ESTIMATING AREA MARKET DEMAND

Companies face the problem of selecting the best sales territories and allocating their marketing budget optimally among these territories. Therefore, they need to estimate the market potential of different cities, provinces, and countries. Two major methods are available: the market-buildup method, which is used primar-ily by business goods firms, and the market-factor index method, which is used primarily by consumer goods firms.

MARKET-BUILDUP METHOD

A forecasting method that calls for identifying all the potential buyers in each market and estimating their potential purchases.

The market-buildup method is a market forecasting technique that involves identifying the total number of potential buyers within a particular market and learning their product preferences or choices. Such market information would give companies a brief understanding of their chances within the market, or estimate whether their product or service would see any buyers. The details relating to the buyer and his/her purchase behaviors can be acquired via primary sources of data, such as questionnaires, surveys, etc. If time is a constraint, secondary sources like sales history records, past financial statements of other companies, etc. can also be sought. Though a very effective way to study a particular market, gathering the information could be a strenuous task and can be difficult to acquire, at times.

Example: Suppose a manufacturer of min-ing instruments developed an instrument that can be used in the field to test the actual proportion of gold content in gold-bearing ores. By using it, miners would not waste their time digging deposits of ore containing too little gold to be commercially profitable. The manufacturer wants to price the instrument at $1000. It sees each mine as buying one or more instruments, depending on the mine’s size. The company wants to determine the market potential for this instrument in each mining province or territory. It would hire a salesperson to cover each area that has a market potential of over $300 000. The company wants to start by finding the market potential in the Northwest Territories.

To estimate the market potential in the N.W.T., the manufacturer can con-sult the Standard Industrial Classification (SIC) developed by Statistics Canada. The SIC is the government’s coding system that classifies industries, for purposes of data collection and reporting, according to the product produced or operation performed. Each major industrial group is assigned a two-digit code—metal min-ing bears the code number 06. Within metal mining are further breakdowns into four-digit SIC numbers (the gold category has the code number 0611).

Next, the manufacturer can turn to the Financial Post Survey of Mines to determine the number of gold-mining operations in each territory and province, their locations within the territory and province, and the number of employees, annual sales, and net worth. Using the data on the N.W.T., the company can pre-pare a market potential estimate.

An examination of the SIC data reveals that the N.W.T. has 220 gold mines. It is projected that large mines have the potential to purchase four instruments each, while small mines will purchase only one instrument. Fifty percent of the mining operations are large mines. Therefore, the total market for potential instru-ment sales in the N.W.T. equals (220 * .50 * 4) + (220 * .50 * 1) 550 instru-ments. Since each instrument sells for $1000, the market equals $550 000. Thus, the company would need to hire two salespeople to cover the N.W.T.

MARKET-FACTOR INDEX METHOD:

A forecasting method that identifies market factors that correlate with market potential and combines them into a weighted index.

Consumer goods companies also have to estimate area market potentials. Considering the following examples: A manufacturer of men’s dress shirts wishes to evaluate its sales performance relative to market potential in several major market areas, start-ing with Vancouver. It estimates total national potential for dress shirts at about $200 million per year. The company’s current nationwide sales are $14 million, about a seven percent share of the total potential market. Its sales in the Vancouver metropolitan area are $1 200 000. It wants to know whether its share of the Vancouver market is higher or lower than its national seven percent market share. To determine this, the company first needs to calculate market potential in the Vancouver area.

A common method for calculating area market potential is the market-factor index method, which identifies market factors that correlate with market poten-tial and combines them into a weighted index. An excellent example of this method is called the market rating index, which is published each year by The Financial Post in its Canadian Markets publication. This survey estimates the market rating for each province and metropolitan area of Canada. The market rating index is based on two factors: the area’s share of Canada’s population and retail sales. The market rating index (MRI) for a specific area is given by

MRI = percentage of national retail sales in the area _ percentage of national population in the area.

Using this index, the shirt manufacturer looks up the Vancouver metropolitan area and finds that this market has 5.77 percent of the nation’s population, and 7.03 percent of the nation’s retail sales. Thus, the market rating index for Vancouver is

MRI = 7.03/5.77 = 122

Vancouver has a market rating index that is 22 percent higher than the national average. Because the total national potential is $200 million nationally each year, total potential in Vancouver equals $200 million  1.22  .0577 = $14 078 000. Thus, the company’s sales in Vancouver of $1 200 000 amount to a $1 200 000 _ $14 078 800 = 8.5 percent share of area market potential. Com-paring this with its seven percent national share, the company appears to be doing better in Vancouver than in other areas of Canada.

The weights used in the buying power index are somewhat arbitrary. They apply mainly to consumer goods that are neither low-priced staples nor high-priced luxury goods. Other weights can be used. Also, the manufacturer would want to adjust the market potential for additional factors, such as level of competition in the market, local promotion costs, seasonal changes in demand, and unique local market characteristics.

Many companies compute additional area demand measures. Marketers now can refine province-by-province and city-by-city measures down to census tracts or postal codes. Census tracts are small areas about the size of a neighbourhood, and postal code areas (designated by Canada Post) can be used to identify particular streets, neighbourhoods, or communities within larger cities.