Market And Demand Analysis

In most case, the first step in project analysis is to estimate the potential size of the market for the product proposed
to be manufactured (or service planned to be offered) and get an idea about the market share that is likely to be
captured. Put differently, market and demand analysis is concerned with two broad issues: what is likely aggregate
demand for the product/service? What share of the market will the proposed project enjoy?

These are very important, yet difficult, questions in project analysis. Intelligent and meaningful answers to them cal
for an in-depth study and assessment of various factors like patterns of consumption growth, income and precise
elasticity of demand, composition of market, nature of competition, availability of substitutes, reach of distribution
channels, so on and so forth. Yet, in many cases project feasibility studies seem to make a short shrift of market and
demand analysis. It is not uncommon to find cursory statements like “the market is attractive” or “the demand is
expected to exceed supply” as substitutes for a thorough market and demand analysis in project evaluation
exercises.

Given the importance of market and demand analysis, it should be carried out in an orderly and systematic manner.
The key steps involved in market and demand analysis are depicted in Exhibit 4.1. this chapter discusses these
steps. It is organized into seven section as follows:
• Situational analysis and specification of objectives
• Collection of secondary information
• Conduct of market survey
• Characterization of the market
• Demand forecasting
• Uncertainties in demand forecasting
• Market planning

1.SITUATIONAL ANALYSIS AND SPECIFICATION OF OBJECTIVES

In order to get a “feel” of 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 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. In most cases, of course, a formal study of the market and demand is warranted.
To carry out such a study it is necessary to spell out its objectives clearly and comprehensively. Often this
means that the intuitive and 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 form of
questions. Of course, in doing so, always bear in mind how the information generated will be relevant in
forecasting the overall market demand and in assessing the share of the market that the project will capture.
This will ensure that questions not relevant to the market and demand analysis will not be asked
unnecessarily.
To illustrate, suppose that a small but technologically competent firm has developed an improved air
cooler based on a new principle that appears to offer several advantages over conventional air cooler. The
chief executive of the firm needs information about where and how to market the new air cooler. The
objectives of the market and demand analysis in this case may be to answer the following questions:
• Who are the buyers of air coolers?
• What is the total current demand for air coolers?
• How is demand distributed temporally (pattern of sales over the year) and geographically?
• What is the break-up of demand for air coolers of different sizes?
• What price will the customers are willing to pay for the improved air cooler?
• How can potential customers be convinced about the superiority of the new cooler?
• What price and warranty will ensure its acceptance?
 • What channels of distribution are most suited for the air cooler? What trade margins will include
distributors to carry it?
• What are the prospects of immediate sales?

Demand
Collection of forecasting
Secondary
information

Situational
Analysis and Characterization
Specification of the Market
of Objectives

Conduct of Market
market survey Planning
Key steps in Market and Demand Analysis and their Inter-relationships

2.COLLECTION OF SECONDARY INFORMATION

In order to answer the questions listed while delineating 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. Secondary
information provides the base and the starting point of the market and demand analysis. It indicates what is
known and often provides leads and cues for gathering primary information required for further analysis.
This section looks at secondary information and the following at primary information.

General Sources of Secondary Information

The important sources of secondary information useful for market and demand analysis in India are
mentioned below:

Census of India: A decennial publication of the Government of India, it provides, inter alia, information
on population, demographic characteristics, household size and composition, and maps.
National Sample Survey Reports: Issued from time to time by the Cabinet Secretariat, Government of
India, these reports present information on various economic and social aspects like patterns of consumption,
distribution of households by the size of consumer expenditure, distribution of industries, and characteristics
of the economically active population. The information presented in these reports is obtained from nationally
representative sample by the interview method.

Plan reports: issued by the Planning Commission usually at the beginning, middle, and end of the five-
year plans, these reports and documents provide a wealth of information on plan proposals, physical and
financial targets, actual outlays, accomplishment etc.

