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LEAN MANAGEMENT GUIDELINES FOR CHECK POINT 85

WHAT IS MARKET MEASUREMENT?

Business owners and marketing managers must be fully familiar with market measurement and forecasting procedures to ensure effective marketing management process within the organization.

Once the marketing manager completes the Target Marketing Process, which includes Market Segmentation, Market Targeting, and Market Positioning, it becomes necessary to provide a quantitative estimate for each selected market segment. This process, known as Market Measurement, entails evaluation of specific demand for a particular product or service in a defined territory and by a defined type of customer.

Total Market Demand for a particular product or service is represented by the total volume that could be purchased by a specified group of customers in a particular geographical area during a predetermined period of time. Proper measurement of the total market demand can be very useful in the process of forecasting and sales budget preparation. (19)

ADDITIONAL INFORMATION ONLINE

WHAT IS MARKET FORECASTING?

Market Forecasting is an important responsibility of the marketing manager and it entails predicting the company’s future marketing activities by analyzing past marketing and sales results.

The preparation of Marketing And Sales Forecasts for specific products or services necessitates a detailed analysis of the company's past sales performance and results related to specific market segments during a defined period of time.

Forecasting must also be supported by Statistical Information from governmental and other sources, such as

• USA Government Data And Statistics.
• Federal Agencies With Statistical Programs.

The information related to the company's past performance obviously cannot provide any guarantee for future success. However, it represents a valid start in the process of marketing and sales forecasting and planning.

Accurate forecasting will help the marketing and sales managers in accomplishing a number of important tasks outlined below.

ADVANTAGES OF MARKET FORECASTING

Marketing and sales forecasting plays a central role in the entire marketing and sales management process and it provides the foundation for the overall planning activities within the organization. (20)

ADDITIONAL INFORMATION ONLINE

MARKET MEASUREMENT AND FORECASTING

You and your marketing and sales managers should be asking the following questions during the Market Measurement And Forecasting Process:

• What is the total market demand for our products or services in a specific geographic area?
• What is the total market potential for our products or services in a specific geographic area?
• What is the total market forecast for our products or services in a specific geographic area?
• What is the total sales potential for our products or services in a specific geographic area?
• What is the total sales forecast for our products or services in a specific geographic area?
• What is our company's market share regarding specific products or services?

Some of the key concepts related to market measurement and forecasting are summarized below.

KEY CONCEPTS IN MARKET MEASUREMENT AND FORECASTING

Marketing Concepts can be visualized as a number of squares with a gradually-reduced surface area. The graphic presentation of these concepts in illustrated below.

KEY MARKETING CONCEPTS

ADDITIONAL INFORMATION ONLINE

TOTAL MARKET DEMAND ASSESSMENT

Total Market Demand Assessment can be defined as:

"The process used by the company to quantify an estimated level of demand for a particular product or service which may exist at present or in a defined period of time in the future." 

The marketing manager can use several methods and various sources of statistical information available online to determine the total market demand for the company’s products and services. Some of these methods are discussed in details below and they include the following:

• The Chain Ratio Method. This method is used primarily by companies supplying
   products in the consumer market.

• The Market Build-Up Method. This method is used by companies supplying products
   in the business and consumer markets.

• The Buying Power Index Method. This method is used primarily by companies
   supplying products in the consumer market.

The estimated value of the total market demand will provide a good starting point in the market measurement and forecasting process. For this reason, the degree of accuracy throughout this process will enhance the ultimate quality of the marketing plan and the company’s chances for success in the marketplace.

Note:

Applications of the Chain Ratio Method, the Market Build-Up Method, and  the Buying Power Index Method are illustrated in examples below.

MARKET POTENTIAL

Market Potential can be defined as:

"The maximum volume of sales of a particular product or service within a specific industry during a certain period of time, assuming a maximum marketing effort by all marketers in the marketplace."

Under ideal circumstances, the Market Potential Value represents the upper limit of the Market Demand Value. This means that if all suppliers of a specific product will maximize their marketing efforts in the marketplace, the market potential value for that product will be similar to the market demand value.

In reality, however, this is usually not the case. For this reason, marketing manager needs to estimate a Market Forecast Value, which will be a portion of the market demand value.

Note:

The calculation of Market Potential is illustrated in an example below.

MARKET FORECAST

Market Forecast can be defined as:

"An estimate of the expected level of sales of a particular product or service that will be realized by the industry in the marketplace, or a part thereof, during a specified time period."

Once the market potential value has been established, the marketing manager should proceed with determining the Market Forecast Value for various products and services by a specific industry, where the company operates, during the forthcoming fiscal period.

Note:

The calculation of the Market Forecast is illustrated in an example below.

SALES POTENTIAL

Sales Potential can be defined as:

"The maximum volume of sales of particular product or service which might be achieved by a company as a direct result of its maximum marketing effort in the marketplace during a specific period of time."

Once the market forecast value has been established, the marketing and sales managers should proceed with determining the Sales Potential Value for specific products and services, which the company plans to offer in specific market segments during the forthcoming fiscal period.

