Page 110 - Marketing Management

COLLECTING INFORMATION AND FORECASTING DEMAND | CHAPTER 3 87

Comparing current and potential market shares yields a firm’s share-penetration index.
If this index is low, the company can greatly expand its share. Holding it back could be low
brand awareness, low availability, benefit deficiencies, or high price. A firm should calculate the
share-penetration increases from removing each factor, to see which investments produce the
greatest improvement. 53
Remember the market demand function is not a picture of market demand over time. Rather, it
shows alternative current forecasts of market demand associated with possible levels of industry
marketing effort.

MARKET FORECAST Only one level of industry marketing expenditure will actually occur.
The market demand corresponding to this level is called the market forecast.

MARKET POTENTIAL The market forecast shows expected market demand, not maximum
market demand. For the latter, we need to visualize the level of market demand resulting from a
very high level of industry marketing expenditure, where further increases in marketing effort
would have little effect. Market potential is the limit approached by market demand as industry
marketing expenditures approach infinity for a given marketing environment.
The phrase “for a given market environment” is crucial. Consider the market potential for auto-
mobiles. It’s higher during prosperity than during a recession. The dependence of market potential
on the environment is illustrated in Figure 3.3(b). Market analysts distinguish between the po-
sition of the market demand function and movement along it. Companies cannot do anything
about the position of the market demand function, which is determined by the marketing environ-
ment. However, they influence their particular location on the function when they decide how
much to spend on marketing.
Companies interested in market potential have a special interest in the product-penetration
percentage, the percentage of ownership or use of a product or service in a population. Companies
assume that the lower the product-penetration percentage, the higher the market potential,
although this also assumes everyone will eventually be in the market for every product.

COMPANY DEMAND Company demand is the company’s estimated share of market
demand at alternative levels of company marketing effort in a given time period. It depends on how
the company’s products, services, prices, and communications are perceived relative to the
competitors’. Other things equal, the company’s market share depends on the relative scale and
effectiveness of its market expenditures. Marketing model builders have developed sales response
functions to measure how a company’s sales are affected by its marketing expenditure level,
marketing mix, and marketing effectiveness. 54

COMPANY SALES FORECAST Once marketers have estimated company demand, their next
task is to choose a level of marketing effort. The company sales forecast is the expected level of
company sales based on a chosen marketing plan and an assumed marketing environment.
We represent the company sales forecast graphically with sales on the vertical axis and market-
ing effort on the horizontal axis, as in Figure 3.3. We often hear that the company should develop
its marketing plan on the basis of its sales forecast. This forecast-to-plan sequence is valid if
forecast means an estimate of national economic activity, or if company demand is nonexpansible.
The sequence is not valid, however, where market demand is expansible or where forecast means
an estimate of company sales. The company sales forecast does not establish a basis for deciding
what to spend on marketing. On the contrary, the sales forecast is the result of an assumed mar-
keting expenditure plan.
Two other concepts are important here. A sales quota is the sales goal set for a product line, com-
pany division, or sales representative. It is primarily a managerial device for defining and stimulating
sales effort, often set slightly higher than estimated sales to stretch the sales force’s effort.
A sales budget is a conservative estimate of the expected volume of sales, primarily for making
current purchasing, production, and cash flow decisions. It’s based on the need to avoid excessive
risk and is generally set slightly lower than the sales forecast.
COMPANY SALES POTENTIAL Company sales potential is the sales limit approached by
company demand as company marketing effort increases relative to that of competitors. The
absolute limit of company demand is, of course, the market potential. The two would be equal if
the company got 100 percent of the market. In most cases, company sales potential is less than the