From local to national to global marketing: As companies expand their geographical mar-ket coverage, their managers need more information more quickly.
From buyer needs to buyer wants: As incomes improve, buyers become more selective in
their choice of goods. To predict buyers’ responses to different features, styles, and
other attributes, sellers must turn to marketing research.
From price to nonprice competition: As sellers increase their use of branding, product dif-
ferentiation, advertising, and sales promotion, they require information on these mar
keting tools’ effectiveness.
Fortunately, the exploding information requirements have given rise to impressive new information technologies: computers, microfilm, cable television, copy machines, fax machines, tape recorders, video recorders, videodisc players, CD-ROM drives, the Internet.1 Some firms have developed marketing information systems that provide company man-agement with rapid and incredible detail about buyer wants, preferences, and behavior. For example, the Coca-Cola Company knows that we put 3.2 ice cubes in a glass, see 69 of its commercials every year, and prefer cans to pop out of vending machines at a tem-perature of 35 degrees. Kimberly-Clark, which makes Kleenex, has calculated that the av-erage person blows his or her nose 256 times a year. Hoover learned that we spend about 35 minutes each week vacuuming, sucking up about 8 pounds of dust each year and us-ing 6 bags to do so.2 Marketers also have extensive information about consumption patterns in other countries. On a per capita basis within Western Europe, for example, the Swiss consume the most chocolate, the Greeks eat the most cheese, the Irish drink the most tea, and the Austrians smoke the most cigarettes.3
Nevertheless, many business firms lack information sophistication. Many lack a mar-keting research department. Others have departments that limit work to routine forecast-ing, sales analysis, and occasional surveys. In addition, many managers complain about not knowing where critical information is located in the company; getting too much informa-tion that they can’t use and too little that they really need; getting important information too late; and doubting the information’s accuracy. In today’s information-based society, companies with superior information enjoy a competitive advantage. The company can choose its markets better, develop better offerings, and execute better marketing planning.
HE COMPONENTS OF A MODERN MARKETING INFORMATION SYSTEM
Every firm must organize a rich flow of information to its marketing managers. Competitive companies study their managers’ information needs and design marketing information systems (MIS) to meet these needs.
■ A marketing information system (MIS) consists of people, equipment, and procedures to gather, sort, analyze, evaluate, and distribute needed, timely, and accurate information to marketing decision makers.
To carry out their analysis, planning, implementation, and control responsibilities, Analyzing marketing managers need information about developments in the marketing envi-Marketing ronment. The role of the MIS is to assess the manager’s information needs, develop Opportunities the needed information, and distribute that information in a timely fashion. The in-formation is developed through internal company records, marketing intelligence activities, marketing research, and marketing decision support analysis.
NTERNAL RECORDS SYSTEM
Marketing managers rely on internal reports on orders, sales, prices, costs, inventory levels, receivables, payables, and so on. By analyzing this information, they can spot important opportunities and problems.
THE ORDER-TO-PAYMENT CYCLE
The heart of the internal records system is the order-to-payment cycle. Sales represen-tatives, dealers, and customers dispatch orders to the firm. The sales department pre-pares invoices and transmits copies to various departments. Out-of-stock items are back ordered. Shipped items are accompanied by shipping and billing documents that are sent to various departments.
Today’s companies need to perform these steps quickly and accurately. Customers favor those firms that can promise timely delivery. Customers and sales representa-tives fax or e-mail their orders. Computerized warehouses fulfill these orders quickly. The billing department sends out invoices as quickly as possible. An increasing num-ber of companies are using electronic data interchange (EDI) or intranets to improve the speed, accuracy, and efficiency of the order-to-payment cycle. Retail giant Wal-Mart tracks the stock levels of its products and its computers send automatic replenishment orders to its vendors.4
SALES INFORMATION SYSTEMS
Marketing managers need up-to-the-minute reports on current sales. Armed with lap-top computers, sales reps can access information about prospects and customers and provide immediate feedback and sales reports. An ad for SalesCTRL, a sales force au-tomation software package, boasts, “Your salesperson in St. Louis knows what Cus-tomer Service in Chicago told their customer in Atlanta this morning. Sales managers can monitor everything in their territories and get current sales forecasts anytime.”
