penetrated market is the set of consumers who are buying the company's product.

Indicators for evaluating companies competitive position in the market : 

Indicators for evaluating companies competitive position in the market Sales potential refers to the quantitative indication of what the organisation's probable sales in a total market, available market and/or target market should be in view of various possible marketing efforts Sales potential should not be confused with market potential, which is an indication of the size of the total demand for a product type at an infinite level of marketing input from all participants (competitors) in the market. Market share indicates the relationship of an organisation's sales to the sales of all participants (competitors) in the same market Market share can be expressed in volume as well as monetary terms. . It must be noted that these two measures of market share can differ for the same company

Methods of market measurement : 

Methods of market measurement Total market potential Area market potential Total industry sales and market shares

Total market potential : 

Total market potential The basic method This is the most simple method of market measurement and entails a calculation of the total number of buyers, the average quantity purchased per time period and the average price of the product for the same time period. The calculation is expressed in the following formula: Q = n x q x p where: Q = total market demand n = total number of buyers in the market q = average quantity purchased by a buyer per time period p = average price of the product per time period The most difficult component to estimate is the number of buyers for the specific product or market

Total market potential : 

Total market potential The chain ratio method The chain ratio method involves a series of successive calculations to a base quantity. The base quantity is often the total economic productive population (or just the total population). The following calculations are percentage breakdowns from the base quantity. The percentage calculations can be obtained from marketing research or reliable secondary sources. This method usually involves a percentage calculation of the number of people who are expected to buy the product in the future. This is called buying intention. Suppose a brewery is interested in estimating the market potential for a new light beer. An estimate can be made by the following calculation: Demand for the new light beer = Population x personal discretionary income per capita x average percentage of discretionary income spent on food x average percentage of amount spent on food that is spent on beverages x average percentage of amount spent on beverages that is spent on alcoholic beverages x average percentage of amount spent on alcoholic beverages that is spent on beer x expected percentage of amount spent on beer that will be spent on light beer.

Area market potential : 

Area market potential Market build-up method The method involves the determination of all potential buyers of the product and the quantities they will buy. These two figures are then multiplied to obtain the market potential for the particular product. It usually involves the use of the Standard Industrial Classification (SIC), which is available from the Central Statistical Service. The calculation of potential quantities to be purchased can be based on aspects such as total production, sales turnover, technology used and number of employees.

Slide 18: 

Consider a machine-tool company that wants to estimate the area market potential for its wood lathe in the Boston area. Its first step is to identify all potential buyers of wood lathes in the area. The buyers consist primarily of manufacturing establishments that have to shape or ream wood as part of their operation, so the company could compile a list from a directory of all manufacturing establishments in the Boston area. Then it could estimate the number of lathes each industry might purchase based on the number of lathes per thousand employees or per $1 million of sales in that industry.

Slide 19: 

An efficient method of estimating area market potentials makes use of the North American Industry Classification System (NAICS), developed by the U.S. Bureau of the Census The NAICS classifies all manufacturing into 20 major industry sectors. Each sector is further broken into a six digit, hierarchical structure as follows 51 Industry Sector (Information) 513 Industry Sub sector (Broadcasting and telecommunications) 5133 Industry Group (Telecommunications) 51332 Industry (Wireless telecommunications carriers, except satellite) 513321 National Industry (U.S. Paging) For each six-digit NAICS number, a company can purchase CD-ROMs of business directories that provide complete company profiles of millions of establishments, sub classified by location, number of employees, annual sales, and net worth The company's next task is to determine an appropriate base for estimating the number of lathes that will be used in each industry. Once the company estimates the rate of lathe ownership relative to the customer industry's sales, it can compute the market potential.

Area market potential : 

Area market potential The Multiple-factor index method The method is based on a statistical index calculated from the number of potential buyers that form part of a specific market and should be used as a relative measure. A market index can then be calculated from the various applicable indices for that particular region or market. The indices used to calculate the market index are weighted according to their relative contribution to the final measurement. For example, suppose Virginia has 2.00 percent of the U.S. disposable personal income, 1.96 percent of U.S. retail sales, and 2.28 percent of U.S. population, and the respective weights are 0.5, 0.3, and 0.2. The buying-power index for Virginia would be 2.04 [0.5(2.00) + 0.3(1.96) + 0.2(2.28)]. Thus 2.04 percent of the nations drug sales might be expected to take place in Virginia.

