Market Demand Measurement and Forecasting Techniques

Posted on Dec 3, 2024 in Economy

Measuring and Predicting Demand

Introduction

This paper presents methods for measuring and forecasting market demand, including tools and techniques for calculating it. This analysis is crucial for companies to understand consumer behavior and the impact of marketing strategies on product sales. We will define the market and its classifications, then analyze demand and the tools used to measure current and forecast future demand.

Defining the Market

A market is where buyers and sellers exchange goods and services. Economists define a market as all buyers and sellers trading a good or service. Marketers define it as the present and potential buyers of a product or service. A market comprises buyers, while an industry comprises sellers.

Potential buyers have three key characteristics: interest, income, and access.

  • Potential Market: Consumers with some interest in a product or service.
  • Existing Market: Consumers with interest, income, and access to a product or service.
  • Qualified Existing Market: Consumers with interest, income, access, and relevant skills for the product or service.
  • Market Served: Where the company focuses its efforts and resources.
  • Penetrated Market: Consumers who have purchased the product.

Measuring Current Market Demand

Marketers estimate three aspects of current market demand: total market demand, market area demand, and actual market share and sales.

Estimating Total Market Demand

Total market demand is the total amount a defined consumer group would buy in a defined geographical area, within a defined time, marketing environment, and industry marketing effort level and mix.

The figures below illustrate the relationship between total market demand and these conditions. The horizontal axis represents different industry marketing spending levels, while the vertical axis represents the resulting demand. The curve shows estimated market demand at different marketing spending levels. Increased spending raises demand, initially at an increasing rate, then a decreasing rate. Beyond a certain level, spending yields little extra demand, creating an upper limit called market potential. Figure B shows how market demand relates to the environment. Any marketing spending generates more demand during prosperity than recession.

Figure A:

Projected Expenditure

Q1: Market Potential

Market Forecast

Q2: Minimum Market

Industry Spending for Marketing

Figure B:

Market Potential (Prosperity)

Market Potential (Recession)

Market Demand (Specified Period)

Industry Spending for Marketing

A common way to estimate total market demand is:

Q = n x q x p

Where:

Q = total market demand

n = number of buyers

q = quantity purchased per average buyer annually

p = average unit price

A variant, the chain ratio method, multiplies a base number by a chain of ratios.

Estimating Market Area Demand

Companies must select the best sales territories and optimally allocate their marketing budget. This requires estimating market potential for different cities, states, or countries.

Two basic methods exist: the market buildup method (for business goods) and the market factor index method (for consumer goods).

  • Market Buildup Method: Identifies all potential buyers in each market and estimates their potential purchases.
  • Market Factor Index Method: Compares living standards across countries, relating domestic and foreign price levels to foreign currency exchange rates.

Calculating Actual Market Share and Sales

Besides total demand, companies need to know actual industry sales in their market. This involves identifying competitors and estimating their sales.

Industry associations often publish total sales, but not individual company sales. Alternatively, market research companies sell reports with total and brand-specific sales data, allowing performance comparison against the industry or competitors to track relative position.

Forecasting Future Demand

Companies typically use a three-step sales forecasting procedure:

  • Environmental forecast
  • Industry forecast
  • Company sales forecast

This yields a gross national product forecast, used with other indicators to forecast industry sales.

“Forecasting is the art of estimating future demand, which is usually not easy.”

Common Sales Forecasting Techniques

Methods Based On:

  • Buyer Intent Surveys: Directly asking buyers about their intentions. Valuable when buyers have clear intentions and the interviewer can describe the offering.
  • Sales Force Composite: When buyer interviews are impossible, companies can use salesperson estimates for their territories, aggregated into a general forecast.
  • Expert Opinion: Consulting experts like marketing consultants, distributors, and trade associations. Similar pros and cons to sales force estimates. Expert panels can also be used.
  • Test Market Method: Directly testing the market, useful for new products or established products in new channels or territories.
  • Time Series Analysis: Breaks down sales into trend, cycle, seasonal, and erratic components, then reassembles them for a forecast.
    • Trend: Long-term growth or decline from changes in population, capital formation, and technology.
    • Cycle: Medium-term sales fluctuations from economic activity and competition.
    • Seasonal: Consistent annual sales patterns.
    • Erratic: Random events like strikes, blizzards, etc.
  • Leading Indicators: Using other time-series that change in the same direction as company sales.
  • Statistical Demand Analysis: Statistical procedures to identify key factors affecting sales and their relative influence, such as prices, incomes, population, and promotion. Expresses sales demand (Q) as a dependent variable, explained by independent demand variables X1, X2,…Xn:
    Q = f(X1, X2,…Xn)