MARKET AND DEMAND ANALYSIS

MARKET AND DEMAND ANALYSIS

    In most cases, the first step in project analysis is to estimate the potential size of the market for the product proposed to be manufactured and get an idea about the market share that is likely to be captured.  To make an idea about these things an in depth study and assessment of various factors like patterns of consumption growth, income and price elasticity of demand, composition of the market, nature of competition, availability of substitutes, reach of distribution channels and so on is required.  Market and demand analysis should be carried out in an orderly and systematic manner.  The key steps in such analysis are as follows:
Situational analysis and specification of objectives
Collection of secondary information
Conduct of market survey
Charecterisation of the market
Demand forecasting
Market planning

Situational analysis and specification of objectives

    In order to get an idea about the relationship between the product and its market, the project analyst may informally talk to customers, competitors, middlemen, and others in the industry.  Wherever possible, he may look at the experience of the company to learn about the preferences and purchasing power of customers, actions and strategies of competitors, and practices of the middlemen.  If such a situational analysis generates enough data to measure the market and get a reliable handle over projected demand and revenues, a formal study need not be carried out, particularly when cost and time considerations so suggest.  The informal goals that guide situational analysis need to be expanded and articulated with greater clarity. A helpful approach to spell out objectives is to structure them in the form of questions. In doing so, always bear in mind how the information generated will be relevant in forecasting the overall market demand and assessing the share of the market the project will capture.
    The objectives of the market and demand analysis may be to answer the following questions:
Who are the buyers of our product?
What is the current demand?
How is the demand distributed?
What is the break-up of demand?
What the price customers willing to pay?
How can potential customers be convinced about the superiority of our product?
What channels of distribution most suited?

Collection of secondary information
    In order to answer the questions listed while setting the objectives of the market study, information may be obtained from secondary and/or primary sources.  Secondary information is information that has been gathered in some other context and is already available.  Primary information on the other hand, represents information that is collected for the first time to meet the specific purpose on hand.  Secondary information provides the base and starting point of market and demand analysis.  It indicates what is known and often leads for gathering primary information required for further analysis.

General sources of secondary information
    The important sources of secondary information useful for market and demand analysis in India are mentioned below:
a)Census data published every ten years containing information on population, demographic characteristics, household size and composition and maps.
b)National sample survey reports containing data on various economic and social aspects like patterns of consumption, distribution of industries etc.
c)Planning commission reports containing data on plan proposals, physical and financial targets, actual outlays, accomplishments etc.
d)Statistical abstracts published by Central Statistical Organisation which contain data on demographic characteristic, national income estimates, agricultural and industrial statistics.
e)India Year Book published by Ministry of Information and Broadcasting containing wide-range of data on economic and other aspects.
f)UN Statistical Year Book giving world statistical data relating to population, gross domestic production, industrial production, world trade etc.
g)Annual Economic Survey published by Ministry of Finance containing data on wholesale prices, industrial production, exports, agricultural production, national income etc.
h)Central Statistical Organisation’s annual Survey of Industries providing information regarding various aspects of industry.
i)Annual reports published by Commerce and Industry department of Indian Government.
j)Exports and Imports Annual Bulletin of Statistics.
k)Techno economic surveys conducted and published by the National Council of Applied Economic Research.
l)Industrial potential Surveys conducted by All India Financial Institutions under the leadership of IDBI giving data on several backward areas.
m)Stock Exchange Directory containing data on financial performance of various companies classified industry wise.
n)Monthly bulletin of Reserve Bank of India containing data on prices, production indices, exchange rates, balance of payment, etc.
o)Monthly studies of production of selected industries published by Central Statistical Organisation containing data on production, number of units installed, their capacities etc. for selected industries.
p)Publications of advertising agencies containing data on consumer index of markets, test markets etc. which is valuable for understanding Indian markets.

The advantage of secondary sources of data is that it is readily and economically available. But the accuracy, reliability and relevance of such data must be studied carefully.

