Page 111 - Marketing Management

88 PART 2 CAPTURING MARKETING INSIGHTS

market potential, even when company marketing expenditures increase considerably. Each
competitor has a hard core of loyal buyers unresponsive to other companies’ efforts to woo them.

Estimating Current Demand
We are now ready to examine practical methods for estimating current market demand. Marketing
executives want to estimate total market potential, area market potential, and total industry sales
and market shares.
TOTAL MARKET POTENTIAL Total market potential is the maximum sales available to all
firms in an industry during a given period, under a given level of industry marketing effort and
environmental conditions. A common way to estimate total market potential is to multiply the
potential number of buyers by the average quantity each purchases, times the price.
If 100 million people buy books each year, and the average book buyer buys three books a year
at an average price of $20 each, then the total market potential for books is $6 billion (100 million
3 $20). The most difficult component to estimate is the number of buyers.We can always start with
the total population in the nation, say, 261 million people. Next we eliminate groups that obviously
would not buy the product. Assume illiterate people and children under 12 don’t buy books and
constitute 20 percent of the population. This means 80 percent of the population, or 209 million
people, are in the potentials pool. Further research might tell us that people of low income and low
education don’t buy books, and they constitute over 30 percent of the potentials pool. Eliminating
them, we arrive at a prospect pool of approximately 146.3 million book buyers.We use this number to
calculate total market potential.
A variation on this method is the chain-ratio method, which multiplies a base number by
several adjusting percentages. Suppose a brewery is interested in estimating the market poten-
tial for a new light beer especially designed to accompany food. It can make an estimate with the
following calculation:

Average
Average Average Average Expected
percentage of
percentage of percentage of percentage of percentage of
Demand personal amount spent amount spent on amount spent amount spent
for the new Population discretionary on food that is beverages that is on alcoholic on beer that
light beer income per spent on spent on alcoholic beverages that will be spent on
capita spent
beverages beverages is spent on beer light beer
on food

AREA MARKET POTENTIAL Because companies must allocate their marketing budget
optimally among their best territories, they need to estimate the market potential of different cities,
states, and nations. Two major methods are the market-buildup method, used primarily by
business marketers, and the multiple-factor index method, used primarily by consumer marketers.

Market-Buildup Method The market-buildup method calls for identifying all the potential
buyers in each market and estimating their potential purchases. It produces accurate results if we
have a list of all potential buyers and a good estimate of what each will buy. Unfortunately, this
information is not always easy to gather.
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,
primarily manufacturing establishments that shape or ream wood as part of their operations. The
company could compile a list from a directory of all manufacturing establishments in the 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 in conjunction
with the Canadian and Mexican governments. 55 The NAICS classifies all manufacturing into
20 major industry sectors and further breaks each sector into a six-digit, hierarchical structure
as follows.