Note:

1. The calculation of Sales Potential is illustrated in an example below.

2. Additional information about Sales Potential is provided in detail in Tutorial 5.

SALES FORECAST

Sales Forecast can be defined as:

"An estimate of actual volume of sales of a particular product or service that will be achieved by a company as a direct result of its maximum marketing effort in the marketplace during a specific period of time and under expected environmental conditions."

Once the sales potential value has been established, the marketing and sales managers should proceed with determining the Sales Forecast Value for specific products and services, which the company plans to offer in specific market segments during the forthcoming fiscal period.

Note:

1. The calculation of the Sales Forecast is illustrated in an example below.

2. Additional information about Sales Forecast is provided in detail in Tutorial 5.

MARKET SHARE

The Market Share Value represents an important parameter, which indicates the strength of the company’s position in the marketplace in terms of its contribution to the total value of sales in a defined market segment, or industry. The market share value is certainly meaningful for many larger organizations, while the majority of small and medium-sized companies usually do not relate to this parameter, unless they offer a unique product or service in the marketplace.

Marke Share can be defined as:

"The ratio of total actual company sales to total actual industry sales." (21)

Market Share (%)  = Total Company Sales (In $)
                                       Total Industry Sales (In $)

ADDITIONAL INFORMATION ONLINE

MARKET MEASUREMENT AND FORECASTING

Depending upon the specific company requirements, the Market Measurement And Forecasting may be carried out for a short- or long-term periods as illustrated below.

THE MARKET MEASUREMENT AND FORECASTING PERIODS

Short-Term Market Measurement And Forecasting, involves five steps outlined below.

THE SHORT-TERM MARKET MEASUREMENT AND FORECASTING PROCESS

Step 1: Establish The Market Boundaries.

Establish the boundaries of the total market for the current fiscal year – evaluate the total market demand for a specific product or service for the next twelve months.

Step 2: Estimate Short-Term Market Potential.

Estimate a short-term market potential for the current fiscal year - assess the upper limit of the total market demand.

Step 3: Develop Short-Term Market Forecast.

Develop a short-term market forecast for the current fiscal year - estimate the potential value of sales for a specific product or service in the total market.

Step 4: Estimate Short-Term Sales Potential.

Estimate a short-term sales potential for the current fiscal year - assess the maximum sales for a specific product or service available to a company under maximum marketing effort conditions.

Step 5: Develop Short-Term Sales Forecast.

Develop a short-term sales forecast for the current fiscal year - estimate the company's actual sales of a specific product or service that are expected to be realized under the planned marketing program and anticipated environmental conditions.

LONG-TERM MARKET MEASUREMENT AND FORECASTING

Long-Term Market Measurement And Forecasting is carried out in a similar manner in which the "current fiscal year" is replaced by an appropriate long-term period. This procedure is particularly important to larger organizations with an established share in the marketplace and to organizations that plan to enter into new markets.

METHODS FOR ASSESSING CURRENT MARKET DEMANDS

THE CHAIN RATIO METHOD

The Chain-Ratio Method entails:

"Assessment of the current demands for products or services based on typical user characteristics and consumption rates." 

This method starts with an estimate of overall market demands and establishes the demand for a specific product or service through Typical User Consumption Rates.

User Characteristics relate to a particular market or market segment and may include a number of Market Segment Variables illustrated below.

MARKET SEGMENT VARIABLES

Product Consumption Or Usage Rate provides the basic information about the quantity and frequency of products or services being purchased. The Chain-Ratio Method also considers the expected life period of a particular product or service.

THE CHAIN RATIO METHOD APPLICATION

The Chain-Ratio Method is particularly useful in a consumer environment. 

This may be illustrated by the following example:

• 1. A golf club manufacturer caters to people between 30 and 70 years of age with annual    income in excess of $60,000. These people reside in state X and represent 25 percent of    the total population of 10 million.
• 2. It may be assumed from past experience that 8 percent of these people play or are    interested in golf. This, in turn, leads to the establishment of boundaries of the total    market for golf clubs in state X.
• 3. In order to determine the annual consumption rate per unit of product in this example, it    should be recognized that 15 percent of the total market consists of first-time buyers and    an additional 10 percent purchases the product for replacement purposes. Thus, the    annual consumption rate includes both new and replacement demand.
• 4. Taking this data into consideration, it becomes possible to assess the current market    demand and evaluate sales potential for the current fiscal year, assuming that the    company's market share is 30 percent.

THE MARKET-BUILDUP METHOD

The Market-Buildup Method requires:

"Assessment of the current demand for several identifiable market segments. Thereafter, all individual estimates are added together to obtain the value of the total market demand."

The market-buildup method entails estimating the total sales potential of several market segments in a business or consumer market, by identifying the number of potential buyers in each market segment and their specific purchase needs. A particular requirement of the market-buildup method is that sales potential of each market segment be estimated by means of a common market denominator. 

A Common Market Denominator is:

"A descriptive factor which may be applicable across all market segments in the task of assessing the total market demand for a particular product or service."