Conduct of market survey
    Secondary information, though useful, often does not provide a comprehensive basis for market and demand analysis.  It needs to be supplemented with primary information gathered through market survey, specific to the project being appraised.  The market survey may be a census survey or a sample survey.  Census surveys are employed principally for intermediate goods and investment goods when such goods are used by a small number of firms.  In other cases, a census survey is costly and may also be infeasible.  Due to the limitations of census survey, the market survey, in practice is typically a sample survey.  In such a survey a sample of the population is contacted/observed and relevant information is gathered.  On the basis of such information, inferences about the population may be drawn.
The information sought in a market survey may relate to one or more of the following:
Total demand and rate of growth of demand
Demand in different segments of the market
Income and price elasticity of demand
Motives of buying
Purchasing plans and intentions
Satisfaction with existing products
Unsatisfied needs
Attitudes toward various products
Distributive trade practices and preferences
Socio-economic characteristics of buyers

Steps in a sample survey
Typically, a sample survey consists of the following steps:
a.Define the target population In defining the target population the important terms should be carefully and unambiguously defined.  The target population may be divided into various segments which may have differing characteristics.

b.Select the sampling scheme and sample size  There are several sampling schemes: simple random sampling, cluster sampling, stratified sampling, systematic sampling and non-probability sampling.  Each scheme has its advantages and limitations.  The sample size has a bearing on the reliability of the estimates- the larger the sample size, the greater is the reliability.

c.Develop the questionnaire   The questionnaire is the principal instrument for eliciting, information from the sample of respondents.  The effectiveness of the questionnaire depends on its length, the type of questions, the wording of the questions.   Developing the questionnaire requires a thorough understanding of the product and its usage, imagination, insight in to human behavior, the familiarity with the tools of descriptive and inferential statistics to be used later for analysis.  Since the quality of the questionnaire has an important bearing on the results of the market survey, the questionnaire should be tried out in a pilot survey and modified in the light of problems/difficulties noted.

d.Recruit and train the field investigators  Recruiting and training of field investigators must be planned well since it can be time consuming.  Great care must be taken in recruiting the right kind of investigators and imparting the proper kind of training to them.

e.Obtain information as per Questionnaire from the sample of respondents  Respondents may be interviewed personally, telephonically, or by mail for obtaining information.  Personal interviews ensure a high rate of response.  But they are expensive and likely to result in biased responses because of the presence of the interviewer.

f.Scruitinise the information gathered   Information gathered should be thoroughly scrutinized to eliminate data which is internally inconsistent and which is invalid

g.Analyse and interpret the information  Information gathered in the survey needs to be analysed and interpreted with care and imagination.  After tabulating it as per a plan of analysis, suitable statistical investigation may be conducted, if necessary.  For purposes of statistical analysis, a variety of methods are available.  These may be divided into two broad categories: parametric method and non-parametric methods.  Parametric methods assure that the variable or attribute under study conforms to some known distribution.  Non-parametric methods do not presuppose any particular distribution.
Results of the data based on the sample survey will have to be extrapolated to the target population.  For this purpose, appropriate inflationary factors, based on the ratio of the size of the target population to the size of the sample studies, will have to be used.

Charecterisation of the market
   
    Based on the information gathered from secondary sources and through market survey, the market for the product or service may be described in terms of the following
Effective demand in the past and present
Breakdown of demand
Price
Methods of distribution and sales promotion
Consumers
Supply and competition
Government policy

Effective demand in the past and present- To gauge the effective demand in the past and present, the starting point typically is apparent consumption which is defined as:
    Production + Imports – Exports – Changes in Stock level
The figure of apparent consumption has to be adjusted for consumption of the product by the producers and the effect of abnormal factors.  The consumption series, after such adjustments, may be obtained for several years.

Breakdown of demand – To get deeper insight into the nature of demand, the aggregate market demand may be broken into demand for different segments of the market.  Market
segments may be defined by (i) nature of product, (ii) consumer group, and (iii) geographical division.

