Estimating Area and Market Demand

Companies face the problem of selecting the best sales territories and allocating their marketing budget optimally among these territories. Therefore they need to estimate the market potential of different cities, regions and even nations (see Marketing Highlight 8.2). Two main methods are available; the market-build-up method, used primarily by business-goods firms; and the market-factor index method, used primarily by consumer-goods firms.

The market-build-up method identifies all the potential buyers in each market and estimates their potential purchases. Suppose a manufacturer of mining instruments developed an instrument for assessing the actual proportion of gold content in gold-bearing ores. The portable instrument tests gold ore in die field. By using it, miners would not waste their time digging deposits of ore containing too little gold to be commercially profitable. It sees each mine as buying one or more instruments, depending on the mine's size. The company wants to determine the market potential for this instrument in each gold-mining country and whether to hire a salesperson to cover it.

To estimate the market potential in each country, the manufacturer first finds out the number of gold-mining operations in each country, their locations, the

KFC Gets Japan Finger Lickin"

Marketing

Highlight 8.2

closed market, the non-tariff bar

Market Potential Estimate

are willing to pay more for sitting in an American-style restaurant. Second, Asian women have been entering the labour force in large numbers, leaving them with less time for cooking meals at home. Third, chicken is more familiar to the Asian palate than pizza, and more available than beef. Further, chicken faces none of the religious strictures that beef faces in India or that pork faces in Muslim countries. KFC serves its standard chicken, mashed potatoes and coleslaw throughout Asia, but has offered a few adaptations, such as Hot Wings, a spicier chicken, in Thailand, and fried fish and chicken curry in Japan.

As Le Monde recognized years ago: 'To continue to complain about the bilateral deficit with Japan as the result of Japanese protectionism only serves to obscure the problem, not resolve it.' All markets have entry barriers and Japan's are more discouragement to enter than real costs. Japan is the largest market that the United States and Europe have never been close to. It has a strong culture that is so different from the West's that we have to try very hard to grasp it. The trade barriers are often an excuse for European and US failures to penetrate the Japanese market. Often those who complain most loudly about the barriers are businesspeople who have never tried or who have tried once and failed. The Japanese rarely give up after only one attempt.

KFC has tried and won. So has Nestle, and KitKat is now Japan's second-best-selling confectionery. Clearly companies can succeed if they view the world as their market and take the time to learn. They must find those areas that promise the greatest potential sales and profit growth, whether in their neighbourhood, state or nation, or even in Japan.

Sourcbs: Andrew Tänzer, 'Hot wings take off, Forbes (18 January 1993), p. 74; George Statin ton, 'Tokyo: idler an fond îles choses', Le Monde (J2 December 1977), p. 7; Endymion Wilkinson, Japan Versus the fp&st image and reality (London: Penguin 1.990); Leonard Konen, 2S3 Useful Ideas from Japan (Sal rranciseo, CA; Chronicle, 1988); Sheridan M. Tatsmno, ('routed in Japan: From imitation to world-class innovators (London; Harper & Row, 1990),

Everyone is familiar with com-

plaints about the bilateral trade

.Japan. Many reasons are suggested impenetrable': because it is a closed market, the non-tariff bar market-factor index method

A metliod used mainly by consumer-products firms lo estimate the market potential far consumer products.

number of employees, annual sales and net worth. This will be harder in some countries than others, since some have poor records and others, like China, are secretive about gold mining. Using these data, the company can estimate the market potential of each country based on the number of mines that are big enough and wealthy enough to buy the instrument.

The market-factor index metliod estimates the market potential for consumer goods. Consider the following example. An American manufacturer of men's dress shirts wishes to evaluate its sales performance with market potential in the Indianapolis region. It estimates total national potential for drews shirts at $2 billion per year. The company's current nationwide sales are S140 million -about a 7 per cent share of the total potential market. Its sales in the Indianapolis metropolitan area are SI, 100,000. It wants to know whether its share of the Indianapolis market is higher or lower than its national 7 per cent market share. To find this out, the company first needs to calculate market potential in the Indianapolis area.

The company calculates this by multiplying together population and the areas income per capita by the average share of income spent on shirts. The product then compares with that for the whole country. Using this calculation, the shirt manufacturer finds that Indianapolis accounts for 0.51 per cent of the nation's total potential demand for dress shirts. Since the total national potential is $2 billion each year, total potential in Indianapolis equals 810,200,000 (= j">2 billion x 0.0051). Thus the company's sales in Indianapolis of SI,100,000 amount to a 10,8 per cent share (= $1,100,000/$10,200,000} of area market potential. Comparing this with the 7 per cent national share, the company appears to be doing better in Indianapolis than in other parts of the country.

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Responses

  • Ariam
    What is "market factor index" for assessing market demand?
    7 years ago
  • sm boffin
    Why kfc has spicier chicken in thailand?
    7 years ago
  • margherita
    What is a method used for estimating area market demand?
    5 years ago

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