MarketandDemandAnalysis

Situationalanalysisandspecificationofobjectives
Collectionofsecondaryinformation
Conductofmarketsurvey
Characterisationofthemarket
Demandforecasting
Uncertaintiesindemandforecasting
Marketplanning

KeyStepsinMarketandDemandAnalysisandtheirInter-relationships

Collectionof
Secondary
Information

Situational
Analysisand
Specification
ofObjectives

Demand
Forecasting

Characterisation
oftheMarket

Conductof
MarketSurvey

Market
Planning

SituationalAnalysis

Inordertogetafeeloftherelationshipbetweentheproduct
anditsmarket,theprojectanalystmayinformallytalkto
customers,competitors,middlemen,andothersintheindustry.
Whereverpossible,hemaylookattheexperienceofthecompany
tolearnaboutthepreferencesandpurchasingpowerof
customers,actionsandstrategiesofcompetitors,andpractices
ofthemiddlemen

CollectionofSecondaryInformation
Secondaryinformationisinformationthathasbeen
gatheredinsomeothercontextandisreadilyavailable.
Secondaryinformationprovidesthebaseandthestarting
pointforthemarketanddemandanalysis.Itindicates
whatisknownandoftenprovidesleadsandcuesfor
gatheringprimaryinformationrequiredforfurther
analysis.

EvaluationofSecondaryInformation
Whilesecondaryinformationisavailableeconomicallyandreadily(providedthe
marketanalystisabletolocateit),itsreliability,accuracy,andrelevanceforthepurpose
underconsiderationmustbecarefullyexamined.Themarketanalystshouldseekto
know:

Whogatheredtheinformation?Whatwastheobjective?
Whenwastheinformationgathered?Whenwasitpublished?
Howrepresentativewastheperiodforwhichtheinformationwasgathered?
Havethetermsinthestudybeencarefullyandunambiguouslydefined?
Whatwasthetargetpopulation?
Howwasthesamplechosen?
Howrepresentativewasthesample?
Howsatisfactorywastheprocessofinformationgathering?
Whatwasthedegreeofsamplingbiasandnon-responsebiasintheinformationgathered?
Whatwasthedegreeofmisrepresentationbyrespondents?

MarketSurvey
Secondaryinformation,thoughuseful,oftendoesnotprovide
acomprehensivebasisformarketanddemandanalysis.It
needstobesupplementedwithprimaryinformationgathered
throughamarketsurvey.
Themarketsurveymaybeacensussurveyorasample
survey;typicallyitisthelatter

InformationSoughtinaMarketSurvey
Theinformationsoughtinamarketsurveymayrelatetooneor
moreofthefollowing:
Totaldemandandrateofgrowthofdemand
Demandindifferentsegmentsofthemarket
Incomeandpriceelasticitiesofdemand
Motivesforbuying
Purchasingplansandintentions
Satisfactionwithexistingproducts
Unsatisfiedneeds
Attitudestowardvariousproducts
Distributivetradepracticesandpreferences
Socio-economiccharacteristicsofbuyers

StepsinaSampleSurvey
Typically,asamplesurveyinvolvesthefollowingsteps:

1. Definethetargetpopulation.
2. Selectthesamplingschemeandsamplesize.
3. Developthequestionnaire.
4. Recruitandtrainthefieldinvestigators.
5. Obtaininformationasperthequestionnairefromthe
sampleofrespondents.
6. Scrutinisetheinformationgathered.
7. Analyseandinterprettheinformation.

CharacterisationoftheMarket
Basedontheinformationgatheredfromsecondarysourcesand
throughthemarketsurvey,themarketfortheproduct/service
maybedescribedintermsofthefollowing:
Effectivedemandinthepastandpresent
Breakdownofdemand
Price
Methodsofdistributionandsalespromotion
Consumers
Supplyandcompetition
Governmentpolicy

MethodsofDemandForecasting
IQualitativeMethods:Thesemethodsrelyessentiallyonthejudgmentofexpertsto

translatequalitativeinformationintoquantitativeestimates.Theimportant
qualitativemethodsare:
Juryofexecutivemethod
Delphimethod
IITimeSeriesProjectionMethods:Thesemethodsgenerateforecastsonthebasisof
ananalysisofthehistoricaltimeseries.Theimportanttimeseriesprojection
methodsare:

Trendprojectionmethod
Exponentialsmoothingmethod
Movingaveragemethod
IIICausalMethods:Moreanalyticalthantheprecedingmethods,causalmethods
seektodevelopforecastsonthebasisofcause-effectrelationshipsspecifiedinan
explicit,quantitativemanner.Theimportantcausalmethodsare:
Chainratiomethod
Consumptionlevelmethod
Endusemethod
Leadingindicatormethod
Econometricmethod

JuryofExecutiveOpinionMethod
Thismethodinvolvessolicitingtheopinionofagroupof
managersonexpectedfuturesalesandcombiningtheminto
asalesestimate
Pros
Itisanexpeditiousmethod
Itpermitsawiderangeoffactorstobeconsidered
Itappealstomanagers
Cons
Thebiasescannotbeunearthedeasily
Itsreliabilityisquestionable

DelphiMethod
This method is used for eliciting the opinions of a group of
experts with the help of a mail survey. The steps involved in
thismethodare:
1.Agroupofexpertsissentaquestionnairebymailand
askedtoexpresstheirviews.
2.Theresponsesreceivedfromtheexpertsaresummarised
without disclosing the identity of the experts, and sent
back
totheexperts,alongwithaquestionnairemeanttoprobe
furtherthe reasons for extreme views expressed in the
first
round.
3.Theprocessmaybecontinuedforoneormoreroundstill
a reasonable agreement emerges in the view of the
experts.

