Market Measurement and
Forecasting
By:-
Balvinder Kumar
Rochit Balhotra

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
• “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
• 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
• 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
• Consumer level
• Product level
• Geographic level
• Time 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
• 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
• 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
• 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
• Potential market
• Available market
• Target market
• Penetrated market
Total market (eg South Africa in total) 100%
Available market (eg metropolitan areas) 60%
Target market (eg age group 15-35) 40%
Penetrated market (actual buyers) 20%

• 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
• 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
• Total market potential
• Area market potential
• Total industry sales and market shares

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
• 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
• 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.

• 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.

• 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
• 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
• 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
• 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 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..
• 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..
• 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
• 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…
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…
• 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…
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…
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…
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…
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.

Forecasting methods
Figure 21.5

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

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).

• 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.

• 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
• 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.

• 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

• 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.

Thanks