Price - Price statistics must be gathered along with statistics pertaining to physical quantities.  It may be helpful to distinguish the following types of prices: (i) manufacturer’s price quoted as FOB price or CIF price, (ii) landed price for imported goods,(iii) average wholesale price, and (iv) average retail price.

Methods of distribution and sales promotion – The method of distribution may vary with the nature of product, capital goods, Industrial raw materials or intermediates, and consumer products tend to have differing distribution channels.  Further, for a given product, distribution methods may vary.  Likewise, methods used for sales promotion may vary from product to product.

Consumers – Consumers may be characterized along two dimensions viz, demographic and sociological –age, sex, income, profession, residence, social background etc and attitudinal-preferences, intentions, habits, attitudes, responses etc.

Supply and Competition- It is necessary to know the existing sources of supply and whether they are foreign or domestic.  Competition from substitutes and near substitutes should also be specified.

Government policy – The role of government in influencing the demand and market for a product may be significant.  Government plans, policies, legislations etc. have a bearing on the market and demand of the product under examination should be spelt out.

Demand forecasting

    After gathering information about various aspects of the market and demand from primary and secondary sources, an attempt may be made to estimate future demand.  A wide range of forecasting methods is available to the market analyst.  These may be divided into three categories: qualitative methods, time series projection methods and casual methods.

Qualitative methods
    These methods rely essentially on the judgment of experts to translate qualitative information into quantitative estimates.  The important qualitative methods are as follows.
Jury of executive opinion method-  It is very popular in practice. This method calls for the pooling of views of a group of executives on expected future sales and combining them into a sales estimate.  A small number of top executives are requested to register their individual opinions relating to the probable amount of future sales.  A forecast is derived from the average of these figures.  As executives are fully aware of the market conditions, capabilities of the firm etc.,  a forecast under this method gives a better result.

Poll of Sale Force Opinion method -  In this method, sales personnel from different sales territories are asked to provide sales forecasts.  These individual sales forecasts are then combined, modified and refined by the top executives to predict the total or master forecast for the firm.

Delphi method – This method involves converting the views of a group of experts, who do not interact face-to-face, into a forecast through an iterative process.  The steps involved in this method are:
a.A group of experts is sent a questionnaire by mail and asked to express their views.
b.The responses received from the experts are summarized without disclosing the identity of experts, and sent back to the experts,  for reviewing their views in the light of other experts opinion.
c.This process may be continued for one or more rounds till a reasonable agreement emerges in the view of the experts.        

Time series projection methods
    These methods generate forecasts on the basis of an analysis of the historical time series.  The important time series projection methods are as follows:

Trend projection method – The trend projection method involves determining the trend of consumption by analyzing past consumption statistics, and projecting future consumption by extrapolating the past trend onto the future.
When trend projection method is used, the most commonly employed relationship is the linear relationship.
Yt = a + bT
Where Yt = Demand for the year t
    a = Interception of the relationship
    b = Slope of the relationship
    T = Time variable
To estimate the parameters a and b of the linear relationship, the least squares method is used.

Moving average method – According to this method, the forecast for the next period represents a simple arithmetic average or weighted arithmetic average of the last few observations.

Exponential smoothing method – This method is used in case of short range sales forecasts.  It is a type of moving average representing a weighted sum of all past numbers in a time series, with the heaviest weight placed on the most recent data.  This is used to reduce the gap between the actuals and the forecasts. In exponential smoothing, forecasts are modified in the light of observed errors.

