We beg by learning techniques for measuring market deem gin many demand and learn how to calculi elate market a product p and penetration RA and mark share. Tees Eng potential buy in the market. We then We begin estimating our market by identifying all of the p these buyers into groups an analyze the usage Dana he amiss of each group. We I h look at existing segment t buyers to understand their product replacement cycles to esteem t mate existing demand and analyze new buyers to estimate poet entail increment mental demand We use the analyses to determine t market d. He cut. Demand f our proud Measure ring a Mar r get deters use the et efferent ways, which can be confusing, so it is always important to understand how the et ERM is being u used before try wing to measure the marker in question et The potent initial market is the set of co nonusers who possess some interest in a product or to whom the ho product is potentially relevant. How waver, consumers in the p potential mark may not b able to train be enslave their inter into sales given income and marker access cons rest trains.

Or, eve though the product is potentially relevant to them, they m be gnaw of its avail may are liability due to poor market ting communications. Able market is the set of co nonusers who have intern in, income for, and market access to a ho The avail particular product. The target market is the part of the available mar reek the come panky decides to pursue wit marketing the activities. Professor Too moms Guttenberg an Professor Jill VA very (Simmons Such wool of Management prepared this no as the basis for c Tote class discussion.

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Copyright 2 2010 President and Fellows of Harvard College. To rod copies or require permission to re rd deer est. produce materials call 1-800-545-768 write 85, Harvard Buss nines School Pull listing, Boston, M 02163, or go to www. Hobs. Hard MA vary. Deed/educator This publication may not be d photocopied, or otherwise roper educed, posted, or t reanimated, without the permission o Harvard Business School. UT of This document is authorized for use only in Marketing Research by Jetliner Sings at SHADE from September 2014 to January 2015. 10-081 Marketing Analysis Toolkit: Market Size and Market Share Analysis Estimating Market Demand Market demand for a product is the total volume that would be bought by a particular customer group, in a particular time period, in a particular marketing environment, under a particular marketing program. Hence, the demand for a product in a market is heavily dependent on both the external marketing conditions acing the firm as well as the firm’s investment in marketing programs. When we estimate market demand, we need to qualify our estimation as appropriate given a certain level of marketing investment.

For example, if we estimate that market demand for a product will be 1 million units, given a marketing budget of $10 million, then our estimate of potential sales is only valid if we actually spend $10 million marketing the product. If the launch marketing budget is slashed to $5 million, our demand estimate may be grossly optimistic. The market demand corresponding to a certain level of marketing expenditures is called the market forecast. If our product has substitutes that are offered by competitors, the market demand includes the demand for all of the products in the category.

If we have competition for our product, we may want to estimate primary demand and secondary demand. Primary demand measures the total volume demanded by customers for a product category (I. E. Razors), while secondary demand measures the total volume demanded by customers for a specific brand or product (I. E. Gillette razors). Hence, we estimate the market demand and market forecast for the product given the marketing expenditures of all firms participating in the market. Therefore, a market forecast is affected not Just by our own spending, but by the spending of our competitors as well.

When we estimate market demand, we assume that marketing expenditures will increase market demand. However, we also recognize three constraints on this relationship: 1 . ) There is a certain level of demand for the product that would occur without any marketing spending, which we call the market minimum, 2. ) At some point, marketing expenditures become ineffective at generating incremental demand because we have tapped out the market; this point is called the market potential, 3. The market potential is dependent on a given external market environment.

Between the market minimum and the market potential, we have a put into the marketplace. Any of these demand levels are predicted to be achievable if the corresponding level of expenditure is spent. The distance between the market minimum and the market potential indicates whether our market demand is sensitive or insensitive to marketing expenditures. A large distance between the market minimum and the market potential indicates that demand is highly sensitive to marketing expenditures. A small distance indicates that demand is less sensitive o marketing expenditures.

This relationship is illustrated graphically below: 2 Market Demand as a Function of Marketing Expenditures Market Demand Market Potential Market Forecast Market Minimum Planned Marketing Expenditure Level Category Marketing Expenditures Source: Caseworkers. Market demand can be defined in units or in dollars. Market demand in dollars is calculated: Market Demand in Dollars Market Demand in units * Average retail price point in market Note that when estimating market and product demand, we use retail prices, the price at which consumers purchase the product (I. . The retail price point). Hence, hen we calculate market or product demand in dollars, we are calculating the dollar value of the category or product at retail. Firms who do not sell directly to consumers will not realize this full dollar value as revenue, as they will need to share their sales revenue with their distribution channel partners. Once we understand market demand and have a market forecast, we can then begin to analyze our own firm’s current performance and future opportunities in the market.