Total industry sales and market shares : 

Total industry sales and market shares The industry trade association will often collect and publish total industry sales, although it usually does not list individual company sales separately. With this information, each company can evaluate its performance against the whole industry Suppose a company's sales are increasing by 5 percent a year, and industry sales are increasing by 10 percent. This company is actually losing its relative standing in the industry. Another way to estimate sales is to buy reports from a marketing research firm that audits total sales and brand sales. Nielsen Media Research audits retail sales in various product categories in supermarkets and drugstores and sells this information to interested companies.

What is demand : 

What is demand Demand in economics means effective demand, that is one which meets with all its three crucial characteristics; desire to have a good, willingness to pay for that good & ability to pay for that good. In absence of any of these three characteristics, there is no demand.

Demand forecasting : 

Demand forecasting Demand forecasting means estimation of the demand for the good in the forecast period. It is a process of estimating a future event by casting forward past data. The past data are systematically combined in a predetermined way to obtain the estimate of future demand.

Why Demand forecasting.. : 

Why Demand forecasting.. Planning of a new unit or expansion of an existing unit. A multi-product firm must ascertain not only the total demand situation, but also the demand for different items separately. Planning long-term financial requirements. As planning for raising funds requires considerable advance notice, long –term sales forecasting are quite essential to assess long-term financial requirements. Planning man-power requirements. Training & personnel development are long-term propositions, taking considerable time to complete.

Why Demand forecasting.. : 

Why Demand forecasting.. Appropriate production scheduling so as to avoid the problem of over-production & the problem of short-supply. Helping the firm to reducing costs of purchasing raw materials. Determining appropriate price policy. Setting sales targets & establishing controls & incentives. Evolving a suitable advertising & promotion programme. Forecasting short-term financial requirements.

Concepts of Market Demand : 

Concepts of Market Demand Market Demand: Total volume that would be bought by a defined customer group in a defined geographical area in a defined time period in a defined marketing environment. Market demand is not a fixed number rather a function of stated conditions called market demand functions. Market demand increases with demand stimulating expenditures upto maximum level of Q2 i.e. Market potential.

Concepts of Market Demand… : 

Concepts of Market Demand… Two extremes of the Market demand expansible demand or nonexpansible demand. Expansible market demand:- Market demand which can be expanded to maximum potential level by marketing expenditure. For example Juices, mobile phones etc. Nonexpansible market demand:- Market demand which can not be expanded to maximum potential level by marketing expenditure For example Garbage collection from homes, cooking gas etc.

Concepts of Market Demand… : 

Concepts of Market Demand… Market Forecast Only one level of the marketing expenditure will occur and the market demand forecast for corresponding marketing expenditure is market forecast.

Concepts of Market Demand… : 

Concepts of Market Demand… Market Potential It is the limit approached by market demand as industry marketing expenditure approaches infinity for a given market environment. For a given market environment means it is different in different market environments. For example it will be higher in prosperity than in recession.

Concepts of Market Demand… : 

Concepts of Market Demand… Company demand It is the company’s estimated share of market demand at alternative levels of company marketing effort in given time period. It depends how company’s products, services, prices are perceived relative to competitors. If the above are equal then company’s demand will depend upon the relative scale and effectiveness of its marketing expenditure.

Concepts of Market Demand… : 

Concepts of Market Demand… Company sale forecast It is the expected level of company sales based on a chosen marketing plan and an assumed marketing environment. Sales quota is the sales goal set for a product line, company division or sales representative. It is primarily managerial device and are set generally on higher side. Sale budget is a conservative estimate of expected volume of sales, primarily for making current purchasing, production and cash flow decision. It is generally set slightly lower side.