Sales force automation (SFA) software has come a long way. Earlier versions mainly helped managers track sales and marketing results or acted as glorified datebooks. Re-cent editions have put even more knowledge at marketers’ fingertips, often through internal “push” or Web technology, so they can give prospective customers more in-formation and keep more detailed notes. Here are three companies that are using com-puter technology to design fast and comprehensive sales reporting systems:
Ascom Timeplex,Inc. Before heading out on a call, sales reps at this telecom-munications equipment company use their laptop computers to dial into the company’s worldwide data network. They can retrieve the latest price lists, engineering and configuration notes, status reports on previous orders, and e-mail from anywhere in the company. And when deals are struck, the lap-top computers record each order, double-check the order for errors, and send it electronically to Timeplex headquarters in Woodcliff Lake, New Jersey.5
Alliance Health Care Formerly called Baxter, Alliance supplies hospital pur-chasing departments with computers so that the hospitals can electronically transmit orders directly to Alliance. The timely arrival of orders enables Al-liance to cut inventories, improve customer service, and obtain better terms from suppliers for higher volumes. Alliance has achieved a great advantage over competitors, and its market share has soared.
Montgomery Security In 1996, San Francisco–based Montgomery Security Gathering Information was in a bind. To remain competitive in the financial sector, this Nations and Measuring Banks subsidiary had to find a way for more than 400 finance, research, and Market Demand sales or trading employees to share information about companies whose stock they were considering taking public. Yet all of the departments at Mont-gomery had different database formats for their records; some even kept files on notepads. The company solved the problem with Sales Enterprise Software from Siebel Systems. It gave Montgomery significant gains in productivity. With a common database format, everyone could share information and keep confidential information secure.6
The company’s marketing information system should represent a cross between what managers think they need, what managers really need, and what is economi-cally feasible. An internal MIS committee can interview a cross-section of marketing managers to discover their information needs. Some useful questions are:
1 What decisions do you regularly make?
2 What information do you need to make these decisions?
3 What information do you regularly get?
4 What special studies do you periodically request?
5 What information would you want that you are not getting now?
6 What information would you want daily? Weekly? Monthly? Yearly?
7 What magazines and trade reports would you like to see on a regular basis?
8 What topics would you like to be kept informed of?
9 What data analysis programs would you want?
10 What are the four most helpful improvements that could be made in the present marketing information system?
MARKETING INTELLIGENCE SYSTEM
Whereas the internal records system supplies results data, the marketing intelligence system supplies happenings data.
■ A marketing intelligence system is a set of procedures and sources used by managers to obtain everyday information about developments in the mar-keting environment.
Marketing managers collect marketing intelligence by reading books, newspapers, and trade publications; talking to customers, suppliers, and distributors; and meeting with other company managers. A company can take several steps to improve the quality of its marketing intelligence.
First, it can train and motivate the sales force to spot and report new develop-ments. Sales representatives are the company’s “eyes and ears”; they are positioned to pick up information missed by other means. Yet they are very busy and often fail to pass on significant information. The company must “sell” its sales force on their importance as intelligence gatherers. Sales reps should know which types of infor-mation to send to which managers. For instance, the Prentice Hall sales reps who sell this textbook let their editors know what is going on in each discipline, who is do-ing exciting research, and who plans to write cutting-edge textbooks.
Second, the company can motivate distributors, retailers, and other intermediaries to pass along important intelligence. Consider the following example:7
■ Parker Hannifin Corporation A major fluid-power-products manufacturer, Parker Hannifin has asked each of its distributors to forward to Parker’s mar-keting research division a copy of all invoices containing sales of its prod-ucts. Parker analyzes these invoices to learn about end users and shares its findings with the distributors.
Analyzing Marketing Many companies hire specialists to gather marketing intelligence. Retailers often Opportunities send mystery shoppers to their stores to assess how employees treat customers. The city of Dallas recently hired Feedback Plus, a professional-shopper agency, to see how carpound employees treat citizens picking up their cars. Neiman Marcus employs the same agency to shop at its 26 stores nationwide. “Those stores that consistently score high on the shopping service,” says a Neiman Marcus senior VP, “not so coinciden-tally have the best sales.” The stores will tell salespeople that they’ve “been shopped” and give them copies of the mystery shopper’s report. Typical questions on the report are: How long before a sales associate greeted you? Did the sales associate act as if he or she wanted your business? Was the sales associate knowledgeable about products in stock?8
Third, companies can learn about competitors by purchasing their products; at-tending open houses and trade shows; reading competitors’ published reports; at-tending stockholders’ meetings; talking to employees, dealers, distributors, suppliers, and freight agents; collecting competitors’ ads; and reading the Wall Street Journal, the New York Times, and trade association papers.