Similar to market demand, we can estimate our product demand (or secondary demand), which measures the total volume of our firm’s product which will e purchased by a particular customer group, in a particular time period, in a particular marketing environment, under a particular marketing program. Our product demand will depend on 1 . ) our level of marketing expenditures as compared to our competitors’ spending levels, and 2. ) the effectiveness and efficiency of our marketing expenditures versus our competitors.

Our firm should gain demand versus the competition when we outspend them and when the money we spend works harder for us because it is put to use more effectively or efficiently. Product demand can be defined in units or in dollars: Product demand in dollars Product demand in units * Average price point of firm 3 Calculating Market Share Market share analysis helps us understand how our firm is doing versus the competition. Unit Share measures the percentage of the unit market demand that our firm has captured, while Dollar Share measures the percentage of the dollar market demand that our firm has captured.

Calculating market share is like divvying up a pizza; you are calculating how big a slice your firm has versus the other firms in the market. Unit Share = Product demand in units Market demand in units Dollar Share = Product demand in dollars Market demand in dollars OR Product unit sales Market unit sales Product dollar sales Market dollar sales Companies that have the highest unit share in a market do not necessarily have the highest dollar share in the market; for example, a low price competitor may sell a lot of units, driving its unit share higher, but its low price versus its competition depresses its dollar share.

Some companies pursue a unit share objective, trying to sell the most units, while others pursue a dollar share objective, trying to receive the most dollar revenue in the market. Graphically, market share is usually depicted using a pie chart. Below are the unit shares and dollar shares of competitors in the women’s razor market. As you can see, Gillette has a 40% unit share and a 50% dollar share, while Big has a 25% unit share and a 10% dollar share. What does this pattern indicate?

Gillette sells its units at a higher average price than Big so Big sells lots of units, generating a high unit share, but doesn’t reap the dollars, depressing its dollar share. Dollar Share Unit Share 5% 25% Gillette Chick Private Label Calculating Market Penetration After we calculate market demand or product demand, we can calculate market interaction and product penetration indices to see how much room there is to grow the primary and/or secondary demand. The penetrated market is the set of consumers who are buying products in the category.

The 4 market penetration index measures the percentage of consumers in the potential market who are currently purchasing a product in the category. Market Penetration Index = Market demand # of consumers in potential market A low market penetration index indicates that we have room to grow the primary demand in the market because many potential customers are not currently buying, while a high market penetration index indicates that most of the market growth has already been realized.

The product (or brand) penetration index calculates the percentage of consumers in a particular target market who are purchasing a particular product (or brand). Product Penetration Index = Product demand # of consumers in the target market Low product penetration indices may an opportunity to grow the product or brand demand within the target market, while high penetration indices may indicate strong performance in the target market and limited opportunities for incremental growth. How to Size a Market using Market Build-Up Methods How many Chinese restaurants are there in Manhattan?

How many light bulbs are sold in India each year? How big is the market for MBA education worldwide? Questions like these sound almost impossible to answer (without Google! ) at first glance, but can be easily answered by decomposing the problem into a series of smaller problems and then combining the results of those smaller problems together Let’s begin by realizing that we can build up to market demand by decomposing it into its composite parts. Market demand is the product of the number of buyers arching, the amount of units they purchase, and the average retail price they pay for a unit. # of buyers in the market) x (annual quantity purchased by an average buyer) x (the average price paid for a unit) Let’s size the market for women’s razor blades in the United States as an example. The first challenge we face is estimating the number of buyers in the market. Precisely specifying a target market allows us to make a better estimate for this section of the problem. We could start with the population of the United States (305 million people), but that would be too broad. We could narrow it by refining our argue market to include only women (51% of the total population or 1 56 million women).

However, given that not all women shave, we need to take out non-shavers (31 million female children age 0-14). That leaves us with a target market of U. S. Female shavers of 125 million people. Note that we could continue to ratchet this number downwards by estimating the number of adult women who don’t remove hair or the number of adult women who use waxing or laser hair removal. The more finely we determine our target market, the closer our estimate of potential buyers will be. Then, we need to estimate the annual quantity purchased by an average buyer.

Again, a precisely specified target market helps us estimate here too. We can further break our 125 million target market of U. S. Female shavers into heavy, moderate, and light shaver segments. Let’s say that 70% of women are 5 moderate shavers, shaving once a week, are heavy shavers shaving every day, and 15% are light shavers, shaving twice per month. From experience, we know that heavy shavers buy 12, moderate shavers buy 7, and light shavers buy 3 razor blades per year. So we have: 18. 75 million heavy shavers * 12 = 225. 0 million razor blades 87. 5 million moderate shavers * 7 = 612. 5 million razor blades