Statistical Abstract of the Indian Union: An annual publication of the Ministry of the Central Statistical
Organization, it provides, inter alia, demographic information, estimates of national income, and agricultural
and industrial statistics.
 India Year Book: An annual publication of the Ministry of information and Broadcasting, it provides a
wide range of information on economic and other aspects.

Statistical Year Book: An annual publication of the United Nations, it provides world statistics relating to
various aspects like population, demography, gross domestic publication, industrial production, international
trade, etc.

Economic Survey: An annual publication of the Ministry of Finance, it provides the latest data on
industrial production, wholesale prices, consumer prices, exports, agricultural production, national income
etc.

Guidelines to Industries: This is annual of the Ministry of Industrial Development.

Annual Survey of industries: An annual publication of the Central Statistical Organization, it contains
information on various aspects of industry: number of units and state wise distribution, average number of
working days, employment, materials consumption, quantity of products, etc.

Techno-Economic Surveys: The National Council of Applied Economic Research has contacted and
published techno-economic surveys for various states.

Industry Potential surveys: The industrial development Bank of India in consortium with her financial
institutions has conducted and published in industrial potential surveys for several backward areas.

Monthly Bulletin of Reserve Bank of India: this provides information on production indices, prices,
balance of payment position, exchange rates, etc.

Industry Specific Sources of Secondary Information

The important industry-specific sources of secondary information are given in Exhibit 4.2.

Evaluation of Secondary Information

While secondary information is available economically and readily (provided the market analyst is able to
locate it), its reliability, accuracy, and relevance for the purpose under consideration must be carefully
examined. The market analyst should seek to know:
• Who gathered the information? What was the objective?
• When was the information gathered? When it was published?
• How representative was the period for which the information was gathered?
• Have the terms in the study been carefully and unambiguously defined?
• What was the target population?
• How was the sample chosen?
• How representative was the sample?
• How satisfactory was the process of information gathering?
• What was the degree of sampling bias and non-response bias in the information
gathered?
• What was the degree of misrepresentation by respondents?

• How accurately was the information edited, tabulated, and analyzed?

• Was statistical analysis properly applied?
 3.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 a market survey, specific to
the project being appraised.

The market survey may be a census survey or a sample survey. In a census survey, the entire population is
covered. 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 prohibitively costly and may also
be infeasible. For example, it would be inordinately expensive-in fact almost impossible-to cover every user of
Lifebuoy or every person in the income bracket Rs.10, 000- 15,000.

Due to the above-mentioned limitations of the census survey, the market survey, in practice, is typically a
sample survey. In such a survey a sample of population is contacted or 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 elasticities of demand.
• Motives for 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:

Define The Target Population In defining the target population the important terms should be carefully and
unambiguously defined. The target population may be divide into various segments, which may have differing
characteristics. For example, all television owners may be divided into three to four income brackets.

Select Sampling Scheme and Sample Size

There are several sampling schemes, sequential sampling, stratified sampling, systematic sampling, and non-
probability sampling. Each scheme has its advantages and disadvantages. The sample size, other things being equal,
has a bearing on reliability of the estimates- the larger the sample size, the greater the reliability.
Develop the Questionnaire
The questionnaire is the principal instrument for eliciting information from the sample of respondents. The
effectiveness of the questionnaire as a device for eliciting the desired information depends on its length, the
types of questions, and the wording of the questions. Developing the questionnaire requires a thorough
understanding of the product/service and its usage, imagination, insights into human behaviour,
appreciation of subtle linguistic nuances, and familiarity with the tools of descriptive and inferential
statistics to be used later for analysis

Recruit and Train the Field Investigators

Recruiting and training of field investigators must be planned well since it can be time consuming well since it can
be time consuming. Great care must be taken in recruiting the right kind of investigators involved in
industry and trade market surveys need intimate knowledge of the product and technical background,
particularly for products based on sophisticated technologies.

