UNIT 3: MARKET AND DEMAND ANALYSIS

Contents
3.0 Aims and Objectives
3.1 Introduction
3.2 Objectives of Market Analysis
3.3 Marketing Elements
3.4 Situational Analysis and Specification of Objectives
3.5 Collection of Information
3.6 Summary

3.0 AIMS AND OBJECTIVES

After completing this unit, you will be able to:

 understand the objective of market analysis;
 explain the major elements of marketing;
 describe the dimensions of market strategy;
 explain the operating dimensions of marketing;
 understand the role of marketing research in demand analysis;
 apply the basic steps of marketing research in demand forecasting;
 list out the demand forecasting techniques; and
 forecast demand-using demand forecasting techniques, such as moving average
method, trend projection method, exponential smoothing and the like.

3.1 INTRODUCTION

Very often project analysis begins with the estimate of the potential size of the market for the
product proposed to be manufactured or service planned to be offered and get an idea about
the market share that is likely to be captured. These are very important issue in project
analysis. Market and demand analysis aims at determining the aggregate demand for the
product/service and the market share of the proposed project. Traditionally entrepreneurs try
to make the statement that “the market is attractive”. This is simply the expectation of the
investors, but it is misleading. Formal thorough market and demand analysis increases the

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project’s probability for success if it is done in an orderly and systematic manner. This unit
deals with the practice of forecasting demand for the proposed project. More specifically, it
deals with:
- objectives of market analysis
- the marketing elements
- situational analysis
- collection of information
- characterization of the market
- demand forecasting techniques
3.2 OBJECTIVES OF MARKET ANALYSIS

Market and demand analysis is a key activity for determining the scope of an investment, the
possible production programme, the technology required, and the choice of location. What are
the objectives of market and demand analysis? The objectives of demand and marketing
analysis are:
i. To determine the effective demand for the envisaged (proposed) project
ii. To determine the characteristics of the corresponding market in terms of unsatisfied
demand, competition, imports, exports etc.

3.3 MARKETING ELEMENTS

What is marketing? What are the elements of marketing? Marketing is defined as a

managerial and social process by which individuals, and groups obtain what they need and
want through creating, offering and exchanging products of value with others.

Marketing is characterized by the following elements:

a) Business philosophy
Marketing puts the problems, needs, and desires of the existing or potential consumer groups
at the center of business activities of the firm.

b) Marketing research
Market orientation of project preparation considers both demand market and supply market.
Marketing research provides information to develop marketing strategies.

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 c) Marketing instruments
The successful implementation of marketing strategies requires shaping and influencing the
market in a well-planned manner, using the necessary combination or mix of marketing
instruments.
d) Marketing plan and budget
Based on the findings of market research, it is necessary to determine the required means and
to prepare plans of actions in achieving marketing objectives.
Check Your Progress 4.1
1. Why market and demand analysis is considered the key activity in project?
2. What are the objectives of market and demand analysis?
3. Mention the four elements of marketing
4. What is the role of marketing research in market and demand analysis?

3.4 SITUATIONAL ANALYSIS AND SPECIFICATION OF OBJECTIVES

The project analyst should be able to establish the relationship between the product and its
market. To do so, she/he may informally talk to the following parties:
- customers,
- competitors
- middlemen (wholesalers and retailers)
The purpose of contact with the above parties is to learn about the preferences and purchasing
power of customers, actions, and strategies of competitors, and practices of middlemen. The
main benefit of such informal contact is to avoid formal study of the market if adequate and
relevant information is obtained about project demand. If enough data was not generated at
this stage, formal market and demand analysis should be carried.
3.5 COLLECTION OF INFORMATION

In order to achieve the market and demand analysis objectives, information should be
obtained from various sources. These sources are generally classified into primary sources
and secondary sources.

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3.5.1 Sources of Secondary information
Secondary information is information that is gathered in some other context and is already
available. The important sources of secondary information are:
a) Census. The Central Statistical Authority (CSA) gathers and publishes data about
population, demographic characteristics, household size and composition and other
similar data
b) Economic survey
c) Annual reports on imports and exports
d) Industry specific sources
The reliability, accuracy and relevance of a secondary information should be examined
carefully in terms of:
- who gathered the information and the purpose (objective) for which it was gathered
- the time of information gathering and publication
- the relevance of information gather for the period
- target population
- the means of choosing the sample
- the representativeness of the sample

3.5.2 Primary information/Market survey

Secondary sources may not provide a comprehensive data for market and demand analysis.
Information obtained through secondary sources should be supplemented with primary
information gathered through market survey.