Concepts of Market Demand… : 

Concepts of Market Demand… Company sale potential It is the sales limit approached by company demand as marketing efforts increases relative to that of competitors. Absolute limit of company is equal to market potential. However it is not possible inspite of infinite marketing expenditure. As competitors has a hard core of loyal buyers.

Slide 33: 

Forecasting methods Figure 21.5

Market Forecasting Methods : 

Market Forecasting Methods Forecasting methods broadly derive from:- Judgmental sources Statistical sources

Methods Based on Judgment : 

Methods Based on Judgment Intentions With intentions surveys, people are asked to predict how they would behave in various situations. Intentions surveys are widely used when sales data are not available, such as for new product forecasts. There is much empirical research about the best way to assess intentions and Morwitz (2001) draws upon this to develop principles for using intentions in forecasting. Role playing A person's role may be a dominant factor in some situations, such as in predicting how someone in a firm would behave in negotiations. Role playing is useful for making forecasts of the behavior of individuals who are interacting with others, and especially when the situation involves conflict. The key principle here is to provide a realistic simulation of the interactions. It is a method that has considerable potential for forecasting although, currently, it is seldom used (Armstrong, 2001b).

Slide 36: 

Expert opinions Expert opinion studies differ substantially from intentions surveys. When an expert is asked to predict the behavior of a market, there is no need to claim that this is a representative expert. Quite the contrary, the expert may be exceptional. One principle is to combine independent forecasts from a group of experts, typically 5 to 20 The preferred procedure is to weight each expert's forecast equally. The accuracy of expert forecasts can be improved through the use of structured methods, such as the Delphi procedure.

Slide 37: 

Conjoint analysis Intentions can be explained by relating consumers' intentions to various factors that describe the situation. For example, by asking consumers to state their intentions to purchase for a variety of different product offerings, it is possible to infer how the factors relate to intended sales. This can be done by regressing intentions against the factors, a procedure which is known as “conjoint analysis.” Judgmental bootstrapping As with conjoint analysis, one can develop a model of the expert. This approach, known as judgmental bootstrapping, converts subjective judgments into objective procedures. Experts are first asked to make predictions for a series of conditions. For example, they could make forecasts for next year's sales in various geographical regions. This process is then converted to a set of rules by regressing the forecasts against the information used by the forecaster Once developed, judgmental bootstrapping models offer a low-cost procedure for making forecasts

Methods Based on Statistical Sources : 

Methods Based on Statistical Sources Extrapolation Extrapolation methods use historical data on the series of interest. Exponential smoothing is the most popular and cost effective of the extrapolation methods. It implements the principle that more recent data should be weighted more heavily and also seeks to “smooth” out seasonal and/or cyclical fluctuations to predict the direction in which the trend is moving. Rule-based forecasting Quantitative extrapolation methods make no use of managers' knowledge of the time series. The basic assumption is that the causal forces that have affected a historical series will continue over the forecast horizon. This assumption is sometimes false. Rule based forecasting is a type of expert system that allows one to integrate managers' knowledge about the domain with time series data in a structured and inexpensive way.

Slide 39: 

Analogies Experts can identify analogous situations. Extrapolation of results from these situations can be used to predict the situation of interest (Duncan, Gore and Szczypula, 2001). For example, to assess the loss in sales when the patent protection for a drug is removed, one might examine results for previous cases, especially if the drugs are similar. Expert systems As the name implies, expert systems use the rules of experts. These rules are typically created from protocols, whereby the forecaster talks about what he is doing while making forecasts. The real promise, however, is for expert systems to draw upon empirical results of relationships that come from econometric studies. In fact, this is a common way to construct expert systems. Expert opinion, conjoint analysis and bootstrapping can also aid in the development of expert systems

Slide 40: 

Econometric methods Econometric methods use prior knowledge (theory) to construct a model. This involves selecting causal variables, identifying the expected directions of the relationships, imposing constraints on the relationships to ensure that they are sensible, and selecting functional forms. In most marketing problems, one can also make reasonable prior estimates for the magnitude of the relationships, such as for price or advertising elasticities. Data from the situation can then be used to update the estimates, especially if one has sufficient amounts of relevant and reliable data.

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