Obtain Information as per the 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. They are, however, expensive and likely to result biased responses
because of the presence of the interviewer. Mail surveys by snail mail or e-mail are economical and evoke fairly
candid responses.
Scrutinize the Information Gathered
Information gathered should be thoroughly scrutinized to eliminate data which is internally inconsistent and which
is of obvious validity. For example, a respondent with a high income and large family may say that he lives in a
one-room tenement. Such information, probably inaccurate, should be deleted. Sometimes data inconsistencies may
be revealed only after some analysis.

Analyze and Interpret the Information

Information gathered in the survey needs to be analyzed and interpreted with care and imagination. After tabulating
it as per a plan of analysis, suitable statistical investigation may be conducted, wherever possible and necessary. For
purposes of statistical analysis, a variety of methods are available. These may be divided into two broad categories:
parametric methods and non-parametric methods. Parametric methods assume that the variable or attribute under
study conforms to some known distribution. Non-parametric methods do not presuppose any particular distribution.

Some Problems
A market researcher in India has to contend with the following problems:

Heterogeneity of the country

Since it is impossible to cover all the states in an all India survey, the country has to be divided into broad
territories going beyond the state boundaries. However the heterogeneity of the country makes the task difficult.
Presently the research agencies divide the country in a way they think is appropriate. This causes problems in
comparing the findings of different research agencies.

Multiplicity of languages
Related to above difficulty is the problem of multiplicity of languages confronted by a research agency interested in
conducting an all India survey.

Design of Questionnaire
Scaling techniques, commonly recommended in marketing research literature, involve a 5-point scale or a 7-point
scale. Such refined scales are not easily amenable to translation in regional languages. More important, they are
often not comprehensible to a vast majority of respondents who may lack the education and sophistication to
understand them. Hence when refined scaling techniques are used, answers and to be erratic and inconsistent. It is
perhaps desirable to rely more on open-ended questions and less on pre-coded questions on define scales.

4.CHARACTERISATION OF THE MARKET

Based on the information gathered from secondary sources and through the market survey, the market for the
product/service may be described in terms of the following:
• Effective demand in he 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 the abnormal factors. The consumption series, after such adjustments, may be obtained for several years.
In a competitive market, effective demand and apparent consumption are equal. However, in most of the
developing countries, where competitive markets do not exist for a variety of products due to exchange restrictions
and controls on production and distribution, the figure of apparent consumption may have to be adjusted for market
imperfections. Admittedly, this is often a difficult task.

Breakdown of Demand
To get a deeper insight into the nature of demand, the aggregate (total) market demand may be broken down 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.
Nature of Product
One generic name often subsumes many different products: steel covers sections, rolled products, and various semi-
finished products; commercial vehicles, cover trucks and buses of various capacities; so on and so forth.
Consumer groups
Consumers of a product may be divided into industrial consumers and domestic consumers. Industrial consumers
may be sub-divided industry-wise. Domestic consumers may be further divided into different income groups.
Geographical Division
A geographical breakdown of consumers is helpful, particularly for products, which have a small value-to-weight
relationship and for products, which require regular, efficient after-sales service.

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 (free on board) price or CIF (cost,
insurance, and freight) 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 nature of the product. Capital goods, industrial raw materials or
intermediaries, and consumer products tend to have different distribution channels. Likewise, methods used for
sales promotion (advertising, discounts, gift schemes, etc.) may vary from product to product.

Supply and Competition

It is necessary to know the existing sources of supply and whether they are foreign or domestic: For domestic
sources of supply, information along the following lines may be gathered: location, present production capacity,
planned expansion, capacity utilization level, bottlenecks in production, and cost structure.
Competion from substitute and near substitute should be specified because almost any produced may be replaced
by some other product as a result of relative change in price quality, quality, availability, promotional effort, and so
on.
Government policy
The role of the government in influencing the demand and market for a product may be significant. Government
plans, policies, and legislation, which have bearing on the market and demand of the product under examination,
should be spelt out. These are reflect in : production target in national plans, import and export trade control, import
duties, export incentives, excise duties, sales tax, industrial licensing, preferential purchases, credit controls,
financial regulation. And subsidies/penalties. Of various kind

5.DEMAND FORCASTING
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 classified in three categories as shown in exhibit 4.3. The methods listed in this exhibit are
described in some detail below.