The market survey may be a census, or a sample survey. In a census survey, the entire
population is covered. The term population refers to the totality of all units under
consideration in a specific study.

Example
- All higher private educational institutions
- All firms producing textile
Census survey may involve high cost and insensible. When census survey is impractical (all
elements of the population are not covered), sample survey is more useful.

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What kind of information should be gathered through market survey? The following types of
information may be collected through market survey:
- Total demand and rate of growth of demand
- Motives for buying
- Demand in different segments of the market
- Income and price elasticity of demand
- Purchasing plans and intentions
- Satisfaction with existing products
- Unsatisfied needs
- Attitudes towards various products
- Distribution and price practices and preferences
- Socio-economic characteristics of buyers
The steps in sample market survey include:
1. Define the target population
2. selecting the sampling method and sample size
3. Develop the questionnaire
4. Recruit and train the field investigators
5. Obtain information as per the questionnaire from the sample of respondents
6. Secnitinize the information gathered
7. Analyze and interpret the information

3.6 CHARACTERIZATION OF THE MARKET

Market characterization involves describing the market for product/service in terms of the
following factors:
- effective demand in the past and present
- breakdown of demand/segmentation
- price
- methods of distribution
- promotion
- consumers
- supply and competition

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 - government policy

3.6.2 Breakdown of Demand/Market Segmentation

The total (aggregate) demand for the product may be broken down into demand for segments
of the market. What is market segment? What factors are considered in segmenting the
market? Why market is segmented?

Market segmentation is defined as the dividing of the target market into subgroups of
consumer population with identifiable, distinct and homogeneous characteristics. (Philip
Kotler, 1999). The main reasons of market segmentation are:
- efficient use of marketing resources
- better understanding of customer needs
- better understanding of the competitive situation
- accurate measurement of goals and performance
- formulate marketing programs and strategies
- Design marketing mix (i.e., product, price, place, and promotion).
- Pay proper attention to particular area
Market is segmented on varies bases. Some of the most common bases are:
- Geographic segmentation – divide the market into different geographic units such as
western, eastern, northern, southern, central etc.
- Demographic segmentation – divide the market on the basis of age, sex, family size,
marital status, language, religion and so on
- Socio-economic segmentation – divide the market on the basis of income levels,
consumption levels, caste level (exclusive social class), culture and the like
- Psychographics segmentation – divide the market based on how consumers think, feel,
and behave
- Buyer behavior segmentation – divide the market based on customers knowledge,
attitudes, rules, or responses to a product.

3.6.3 Price
Price represents the value of a good or service for both the buyer and the seller. Price is the
only element in the marketing mix which generates revenues. Price may also be defined as the

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value of product attributes expressed in monetary terms which a consumer pays or is expected
to pay in exchange and anticipation of the expected utility.

What factors affect the firm’s pricing decisions? Factors which affect the pricing decisions are
both internal and external. External factors that affect pricing decisions include:
- Demand for the product/service
- Competition
- Consumer’s quality perceptions
- Middlemen (distributors, detailers etc)
- Suppliers
- Government
- Economic conditions
- Ethical considerations
- Cost of materials and labor (or cost of inputs)

Internal factors that affect pricing decisions include:

- Organizational factors
- Marketing mix
- Product differentiation (different product attributes such as color, size, attractive
package, attractive uses, style etc).
- Cost of products
- Objective of the firm

What pricing strategy the firm may follow?

A firm that is planning to introduce new product may follow any one of the following pricing
strategy:
a) Market skimming pricing
It is the approach of setting a relatively high initial price for a new product.

b) Market penetration pricing

It is the strategy of setting a relatively low initial price for new product.
During market and demand analysis, the price statistics must be gathered along with statistics
concerning physical quantities. It may be helpful to distinguish the following types of prices:

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 - manufacturer’s price quoted as FOB (Free-on-Board) price or CIF (Cost, insurance,
and freight) price
- Landed price for imported goods
- Average wholesale price
- Average Retail price

3.6.4 Distribution
The methods of distributing a product/service vary with the nature of the product. The typical
geographic separation of the manufacturer or producer from the ultimate consumer requires
some means for bridging the gap between the producer and the customers: what are the major
components of the distribution system? Distribution system has two components; namely,
channels of distribution, and physical distribution. Channels of distribution refer to
intermediaries or the process through which the products are transferred from the producers to
the ultimate users. Channels include wholesales, retailers, dealers, agents and other parties
involved in transferring the product or service to the consumers.