Fourth, the company can set up a customer advisory panel made up of representa-tive customers or the company’s largest customers or its most outspoken or sophisti-cated customers. For example, Hitachi Data Systems holds a three-day meeting with its customer panel of 20 members every 9 months. They discuss service issues, new technologies, and customers’ strategic requirements. The discussion is free-flowing, and both parties gain: The company gains valuable information about customer needs; and the customers feel more bonded to a company that listens closely to their com-ments.9
Fifth, the company can purchase information from outside suppliers such as the
A. C. Nielsen Company and Information Resources, Inc. (see Table 1.2, part D). These research firms gather and store consumer-panel data at a much lower cost than the company could do on its own.
Sixth, some companies have established a marketing information center to collect and circulate marketing intelligence. The staff scans the Internet and major publica-tions, abstracts relevant news, and disseminates a news bulletin to marketing man-agers. It collects and files relevant information and assists managers in evaluating new information.
MARKETING RESEARCH SYSTEM
Marketing managers often commission formal marketing studies of specific problems and opportunities. They may request a market survey, a product-preference test, a sales forecast by region, or an advertising evaluation. We define marketing research as follows:
■ Marketing research is the systematic design, collection, analysis, and re-porting of data and findings relevant to a specific marketing situation facing the company.
SUPPLIERS OF MARKETING RESEARCH
A company can obtain marketing research in a number of ways. Most large compa-nies have their own marketing research departments.10
Procter & Gamble P&G assigns marketing researchers to each product op-erating division to conduct research for existing brands. There are two sepa-rate in-house research groups, one in charge of overall company advertising research and the other in charge of market testing. Each group’s staff consists of marketing research managers, supporting specialists (survey designers, sta-tisticians, behavioral scientists), and in-house field representatives to conduct and supervise interviewing. Each year, Procter & Gamble calls or visits over 1 million people in connection with about 1,000 research projects.
Hewlett-Packard At HP, marketing research is handled by the Market Re-search & Information Center (MRIC), located at HP headquarters. The MRIC is a shared resource for all HP divisions worldwide and is divided into three Gathering Information and Measuring Market Demand
Using the Internet: A company can collect considerable information at very little cost by examining competitors’ Web sites, monitoring chat rooms, and accessing published data.
Checking out rivals: Many small companies routinely visit their competitors. Tom Coohill, a chef who owns two Atlanta restaurants, gives managers a food al-lowance to dine out and bring back ideas. Atlanta jeweler Frank Maier Jr., who often visits out-of-town rivals, spotted and copied a dramatic way of lighting displays.12
Companies normally budget marketing research at 1 percent to 2 percent of com-pany sales. A large percentage is spent buying the services of outside firms. Market-ing research firms fall into three categories:
Syndicated-service research firms: These firms gather consumer and trade informa-tion, which they sell for a fee. Examples: Nielsen Media Research, SAMI/Burke.
Custom marketing research firms: These firms are hired to carry out specific proj-ects. They design the study and report the findings.
Specialty-line marketing research firms: These firms provide specialized research services. The best example is the field-service firm, which sells field interviewing services to other firms.
THE MARKETING RESEARCH PROCESS
Effective marketing research involves the five steps shown in Figure 1-11. We will illustrate these steps with the following situation:
American Airlines is constantly looking for new ways to serve its passengers. One manager came up with the idea of offering phone service. The other managers got excited about this idea. The marketing manager volunteered to do some preliminary research. He contacted a major telecommunications company to find out the cost of providing this service on B747 coast-to-coast flights. The telecommunications company said that the equipment would cost the airline about $1,000 a flight. The airline could break even if it charged $25 a phone call and at least 40 passengers made calls during the flight. The marketing manager then asked the company’s mar-keting research manager to find out how air travelers would respond to this new service.
Step 1: Define the Problem and Research Objectives
Management must not define a problem too broadly or too narrowly. A marketing manager who tells the marketing researcher, “Find out everything you can about air travelers’ needs,” will collect a lot of unnecessary information. Similarly, a marketing manager who says, “Find out if enough passengers aboard a B747 flying between the East Coast and West Coast would be willing to pay $25 to make a phone call so that American Airlines would break even on the cost of offering this service,” is taking too narrow a view of the problem. To get the information she needs, the marketing re-searcher could say: “Why does a call have to be priced at $25? Why does American have to break even on the cost of the service? The new service might attract enough new passengers to American so that even if they don’t make enough phone calls, American will make money out of attracting new passengers.”
