MARKET MEASUREMENT & FORECASTING

You might notice that this topic does not appear in the outline and the material
is not included in the custom version of the text. There is a good reason for
this. Much of textbook-type material on this topic tends to emphasize the highl
y technical methods used to develop forecasts which are beyond the scope of this
course. The emphasis here will be upon the necessity and usefulness of using e
stimates of the future values of various measures in the decision-making process
.
It is important to recognize that much of the data managers deal with on a daily
basis does not constitute “fact”, but are estimates of what might occur in the futu
re. I have read quite a few recommendations that take the following general app
roach: if your sales reach the required dollar volume, then you should increase
your budget. The problem is the budget would be increased in an attempt to pro
duce an increase in sales. Budget increase first, then the sales results.
When Proctor & Gamble introduces a new product to their Swiffer® line of cleaning
products (with a multi-million dollar advertising expenditure), there is no info
rmation available that will guarantee a certain sales volume will occur. P&G wi
ll know, however, the sales volume needed to cover their expenditures (with the
margins they have selected) and the volume needed to reach a profit objective (c
ontribution analysis). The question for P&G is: can these sales volumes reasona
bly be attained? Answering this question, even by means of a reasonable guess,
is what managers get paid to do. And, they may not get an answer that matches w
hat actually will occur. Understanding this point is essential in the planning
and decision-making process.
Actual versus Estimated
Actual sales are a history of brand, product category, or industry sales for a p
articular period of time.
The term history indicates that these sales occurred some time in the past. Whe
n we consider that an organization’s financial results often are reported weeks or
months after they occur, the lag between when it happened and when we know what
happened is apparent. Even with the relatively sophisticated point-of-sale sys
tems in use at major retailers, there is a lag between the actual sales and the
report being received by managers.
This normally does not present any great difficulty for managers, since most inf
ormation is not easily interpreted in “real-time”. Certainly, banks, brokerage hous
es, and airline and hotel reservation systems need to record and process informa
tion very quickly. A supermarket chain, however, would find little value in kno
wing the number of 20 ounce packages of Lucky Charms® sold in the last 60 seconds.

Whether sales of a product category or industry are ever “actual” is often a matter
of who is doing the counting. The manufacturers of cars and light trucks in the
U.S. report their sales (in units) every ten days to organizations who tabulate
, summarize, and return reports to all manufacturers. Often trade associations
attempt to provide the same information for their members, but may not have 100%
participation. In other situations, the best information is still an estimate.
Sales forecasts are estimates of current and future sales by brand, product cate
gory, and industry.
Consider how this impacts the process of creating an annual plan. Hershey Choco
late has used the calendar year as the basis for their annual plan for a long pe
riod of time. Assuming they still do, the planning timeline for creating the pl
an for 2008 would look something like this:

June 2007: prepare estimates for industry, product category, and brand sales fo
r 2007
July – September 2007: plans for each brand are prepared, including detailed fina
ncials for spending and needed results, and then s
ummarized by product line, etc.
October 2007: The plan is presented to top management and, after altera
tions, is approved.
Notice that this process is begun before actual results are available for the se
cond quarter of the year and concludes when, perhaps, third quarter results are
known. Knowing that candy sales in the U.S. are at their peak in the fourth qua
rter (fourth quarter sales can “make or break” the entire year), you can realize tha
t this process is almost entirely dependent on estimates, or forecasts, of futur
e outcomes.
While it may be obvious that decisions about advertising and promotion budgets m
ust be made in advance, consider all of the other decisions that must be made to
bring a flow of tangible products to the market. Production schedules and inve
ntory levels must be established to insure that an adequate supply of the finish
ed product is available to meet the forecasted demand. Raw material orders must
be made in advance of production to insure an adequate supply when needed. Del
ivery schedules must be established, as well as sales quotas. Staffing levels f
or production and sales must be established which might lead to hiring (or layof
f) decisions. And, all of this takes money; thus both short and long term finan
cing decisions must be made to insure adequate cash is available. Without a for
ecast of sales volumes, none of these decisions is possible.
Market Share
Market share is a relatively simple concept. Consider the formula for calculati
ng it:
Organization’s Market Share = Organization’s Sales / Industry Sales
The values for the organization’s and the industry’s sales must both be on the same
basis and for the same time period for this measure to make sense. The time per
iod might be one year, or the past twelve months, or quarterly, or monthly, or t
he ten-day period ending February 9th. Sales volume could be on the basis of eit
her the number of units sold or the dollar volume of sales.
Logically, the interpretation of an organization’s market share would be the propo
rtion of sales it has obtained to the total sales in the industry. From a mathe
matical perspective, the larger an organization’s sales, the larger their market s
hare. This is true because a larger number (organization’s sales) divided by a co
nstant number (industry sales) will produce a larger result. An organization wi
th a 40% market share, therefore, sells eight times as much (units or dollars, d
epending on which measure is used) than an organization with a five percent mark
et share.
When I read a statement about market share as the portion of the market’s sales an
organization “owns”, I suffer an immediate increase in blood pressure and heart rat
e. Ownership implies some degree of permanence and a sale is temporary. It las
ts only until the next purchase is made. Leasing a sale would be a far better c
oncept, given the temporary nature of the transaction.
Thinking about market share as a “won-loss” record might be better. Consider the sh
opper in the cereal aisle of the supermarket. Assuming they are there to purcha
se one package of cereal from the scores of brands available, whichever brand th
e customer selects “wins” and the others lose. Lucky Charms® wins; Fruit Loops® (and ev
ery other brand) loses. The next time that same customer visits the cereal aisl
e, the result may be different. And, within seconds of one shopper’s selection, a
nother shopper is choosing a different brand.
Given the millions of packages of cereal sold in a day, one or two shoppers’ selec
tions will not have a discernable impact on a brand’s market share and two shopper
s could cancel any market share impact. Market share, therefore, is a measure o
f the relative sales for a brand over various time periods. It also is used to
judge the impact marketing decisions will require on future sales volumes relati
ve to the market.
Market Potential
Market potential is an estimate of current and future levels of maximum sales fo
r all sellers.
Since it represents the maximum sales for an industry, market potential may be t
hought about as the upper limit of demand in a market. One way this is estimate
d in practice is to develop a measure of household penetration for a product cat
egory.
Household penetration attempts to estimate the number, or proportion, of househo
lds that purchase, own, or use a particular product. The following shows househ
old penetration for a number of electronic devices in the U.S.:

Interpreting this data indicates that about 98% of all U.S. households had one o
r more color televisions in 1998, while only about ten percent had a fax machine
in the home. In the 2004 data, below, you can see the changes in penetration i
n some categories – an increase in households with personal computers and a decrea
se in VCR’s – as well as the changes in the categories being measured.

Notice that about 43% of U.S. households received digital television by year-end
2004, but satellite reception is in 15% more households than digital cable (als
o notice this is 15% more, not three percent more). Also according to Nielsen M
edia Research, televisions were in 98% of U.S. households, with 81% of household
s having two and 50% having three or more.
Now, consider the following:

The spike in the number of households receiving basic cable in 1999 is due to th
e fact that broadcast satellite reception was included in the data beginning in
that year.
Obviously, this data would be of interest to mangers in a national cable company
as they plan their marketing strategies and programs. With over 86% of househo
lds receiving (and paying for) television reception, but only 43% able to receiv
e digital broadcast, the digital business represents a better opportunity for gr
owth than basic cable.
This concept can be generalized in the following:
In this example, we see a steady growth in the market potential for a product ca
tegory (number of households) and a gap between industry sales and the maximum s
ales. Alternatively, a product category might show the following:

While the market potential is the same, the gap between household penetration an
d the market potential is smaller, perhaps indicating there will be less opportu
nity, or greater difficulty, in achieving sales growth by attracting new custome
rs.
Top management is interested in the size and potential sales growth in markets a
s they make their decisions about corporate and product-mix strategy. In the ca
ble television industry, the digital product might be the focus, with more resou
rces being directed toward this segment of the business, and higher objectives b
eing set, than for basic cable.
Whether the gap is large or small, management would be interested in the reason(
s) the gap exists. Some possible, generalized, reasons are:
1. Demand exceeds industry supply capacity. This might not sound like a pr
oblem since organizations would be selling all they can produce. Consider, howe
ver, what happened to Quaker Oats shortly after introducing a new product catego
ry, the Granola bar, in the early 1980’s. The initial demand was far greater than
Quaker’s ability to supply the product. The result was that Quaker withdrew the
product from the market, accompanied by full-page ads in newspapers in major mar
kets, explaining the withdrawal and promising the product would return to the ma
rket once adequate production could be achieved. The logic offered is that they
did not want to disappoint their customers. That was true. The customers Quak
er referred to, however, were the major supermarket chains. With limited supply
, Quaker did not want to risk alienating any large customers by rationing distri
bution of the product, given all of the product categories Quaker supplies to su
permarkets. When Quaker was able to return to the market nine months later, the
y faced a host of competition in the product category rather than having the pro
duct category to themselves. Likewise, when an automobile manufacturer cannot s
upply enough cars for a hot-selling model, it is the dealers who might benefit b
y charging premium prices over invoice. The manufacturer loses both potential r
evenue and profits.
2. Prices are too high. Industry pricing simply may be at price points tha
t negatively impact a large number of potential customers’ ability to purchase. P
ersonal computers at $5,000 price points (1983) or $10,000 large-screen digital
televisions (two years ago) leave many potential customers unable to purchase.
As the price points decrease, industry sales tend to increase, if prices are too
high.
3. Industry marketing efforts are ineffective. It is possible that the ind
ustry has been unable to communicate the benefits of the product to a large numb
er of potential customers. This might occur if industry spending for communicat
ions programs is inadequate to reach a large number of people. Alternatively, t
he effectiveness of the messages may be insufficient to persuade a large number
of people to consider product purchase.
4. Environmental factors. The easy example here is the economy. High infl
ation, unemployment, and/or interest rates can limit demand for a product. The
low-carb craze, however, has negatively impacted industry sales for high-carb pr
oducts. And, the political-legal-regulatory process can prevent some products f
rom reaching their potential.
Absolute Market Potential
Measuring household penetration is one method for estimating the market potentia
l for a product category or industry, and focuses on the opportunity to attract
additional customers. To estimate the potential sales volume in a market, howev
er, would require considering not only the number of potential buyers, but also
the rate of purchase. I have not been able to find statistics, but it is fair t
o say that a large proportion of households in the U.S. purchase packaged bread.
Estimates also exist for the average number of purchases per household. Multi
plying the number of potential buyers by the average purchase rate produces an e
stimate for the possible number of loaves of bread sold in a given time period.
An example of a measure of absolute market potential that has produced consisten
tly accurate forecasts is the estimation of the size of the pool of first-time s
tudents at U.S. colleges and universities. The process involves the following:
Number of births (18 years ago) x survival rate x percent high school graduates
x percent choosing college = first-time applicant pool.
When college attendance, high school graduation rates, and survival rates are ad
justed for current conditions, this model has provided a reasonable estimate of
the total number of high school applicants from the U.S. that can be expected in
the current recruiting year. Colleges and universities watch this number close
ly and make adjustments in their recruiting efforts accordingly.
In general, absolute market potential estimates the “big-picture”. U.S. sales of ca
rs and light trucks for the 2008 model year or U.S. sales of new and existing ho
mes in 2008 are examples.
The usefulness of these estimates is in allowing management to evaluate opportun
ities in the market. A large gap between industry sales and market potential co
uld indicate a market that deserves additional resources. Likewise, growth in i
ndustry sales that is closing the gap, but still allowing room for additional gr
owth, would be a candidate for additional resources. These conditions also migh
t signal a need to increase spatial availability by providing more retail outlet
s for the product. And, they are useful in the process of setting objectives an
d quotas based upon the situation presented by the absolute market potential.