Qualititative Method
These methods rely essentially on the judgement of expert to translate qualitative
information in to quantitative estimates. The important qualitative methods are:
• Jury of executive method
• Delphi method
2. Time series method
• Trend projection method
• Exponential smoothing method
• Moving average method
3 casual methods
• Chain ratio method
• Consumption level method
According to the least square method the linear relationship is chosen in such a manner that the sum of the
square deviation of the observation from the line is minimize. The parameters a & b of the linear
relationship are estimated with the help of following equation.
-------------------------
The advantage of least square method are
1. It uses all the observation
2. The straight line is derived by objective, Statistical procedure,
3. A Measure of goodness of fit is available.

The limitation of the least square method are

1) The method is somewhat more complicated then the method discussed earlier
2) The result of such analyses is valid only when certain conditions are satisfied.

Exponential Smoothing method

In exponential smoothing forecast are modified in the light of observed errors

Moving Average Method

As per the moving average method of sales forecasting, the forecast for the next period is equal to the
average of the sales for several preceding periods.

CHAIN RATIO METHOD

The potential sales of a product may be estimated by applying a series of factor to a measure of aggregate
demand.

Consumption Level Method

Useful for a product, which is directly consumed, this method estimates consumption level on the basis of
elasticity coefficient, the important ones being the income elasticity of demand and the price elasticity of
demand
Income elasticity of demand
The income elasticity of demand reflects the responsiveness of demand to variation in income. It is
measured as follows.
Q2 - Q1 I1 + I2
E1 = X
I2 – I1 Q2 + Q1

Where E1 = Income elasticity of demand

Q1 = quantity demanded in the base years
Q2 = quantity demanded in the following year
I1 = income level in the base year
I2 = income level in the following year

Price elasticity of demand

The price elasticity of demand measures the responsiveness of demand to variation in Price. It is defined
as:

Q2 - Q1 P1 + P2
Ep = X
P2 – P1 Q2 + Q1
Where Ep = price elasticity of demand
Q1 = Quantity Demanded in the base year
Q2 = quantity demanded in the following year
P1 = price per unit in the base year
P2 = price per unit in the following year

End use method

Suitable for estimating the demand for intermediate products, the end use method, also referred to as the
consumption coefficient method

Leading Indicator Method

Leading indicator is variable which change ahead of other variable, the lagging variables. Hence,
observed changes in the leading indicators may be used to predict the change in the level of urbanization
(a leading indicator) may be used to predict the change in the demand for air conditioner (a lagging
variable)

Two basic are involved in using the leading indicator method:

1) First identify the appropriate leading indicator
2) Second establish the relationship between the leading indicator (s) and the variable to the forecast

Econometric method

An econometric model is a mathematical representation of economical relationship derived from

economic theory. The primary objectives of econometric analysis are to be forecast the future behaviour
of the economic variables incorporated in the model.
UNCERTAINITIES IN DEMAND FORECASTING

Demand forecasts are subject to error and uncertainty, which arise from three principal
Sources:

o Data about past and present market

o Methods of forecasting
o Environmental change

Environmental Changes

The environment in which a business functions is characterized by numerous uncertainties. The important sources
of uncertainty are mentioned below:

• Technological Change This is a very important but hard-to predict factor, which influences business
prospects. A technological advancement may create a new product, which performs the same function more
efficiently and economically, thereby cutting into the market for the existing product. For example,
electronic watches are encroaching on the market for mechanical watches.

6.Market Planning
• Current marketing situation
• Opportunity and issue analysis
• Objective
• Marketing strategy
• Action programme

Current Marketing Situation: -

1. Market situation
2. Competitive situation
3. Distribution situation
4. Macro environment