Pros
Itisintelligibletousers
Itseemstobemoreaccurateandlessexpensivethanthe
traditionalface-to-facegroupmeetings
Cons
Therearesomequestionmarks:Whatisthevalueofthe
expertopinion?Whatisthecontributionofadditional
roundsandfeedbacktoaccuracy?

TrendProjectionMethod
Thetrendprojectionmethodinvolves(a)determiningthetrend
ofconsumptionbyanalysingpastconsumptionstatisticsand
(b)projectingfutureconsumptionbyextrapolatingthetrend.
Linearrelationship

:Yt=a+bT

Exponentialrelationship :Yt=aebt
Polynomialrelationship

:Yt=a0+a1t+a2t2.antn

CobbDouglasrelationship :Yt=atb

ExponentialSmoothingMethod
In exponential smoothing, forecasts are modified in the light of
observederrors.Iftheforecastvalueforyear t,Ft ,islessthan
theactualvalueforyeart,St,theforecastfortheyeart+1,Ft+1,is
sethigherthanFt.IfFt> St ,Ft+1issetlowerthanFt.Ingeneral
Ft+1
=Ft + et

(4.7)
whereFt+1=forecastforyeart+1
=smoothingparameter(whichliesbetween
0and1)
et=errorintheforecastforyeart=St-Ft

MovingAverageMethod
As per the moving average method of sales forecasting, the
forecastforthenextperiodisequaltotheaverageofthesales
forseveralprecedingperiods.
Insymbols,
St+St-1++St-n+1
Ft+1=
(4.9)
n
where Ft+1
=forecastforthenextperiod
St
=salesforthecurrentperiod
n
=periodoverwhichaveragingisdone

ChainRatioMethod
Thepotentialsalesofaproductmaybeestimatedbyapplying
aseriesoffactorstoameasureofaggregatedemand.For
example,theGeneralFoodsoftheU.Sestimatedthe
potentialsalesforanewproduct,afreeze-friedinstantcoffee
(Maxim),inthefollowingmanner:

Totalamountofcoffeesales
:174.5millionunits
Proportionofcoffeeusedathome
:0.835
Coffeeusedathome
:145.7millionunits
Proportionofnon-decaffeinatedcoffeeusedathome:0.937
Non-decaffeinatedcoffeeusedathome
:136.5
millionunits
Proportionofinstantcoffee
:0.400
Instantnon-decaffeinatedcoffeeusedathome :54.6millionunits
Estimatedlong-runmarketshareforMaxim :0.08
PotentialsalesofMaxim
:4.37millionunits

ConsumptionLevelMethod
Themethodestimatesconsumptionlevelonthebasisof
elasticitycoefficients,theimportantonesbeingtheincome
elasticityofdemandandthepriceelasticityofdemand

IncomeElasticityofDemand
The income elasticity of demand reflects the responsiveness of demand to
variationsinincome.Itismeasuredasfollows:
Q2-Q1 I1+I2
EI=
x
(4.10)
I2I1 Q2+Q1

whereEI=incomeelasticityofdemand
Q1=quantitydemandedinthebaseyear
Q2=quantitydemandedinthefollowingyear
I1=incomelevelinthebaseyear
I2=incomelevelinthefollowingyear.

Example Thefollowinginformationisavailableonquantitydemandedand
incomelevel:Q1=50,Q2=55,I1=1,000andI2=1,020.Whatistheincome
elasticityofdemand?Theincomeelasticityofdemandis:

5550 1,000+1,020
EI=
x=4.81

PriceElasticityofDemand
The price elasticity of demand measures the responsiveness of demand to
variationsinprice.Itisdefinedas:
Q2Q1 P1+P2
Ep=
x
(4.11)
P2P1
Q2+Q1
whereEp=priceelasticityofdemand
Q1=quantitydemandedinthebaseyear
Q2=quantitydemandedinthefollowingyear
P1=priceperunitinthebaseyear
P2=priceperunitinthefollowingyear

Example Thefollowinginformationisavailableaboutacertainproduct:
P1=Rs.600,Q1=10,000,P2=Rs.800, Q2=9,000.Whatisthepriceelasticity
ofdemand?Thepriceelasticityofdemandis:
Ep=

9,00010,000 600+800
6008009,000+10,000
x=-0.37

EndUseMethod
Suitableforestimatingthedemandforintermediateproducts,theendusemethod,
alsoreferredtoastheconsumptioncoefficientmethod,involvesthefollowingsteps:
1.Identifythepossibleusesoftheproduct.
2.Definetheconsumptioncoefficientoftheproductforvarioususes.
3.Projecttheoutputlevelsfortheconsumingindustries.
4.Derivethedemandfortheproduct.