In discussing the problem, American’s managers discovered another issue. If the new service were successful, how fast could other airlines copy it? Airline marketing competition is replete with examples of new services that were so quickly copied by competitors that no airline gained a competitive advantage. How important is it to be first and how long could the lead be sustained?
The marketing manager and marketing researcher agreed to define the problem as follows: “Will offering an in-flight phone service create enough incremental prefer-ence and profit for American Airlines to justify its cost against other possible invest-ments American might make?” They then agreed on the following specific research objectives:
The Marketing Research Process
Analyzing Marketing Opportunities
1 What are the main reasons that airline passengers place phone calls while flying?
2 What kinds of passengers would be the most likely to make calls?
3 How many passengers are likely to make calls, given different price levels?
4 How many extra passengers might choose American because of this new service?
5 How much long-term goodwill will this service add to American Airlines’ image?
6 How important is phone service relative to improving other factors such as flight schedules, food quality, and baggage handling?
Not all research projects can be this specific. Some research is exploratory—its goal is to shed light on the real nature of the problem and to suggest possible solutions or new ideas. Some research is descriptive—it seeks to ascertain certain magnitudes, such as how many people would make an in-flight phone call at $25 a call. Some research is causal—its purpose is to test a cause-and-effect relationship. For example, would passengers make more calls if the phone were located next to their seat rather than in the aisle near the lavatory?
Step 2: Develop the Research Plan
The second stage of marketing research calls for developing the most efficient plan for gathering the needed information. The marketing manager needs to know the cost of the research plan before approving it. Suppose the company estimates that launch-ing the in-flight phone service would yield a long-term profit of $50,000. The man-ager believes that doing the research would lead to an improved pricing and promotional plan and a long-term profit of $90,000. In this case, the manager should be willing to spend up to $40,000 on this research. If the research would cost more than $40,000, it is not worth doing.13 Designing a research plan calls for decisions on the data sources, research approaches, research instruments, sampling plan, and contact methods.
Data Sources. The researcher can gather secondary data, primary data, or both. Secondary data are data that were collected for another purpose and already exist some-where. Primary data are data gathered for a specific purpose or for a specific research project.
Researchers usually start their investigation by examining secondary data to see whether their problem can be partly or wholly solved without collecting costly pri-mary data. (Table 1.2 shows the rich variety of secondary-data sources available in the United States.)14 Secondary data provide a starting point for research and offer the ad-vantages of low cost and ready availability.
The Internet, or more particularly, the World Wide Web, is now the greatest repos-itory of information the world has seen. In an incredibly short span of time, the Web has become a key tool for sales and marketing professionals to access competitive in-formation or conduct demographic, industry, or customer research. See the Market-ing Memo “Secondary Sources of Data On-line” for a minidirectory of sites where you can conduct free or at least inexpensive market research.
When the needed data do not exist or are dated, inaccurate, incomplete, or unreliable, the researcher will have to collect primary data. Most marketing research projects involve some primary-data collection. The normal procedure is to interview some people individually or in groups to get a sense of how people feel about the topic in question and then develop a formal research instrument, debug it, and carry it into the field.
When stored and used properly, the data collected in the field can form the back-bone of later marketing campaigns. Direct marketers such as record clubs, credit-card companies, and catalog houses have long understood the power of database marketing.
■ A customer or prospect database is an organized collection of compre-hensive data about individual customers, prospects, or suspects that is cur-rent, accessible, and actionable for marketing purposes such as lead generation, lead qualification, sale of a product or service, or maintenance of
customer relationships.
Some techniques that are becoming increasingly popular are data warehousing
and data mining—but they are not without risks. See the Marketing for the Millen
nium box, “Companies Turn to Data Warehousing and Data Mining: Exercise Care.” Research Approaches. Primary data can be collected in five ways: observation,
focus groups, surveys, behavioral data, and experiments.
■ Observational research: Fresh data can be gathered by observing the relevant ac-tors and settings. The American Airlines researchers might meander around air-ports, airline offices, and travel agencies to hear how travelers talk about the different carriers. The researchers can fly on American and competitors’ planes to observe the quality of in-flight service. This exploratory research might yield some useful hypotheses about how travelers choose air carriers.
■Focus-group research: A focus group is a gathering of six to ten people who are in-vited to spend a few hours with a skilled moderator to discuss a product, service, organization, or other marketing entity. The moderator needs to be objective, knowledgeable on the issue, and skilled in group dynamics. Participants are nor-mally paid a small sum for attending. The meeting is typically held in pleasant surroundings and refreshments are served. In the American Airlines research, the moderator might start with a broad question, such as “How do you feel about air travel?” Questions then move to how people regard the different airlines, different services, and in-flight tele-phone service. The moderator encourages free and easy discussion, hoping that the group dynamics will reveal deep feelings and thoughts. At the same time, the moderator “focuses” the discussion. The discussion, recorded through note taking or on audiotape or videotape, is subsequently studied to understand con-sumer beliefs, attitudes, and behavior.
