A VOCABULARY FOR DEMAND MEASUREMENT
The major concepts in demand measurement are market demand and company demand. Within each we distinguish among a demand function, a sales forecast, and a potential.
The marketerâ€™s first step in evaluating marketing opportunities is to estimate total market demand. Market demand for a product is the total volume that would be bought by a defined customer group in a defined geographical area in a defined time period in a defined marketing environment under a defined marketing program.
Market demand is not a fixed number, but rather a function of stated condition. For this reason, it can be called the Market demand function.
Some base sales (called the market minimum) would take place without any demand stimulating expenditure. Higher level of industry marketing expenditure would yield higher level of demand, first at an increasing rate and then at a decreasing rate. Marketing expenditure beyond a certain value would not stimulate much further demand, thus, suggesting a upper limit to market demand called the market potential.
Difference between the marketing minimum and the market potential shows the overall marketing sensitivity of demand. We can think of two extreme types of Market, the expansible, and the non-expansible. An expansible market such as the market for racquet balls is very much affected in its total size by the level of industry marketing expenditure. Organizations selling in an non-expansible market must accept the marketâ€™s size (the level pf primary demand for the product class) and direct their efforts to winning a larger market share for their product (the level of selective demand for the companyâ€™s product).
It pays to compare the current level of market demand to the potential demand level. The result is called the market penetration index. A low market penetration index indicates substantial growth for all the firms. A high market penetration index suggests that there will be increased costs in attracting the few remaining prospects. Generally, price competition increases and margins fall when the market penetration index is already high.
A company should also compare its current market to its potential market share. The result is called the companyâ€™s share penetration index. A low share penetration index indicates that the company can greatly expand its share.
The underlying factors holding it back could be many: low brand awareness, low brand availability, benefits deficiencies, and too high a price. A firm should calculate the share penetration increases that would occur with investment to remove each deficiency to see which investments would produce the greatest improvement in share penetration.
Only one level of industry marketing expenditure will actually occur. The market demand corresponding to this level is called the market forecast.
The market forecast shows expected market demand, not maximum market demand. For the latter, we have to visualize the level of market demand resulting from a â€œvery highâ€? level of industry marketing expenditure, where further increases in marketing effort would have little effect in stimulating further demand. Market potential is the limit approached by market demand as industry marketing expenditures approach infinity for a given marketing environment.
The phrase â€œfor a given market environmentâ€? is crucial. Consider the market potential for automobiles in a period of recession versus a period of prosperity. The market potential is higher during prosperity. The dependence of market potential on the environment is illustrated. Market analysts distinguish between the position 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 environment. However, companies 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, which is the percentage of ownership or use of a product or service in a population. Here are some US percentage: television (98%), health insurance (84%), car (81%), home ownership (67%), PC (54%), stock ownership (48%), gun ownership (41%) , and fax (21%) . Companies assume that the lower the product penetration percentage, the higher the market potential, although this assumes that everyone will eventually is in the market for every product.