The market-buildup method is suitable for estimating potential in business and consumer market environments. One of the prime sources of market segmentation frequently used by marketing managers is the North American Industry Classification System (NAICS). The NAICS was developed by the U.S. Census Bureau in 1997, when this system replaced the U.S. Standard Industrial Classification (SIC).

The common market denominators that are applied throughout this estimating procedure generally represent a certain measure of size or activity pertinent to all market segments as illustrated below.

EXAMPLES OF MARKET DENOMINATORS

The Market-Buildup Method entails a number of steps which are outlined below.

THE MARKET-BUILDUP METHOD

Step 1: Break Down The Total Market Into Segments.

Break down total market into individual market segments using the NAICS system.

Step 2: Determine Unit Sales.

Determine unit sales per common market denominator for each segment - for example, determine unit sales per 1,000 employees.

Step 3: Determine The Total Value Of Variables.

Determine the total value of variables used as common market denominator for each segment like the total number of employees in each segment.

Step 4: Estimate Market Potential For Each Segment.

Combine steps two and three into an estimate of market potential for each segment.

Step 5: Determine The Total Market Potential.

Add estimates of market potential for each segment and determine total market potential.

Step 6: Develop A Market Forecast.

Consider product unit price and develop a market forecast like the estimated value of sales for the total market.

Step 7: Estimate The Sales Potential.

Consider the company's specific market share and estimate the sales potential.

THE MARKET-BUILDUP METHOD APPLICATION

Consider a particular company, which specializes in the manufacture of safety gloves for building and construction industries and special trade contractors. 

Using the NAICS Codes, the company's marketing manager identifies the appropriate market and breaks it into the following market segments:

• 236115 - Construction management, single-family building.

• 236116 - Apartment building construction general contractors.

• 236118 - Handyman construction service, residential building.

The Common Market Denominator used in this instance reflects the demand for safety gloves per 1,000 employees in each market segment. 

Historical data on safety gloves purchased by each market segment may provide a good starting point for the estimating procedure. Suitable information may be obtained from a local branch of the Chamber Of Commerce or from private organizations specializing in commercial marketing information, such as Economic Information Services, Inc.

The particular information pertinent to the Annual Consumption of safety gloves per 1,000 employees is summarized below.

The next stage is the determination of the Total Number Of Employees per market segment in a specific geographic location (county, state, country). 

This information may be obtained from the local Chamber of Commerce or from special publications such as The Census Of Manufacturers or County Business Patterns. The specific information pertinent to the number of employees in a defined geographic area is assumed to be as outlined below.

The combined information of the average number of units sold per 1,000 employees and the total number of employees in a defined geographic area provides the basis for estimating the market potential of each segment is summarized below.

Considering that the average product unit price is $3, the total market forecast for three market segments in the defined geographic area is as follows:

$3 x 2,080,000 units = $6,240,000

If the company has a 20 percent share in the aforementioned market, the sales potential can be determined as follows:

0. 20 x $6,240,000 = $1,248,000

The corresponding NAICS codes may be found online through the U.S. Census Bureau:

• North American Industry Classification System (NAICS)

ADDITIONAL INFORMATION ONLINE

THE BUYING-POWER-INDEX METHOD

The Buying-Power-Index (BPI) Method is based on information provided by Sales & Marketing Management, a marketing trade publication.

In its Annual Survey of Buying Power this publication provides a Buying Power Index for specific geographic areas.

The BPI Method enables the marketing manager to determine the Relative Buying Power of different metropolitan areas, counties, states, and other regions through the following calculation:

BPI = 0.5 Y + 0.2 P + 0.3 R

KEY:

© Survey of Buying Power, Sales & Marketing Management

THE BUYING-POWER-INDEX METHOD EXAMPLE

The BPI for the State of Texas, for example, can be calculated as follows:

 Y = 6.69; P = 6.56; R = 7.52

BPI = 0.5 x 6.69 + 0.2 x 6.56 + 0.3 x 7.52 = 6.91

The BPI provides a useful basis for estimating the geographic market potential for an entire industry since it takes into consideration three important factors - income, population, and retail activity, while providing the information about the level of demand for  many consumer products.

Sales & Marketing Management also includes a "Survey of Industrial Purchasing Power" that aids industrial marketers in allocating the available market potential. The Survey of Industrial Purchasing Power analyzes markets by both geographic area and NAICS Code. Several factors relating to demand for industrial goods are presented for a specific geographic area or NAICS Category as illustrated below.

KEY FACTORS RELATED TO THE DEMAND OF INDUSTRIAL GOODS

© Survey of Buying Power, Sales & Marketing Management

NOTE

Note that:

• Factors 1, 3, and 4 indicate the level of industrial activity in a specific market and reflect
   its market potential.
• Factors 2, 5, and 6 indicate the level of concentration of industrial activity in a specific    market. 

All factors have important implications with regard to the development of a suitable marketing strategy. They have implications for marketing strategy. For example, a higher percentage of activity concentrated in large companies would suggest the need for a smaller sales force. (22)