Liiitlget is based tin the sales forecast and ihe need to avoid excessive ri^k. Sales budgets are generally slightly lower than the sales fn re cast.
COMPANY SALES POTENTIAL C ompany sales potential is the sales limit approached by company demand as company marketing effort increases relative io thai of com petitors, \ tu.1 absolute limit OF company demand is. of course, die market potential. The two would be equal 0t the company got mo percent of the market, In most eases, company sales potential in less than the market potential, evejt when coiilpany marketing expenditures increase considerably, relative tu competitors- 'I he reason iü that each competitor bas a hardcore of loyal buyers who are not very responsive to other companies' efforts to woo i hem.
Ure are mm ready to examine practical methods for estivaiftlg current market demand. Marketing executives want to estimate iota! inarkei poienri:]l. area market potential, and loial industry i Liles and market Shares.
TOTAL MARKET POTENTIAL Total market potential is the maximum amount of sales that might be available to all die itrios in an industry during <i gjven period, und er a given level of industry marketing effort and environmental conditions. A common way lo estimate tola] market potential is as follows: Estimate the potential number of buyers limes the average mum til y purchased by a buyer 1 i nies the price.
If 1QQ million people buy books each year, and the average book buyer buys three books a yciit. ¿od tin- a^rerage pñee of a boot is then the toiai market potential Kir books is Sö billion (loo million x 3 x $20).The most difficult component to estimate is the number of buyers for the specific produd or market- One can always slarl with ihe mini population in the nation, say. 2it] million people. The ne M step is to eliminate groups that obviously would not buy the product, i.et us assume that illiterate people and children under l2<lo run buy books, and they co tisii lute 20 percent of the popula lion.
fli is means dial only AO percent of the population, or approximately Jl)5J million people, would be in [he suspect pool. We might do further research a tul I inri thai people of low Income and low education do not read hooks« and they Constitute over 30 percent ¡if the suspect pool. I :l ¡minuting I he til. we arrive at a prospect pool aï approximately 146.3 million bunk buyers. Wfe would use this number of potential buyers lo calculate total market potential,
A variation on ibis method is the cluiin-ntfio inrihcni. Ii mvnlvi-s. muliiphin^a nuruber by several adjusting percentages. Suppose a brewery Is inieresied in e it i mat big the market potential fora new light beer. An estimate can be made by the following calculai ion:
Demand for the new light beer : Population x personal discretionary income per capita average percentage ol discretionary income spent on foot! x average percentage of a i no uni spent on food thai is spent pu beverages x average percentage mmtittum spent on beverages that is spent öäti alcohole beverages x average percentage of amount spent On alcoholic leverages thai is spent on beer x eäüpected percentage of amount spent tin beer that will he spent on light beer.
Companies face the problem or selecting the best territories and allocating their marketing budget optimally among these territories. Therefore, they need to estimate tire market potential of different cities, staies. and nations, t wo majar methods of assess in g area market potential are available: the market-buildup method, which is used primarily by business marketers, and tlie multipler factor index method, wbitfi is used primarily hi consumer marketers.
Market-Buildup Method The market-buildup method calls Tor Identifying ali the pot en liai buyers in each market and estimating their poteniial purchases, fhfs method produces accurate results¡Tive have a list of all potential buyers and a good estimate oí what each will buy. Unfortunately, this information is noi always easy in gather.
Considera machine-tool company that wants to estimate the area market potential foi its wood lathe in the Boston area. Us first step is in identify all potential buyers of wood lathes in the atea. I he buyers Consist primarily of manufacturing establishments that have to shape or ream wood as pari of their operation, so ihc company could compile a list from a directory of all manufacturing establishments in the Boston area, then it could estimate t lie number of lathes each industry might purchase based on the number of lathes per thousand employees or pet SI million of sales in that industry.
An efficient method Of estimating area market potentials makes use of the Not'tb American industry Classification System (,\AICS), developed by the tJ.S. Hureair of the CensttS in conjunction with the Canadian and Mexican governments.^*1 The MA ICS classifies all manufacturing into 20 major industry sectors. Each sector is further broken into a six* digit, hierarchical structure as follows (illustrated with paging).
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