On the other hand, physical distribution is concerned with the flow of goods to the ultimate
consumers. Physical distribution includes transportation, warehousing, and inventory
management.

Therefore, the methods of distribution (channels and physical distribution) employed

presently and their rationale must be specified during market and demand analysis. Such a
study may explain certain patterns of consumption and highlights and difficulties that may be
encountered in marketing the proposed products.

3.6.5 Promotion
In marketing, the word “promotion” is used in many ways. In general sense, promotion is
defined as “any identifiable activities (efforts) on the parts of the seller to persuade buyers to
accept the seller’s information and store it in retrievable form”. The promotional function of
any organization involves the transmission of message to present, past, and potential
customers.

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Who is the target in promotion? How is promotion carried? What are the objectives of
promotion?

Personal
selling

Publicity Target
Advertising custome
r

Public relations Sales

promotion

The above diagram shows who the target for promotion is, and how promotion is carried out.
The target in promotion is customers. Customers may include industries, middlemen, opinion
leaders, and other consumers. The means of promotion are:
a) Personal selling – It involves face-to-face contact between seller’s representative and
the buyer
b) Advertising. It is paid form of non-personal mass media communication by an
identified sponsor. The media may include print media, direct mail, TV, radio,
billboard, Internet etc.
c) Sales Promotion. It includes activities that seek to indirectly induce or indirectly serve
as incentives to motivate a desired response on the part of target customers, company
sales people and middlemen, and their sales force.
d) Publicity. It involves the
the news carried in the mass media about a firm and its products,
policies, personnel or actions, such as news releases, press conference etc.

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 e) Public relations. It is a planned effort by an organization to influence the attitudes and
opinions of a specific group.
The primary objectives of promotion are:
- to develop an awareness of, and an interest in, the organization and its products and
services
- to communicate the benefits of buying product or services
- To influence eventual purchase of the product or service
- To build the positive image of the organization
- To differentiate the product/service from its competitors
- To remind the people of the existence of the product/service and the organization
Therefore, during market and demand analysis, the project studying team should specify the
promotion methods employed presently and their rationale.
3.6.5 Supply and Competition
It is necessary to know the existing sources of supply. The existing sources may be domestic
or foreign. The following information should be gathered for domestic sources of supply.
- Location
- Present production capacity
- Planned expansion
- Capacity utilization level
- Bottlenecks in production
- Cost structure
The study should also cover competition from substitutes and near-substitute products.
3.6.6 Government Policy
Government may have significant role in influencing the product’s demand and market. How
government affects the demand and market for the product? Governmental plans, policies and
legislations may have bearing on the market and demand of the product. Some of the areas of
influence are:
- production targets in national plans
- trade control on imports and exports
- import duties
- export and import incentives

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 - excise duties
- taxes
- industrial licensing
- credit controls
- financial regulations
- subsidies or penalties of any kind
Check Your Progress 4.2
1. What is the role of apparent consumption in determining the effective demand?
2. The dividing of the target market into sub groups of consumer population is
__________________.
3. Mention some of the bases of market segmentation.
4. What are the main objectives of market segmentation?
5. Mention at least five external factors that affect pricing decisions.
6. Mention at least four internal factors that affect pricing decisions.
7. What are the possible pricing strategy that can be used by firm considering to launch
new product/service?
8. What are the two major components of product/service distribution?
9. From the following lists, specify whether the item is related to channel of distribution or
physical distribution
a) Transportation
b) Wholesaler
c) Retailer
d) Inventory management
e) Sales agents
f) Consignee
g) Warehousing
10. The effort that involves the transmission of message to present, past, and potential
customers is ________________.
11. Mention the primary means of promotion.
12. In demand and market analysis, the analyst should identify the sources of supply. What
are the possible sources of supply?

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 13. How do you think the government influences the market and demand of the product?

4.8 SUMMARY

Market and demand analysis is a key activity for determining the scope of investment, the
possible production programme, the technology required, and location choice. The primary
objective of market and demand analysis is to determine the effective demand and the
characteristics of the market for the proposed product/service.

In order to project the demand for the envisaged product/service, adequate and relevant
information should be gathered from primary as well as secondary sources. The market for a
product/service is characterized by, among other things, determining aggregate demand,
market segmentation, market mix (product, price, promotion, and distribution), consumers,
supply and competition, and government policy.

Several techniques may be used to forecast the demand for the product/service. They are
generally classified into qualitative methods and quantitative methods. Qualitative techniques
include jury of executive opinion method, and Delphi method. Quantitative techniques
include trend projection method, exponential smoothing, moving average method, and end
use method.

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