Relative Market Potential
Since absolute market potential covers a broad geography (the U.S., or Canada, o
r Europe, or the world), differences in geographic areas are overlooked. You mi
ght recall that pretzel consumption in the Philadelphia area is 12 times the nat
ional average, for example. Breaking down the absolute market potential into ge
ographic customer groups helps to refine the analysis and provide additional clu
es in the decision-making process.
For a national (or international) organization, evaluating which areas of the la
rger geography offer greater sales opportunities can assist in making decisions
such as allocation of advertising expenditures. Using print and/or broadcast ad
vertising in regional or local markets can reduce the cost of advertising versus
using national media. Decisions such as allocating the sales force, locating f
acilities, and obtaining distributors can all be guided by information that sugg
ests that some areas offer greater potential sales than others.
For final customers, the use of zip codes, combined with demographic and credit
card data, can point to areas that offer greater potential sales volume. There
are a number of commercial suppliers of such data that can be used in this proce
ss. Their offerings include both generalized descriptors of demographic informa
tion for zip codes and specific information about purchasing behavior. For indu
strial customers, the SIC (Standard Industrial Classification) codes used by the
Department of Commerce can point to likely customers based on their industry.
Commercial suppliers also make available the industrial equivalent of demographi
cs by publishing directories containing the names, SIC codes, annual sales, numb
er of employees, etc.
Forecasting Techniques
While sophisticated quantitative forecasting techniques are beyond the scope of
this course, it does not mean that they may not be useful to managers grasping f
or what the future will be. An anecdote might put this into perspective.
I became familiar with a relatively small manufacturer (annual sales $500 millio
n) in an industry where the final customer might repurchase their product once e
very several decades. Every year, the headquarters of their parent organization
would provide them with large amounts of econometric data and forecasts for the
upcoming year (at a relatively large expense). On one occasion, I was invited
to attend the practice session for their presentation to the executives of the p
arent company of their annual plan.
Knowing that they possessed a large quantity of econometric data, I was surprise
d that the forecast presented in their plan was based solely upon the industry e
stimate provided in an edition of Business Week. After the presentation, questi
ons were welcomed and I took the opportunity to ask the reasons their forecast w
as based on this single source. Their answer was straightforward. The economet
ric data did not produce as reliable a forecast over time as Business Week did.
In addition, their competitors were relying on the Business Week data so it mad
e sense that their organization’s plan would be in line with competitive efforts.
That probably states the bottom-line on forecasting quite well; go with what wo
rks.
There also are a number of judgmental estimates that can be used in this process
:
1. Sales Force Estimates. The sales force should be communicating with cus
tomers and, therefore, should have a feel for the future. The one snag in this
approach would be for the sales force that is compensated in some way based on q
uotas. In this situation, next year will never be “great” in terms of a sales forec
ast and “bad” years will be worse. It is just not in the sales reps’ best interest to
be optimistic.
2. Distributors. This might fit the category of self-fulfilling prophecy.
If a distributor is optimistic about the future, then they are likely to order
larger quantities. If pessimistic, the reverse. Actual sales may not be in lin
e with the distributors’ estimates, but the distributor may well act within their
perception of the future.
3. Experts. Whether the expert opinion is based on quantitative models or
insight, if the forecast has provided a reasonably good estimate in the past, th
en more attention will be paid to this source.
4. Final Customer Surveys. The so called “Mom & Pop” surveys may also be self-
fulfilling. If final customers are optimistic, they may tend to spend more; if
pessimistic, less. I have lost the reference, but at one time someone did a stu
dy of the forecasts of economists and these customer surveys over a twenty year
period. “Mom & Pop” estimates were more often better (at that point in time) than t
he economists.
5. Survey of Buying Intentions (National Association of Purchasing Manageme
nt – Chicago). These surveys judge the thought process of those involved in indus
trial purchasing and also may be self-fulfilling.
6. Trade Publications. Whether it is BIFMA or directly from the pages of B
usiness Week, these estimates deserve some amount of attention based on the accu
racy of their past predictions.
If the estimates from all sources point in the same direction, the easy conclusi
on is that sales in the market will move in that direction. More often, there w
ill some disagreement. Nothing can guarantee what has not yet occurred. The de
cisions made in the planning process, however, demand that estimates be made, an
d used, to make those decisions.
The final words are the future cannot be known; decisions require some estimates
about the future, get comfortable with it
January 2009 – John Redington