Casual methods
    These methods seek to develop forecasts on the basis of cause-effect relationships specified in an explicit, quantitative manner.  The important methods under this category are as follows:

Chain ratio method – In this method the sales of a product may be estimated by applying a series of factors to a measure of aggregate demand.  For example, a firm planning to manufacture stainless steel blades in India can be estimate its potential sales in the following manner.
Adult male population in the country                    : 150 million
Proportion of adult male using shaving blades            : 0.60
Adult male population using shaving blades                : 90 million
Number of times a person uses shaving blades in a year        : 100
Total shaving done per year                        : 9,000 million
Proportion of shaving done with stainless steel blades        : 0.40
Average number of shaving per stainless steel blade            : 4
Number of stainless steel blades used per year            : 900 million
Proportion of stainless steel blade market the firm could capture    : 0.20
Potential sales                                : 180 million

Consumption level method – This method estimates consumption level on the basis of elasticity coefficients, the important ones being the income elasticity of demand and the price elasticity of demand.

End use method – This method is suitable for estimating demand for intermediate products. The end use method, also referred to as the consumption coefficient method, involves the following steps:
1.Identify the possible uses of the product.
2.Define the consumption coefficient of the product for various uses.
3.Project the output levels for the consuming industries.
4.Derive the demand for the product.

Leading indicator method – Leading indicators are variables which change ahead of other variables, the lagging variables.  Hence, observed changes in leading indicators may be used to predict the changes in lagging variables.  For example, the change in the level of urbanization may be used to predict the change in the demand for air conditioners.

Econometric method – An econometric model is a mathematical representation of economic relationship derived from economic theory.  The primary objective of econometric analysis is to forecast the future behavior of the economic variables incorporated in the model.

Market planning
    To enable the product to reach a desired level of market penetration, a suitable marketing plan should be developed. Broadly, it should cover pricing, distribution, promotion and service.  A marketing plan usually has the following components:
Current marketing situation
Opportunity and issue analysis
Objectives
Marketing strategy

Current Marketing Situation
    This part of marketing plan deals with the different dimensions of the current situation.  It examines the market situation, competitive situation, distribution situation, and the macro environment.
    Market situation deals with size, the growth, the consumer aspirations, and buying behaviour in the market under consideration.  Competitive situation exhibits who are major competitors, their objectives, strategies, strengths, etc.  Distribution situation compares the distribution capabilities of the competitors and available distribution systems which are suitable for our product.  Macro-environment describes the effect of social, political, economic, technological, and other external variables on the market.

Opportunity and Issue Analysis
    The management should conduct a SWOT analysis for the product and the core issues before the product be identified.  The strength may be the use of distribution channel already established for the existing products.  The weakness may be its limited resources.  The opportunities might be the favourable consumer preference.  The threat might be the competition from substitutes.
    The core issues may be how to use our strengths to offset probable threats, how can succeed with the product with identified weaknesses, and how to exploit the opportunities available.

Objectives
    Objectives have to be clear-cut, specific, and achievable.  These objectives form the basis for selection of marketing strategies.  Objectives should be expressed unambiguously, preferable quantitatively and with an indication of time span within which the objectives are planned to be achieved.

Marketing Strategy
    The marketing strategy covers target segment, positioning, product line, price, distribution, sales force, sales promotion, and advertising.
    The market segment the firm wants target should be clearly specified.  It needs to be described clearly in terms of the psychographics.
    Positioning is how a product is placed in the mind of the customer.  Having decided the target market, the positioning should be done in appropriate with its characteristics.
    Product line refers number of similar products a firm offering.  So it has to decide whether to introduce the product with varieties or a single variant.
    Price should be in a range existed within the segment.  It should have a bearing on positioning also.
    The various distribution channels may be available to our product.  Then decision has to be taken to use an effective combination of distribution channels
Sales force should be planned in such a manner that to achieve the objectives.  So strategy in this regard specifies their size, probable abilities, and method training which is proposed to be given to them.
Sale promotion strategies should also be formulated. A balance should be made between dealer level sales promotion and consumer level sales promotion. 
Strategy should also be formulated regarding advertisement.  The firm can choose from a large variety of advertisement media. Before selecting an advertisement media the firm should analyse its effectiveness with respect to our product.