Thismethodmaybeillustratedwithanexample.Acertainindustrialchemical,
IndchemisusedbyfourindustriesAlpha,Beta,Gamma,andKappa.

Theconsumptioncoefficientsfortheseindustries,theprojectedoutputlevelsforthese
industriesfortheyearX,andtheprojecteddemandforIndchemasshowninthe
ProjectedDemandforIndchem
followingslide

ConsumptionProjectedOutputinyearXProjectedDemand
Coefficient*forIndcheminyearX

Alpha
Beta
Kappa
Gamma

2.0
1.2
0.8
0.5

10,000
15,000
20,000
30,000
Total

20,000
18,000
16,000
15,000
69,000

*- This is expressed in tonnes of Indchem required per unit of output of the consuming industry

LeadingIndicatorMethod
Leadingindicatorsarevariableswhichchangeaheadofother
variables,thelaggingvariables.Hence,observedchangesinleading
indicatorsmaybeusedtopredictthechangesinlaggingvariables.For
example,thechangeinthelevelofurbanisation(aleadingindicator)
maybeusedtopredictthechangeinthedemandforairconditioners
(alaggingvariable)
Twobasicstepsareinvolvedinusingtheleadingindicator
method:(i)First,identifytheappropriateleadingindicator(s).(ii)
Second,establishtherelationshipbetweentheleadingindicator(s)and
thevariabletobeforecast.
Theprincipalmeritofthismethodisthatitdoesnotrequirea
forecastofanexplanatoryvariable.Itslimitationsarethatitmaybe
difficulttofindappropriateleadingindicator(s)andthelead-lag
relationshipmaynotbestableovertime.

EconometricMethod
Aneconometricmodelisamathematicalrepresentationof

economicrelationship(s)derivedfromeconomictheory.
Theprimaryobjectiveofeconometricanalysisisto
forecastthefuturebehaviouroftheeconomicvariables
incorporatedinthemodel.
Twotypesofeconometricmodelsareemployed:thesingle
equationmodelandthesimultaneousequationmodel

SingleEquationModel
The single equation model assumes that one variable, the dependent
variable(alsoreferredtoastheexplainedvariable),isinfluencedbyone
or more independent variables (also referred to as the explanatory
variables).Inotherwords,one-waycausalityispostulated.Anexampleof
thesingleequationmodelisgivenbelow:

Dt=a0+a1Pt+a2Nt

(4.12)

whereDt=demandforacertainproductinyeart
Pt=pricefortheproductinyeart
Nt=incomeinyeart

SimultaneousEquationModel
The simultaneous equation model portrays economic relationships in
terms of two or more equations. Consider a highly simplified threeequationeconometricmodelofIndianeconomy.
GNPt=Gt+It+Ct
(4.13)
It=a0+a1GNPt
(4.14)
Ct=b0+b1GNP1
(4.15)
whereGNPt=grossnationalproductforyeart
Gt=governmentalpurchasesforyeart
It=grossinvestmentforyeart
Ct=consumptionforyeart

ImprovingForecasts
Youcanimproveforecastsbyfollowingsomesimpleguidelines:

Checkassumptions
Stressfundamentals
Bewareofhistory
Watchoutforeuphoria
Dontbedazzledbytechnology
Stayflexible

UncertaintiesinDemandForecasting
Demandforecastsaresubjecttoerroranduncertaintywhich
arisefromthreeprincipalsources
Dataaboutpastandpresentmarket
Methodsofforecasting
Environmentalchange

CopingwithUncertainties
Giventheuncertaintiesindemandforecasting,adequateefforts,
alongthefollowinglines,maybemadetocopewithuncertainties
Conductanalysiswithdatabasedonuniformandstandard
definitions.
Inidentifyingtrends,coefficients,andrelationships,ignorethe
abnormalorout-of-the-ordinaryobservations.
Criticallyevaluatetheassumptionsoftheforecastingmethodsand
chooseamethodwhichisappropriatetothesituation.
Adjusttheprojectionsderivedfromquantitativeanalysisinthelight
ofunquantifiable,butsignificant,influences.
Monitortheenvironmentimaginativelytoidentifyimportant
changes.
Considerlikelyalternativescenariosandtheirimpactonmarketand
competition
Conductsensitivityanalysistoassesstheimpactonthesizeof
demand
forunfavorableandfavorablevariationsofthedeterminingfactors
fromtheirmostlikelylevels.

MarketPlanning
Amarketingplanusuallyhasthefollowingcomponents:

Currentmarketingsituation
Opportunityandissueanalysis
Objectives
Marketingstrategy
Actionprogramme