Focus-group research is a useful exploratory step. Consumer-goods companies have been using focus groups for many years, and an increasing number of newspapers, law firms, hospitals and public-service organizations are discovering
(continued)
National Trade Data Bank—free access to over 18,000 market research reports analyzing trends and competition in scores of industries and for hundreds of products (www.stat-usa.gov)
Public Register’s Annual Report Ser-vice—allows searches of 3,200 public companies by company name or in-dustry and offers annual reports via e-mail (www.prars.com/index.html)
Quote.Com—access to a wide range of business wires, companies’ directo-ries, and stock quotes (www.quote.com)
Government Information
Census Bureau (www.census.gov)
FedWorld—a clearinghouse for over 100 federal government agencies (www.fedworld.gov)
Thomas—indexes federal govern-ment sites (thomas.loc.gov)
Trade/Exporting/business:Stat-USA (www.stat-usa.gov)
US Business Advisor (www.business.gov)
International Information
CIA World Factbook—a comprehen-sive statistical and demographic direc-tory covering 264 countries around the world (www.odic.gov/cia/publications)
The Electronic Embassy (www.em-bassy.org)
I-Trade—free and fee-based informa-tion services for firms wishing to do business internationally (www.i-trade.com)
The United Nations (www.un.org)
Sources: Based on information from Robert I. Berk-man, Find It Fast: How to Uncover Expert Information on Any Subject in Print or Online (New York: Harper-Collins, 1997); Christine Galea, “Surf City: The Best Places for Business on the Web,” Sales & Marketing Management, January 1997, pp. 69–73; David Curle, “Out-of-the-Way Sources of Market Research on the Web,”Online,January–February 1998,pp.63–68.See also Jan Davis Tudor,“Brewing Up:A Web Approach to Industry Research,” Online, July–August 1996,
marketing researcher’s report may seem abstract, complicated, and tentative. Yet in the more progressive companies, marketing researchers are increasingly being included as members of the product management team, and their influence on marketing strategy is growing.
MARKETING DECISION SUPPORT SYSTEM
A growing number of organizations are using a marketing decision support system to help their marketing managers make better decisions. Little defines an MDSS as follows:
■ A marketing decision support system (MDSS) is a coordinated collec-tion of data, systems, tools, and techniques with supporting software and hardware by which an organization gathers and interprets relevant informa-tion from business and environment and turns it into a basis for marketing action.22
Table 1.6 describes the major statistical tools, models, and optimization routines that comprise a modern MDSS. Lilien and Rangaswamy recently published Marketing Engineering: Computer-Assisted Marketing Analysis and Planning, which provides a pack-age of widely used modeling software tools.23
The April 13, 1998, issue of Marketing News lists over 100 current marketing and sales software programs that assist in designing marketing research studies, segment-ing markets, setting prices and advertising budgets, analyzing media, and planning sales force activity. Here are examples of decision models that have been used by mar-keting managers:
BRANDAID: A flexible marketing-mix model focused on consumer packaged goods whose elements are a manufacturer, competitors, retailers, consumers, and the gen-eral environment. The model contains submodels for advertising, pricing, and com-petition. The model is calibrated with a creative blending of judgment, historical analysis, tracking, field experimentation, and adaptive control.24
CALLPLAN: A model to help salespeople determine the number of calls to make per period to each prospect and current client. The model takes into account travel time as well as selling time. The model was tested at United Airlines with an ex-perimental group that managed to increase its sales over a matched control group by 8 percentage points.25
DETAILER: A model to help salespeople determine which customers to call on and which products to represent on each call. This model was largely developed for pharmaceutical detail people calling on physicians where they could represent no more than three products on a call. In two applications, the model yielded strong profit improvements.26
GEOLINE: A model for designing sales and service territories that satisfies three prin-ciples: the territories equalize sales workloads; each territory consists of adjacent areas; and the territories are compact. Several successful applications were re-ported.27
MEDIAC: A model to help an advertiser buy media for a year. The media planning model includes market-segment delineation, sales potential estimation, diminishing marginal returns, forgetting, timing issues, and competitor media schedules.28
Some models now claim to duplicate the way expert marketers normally make their decisions. Some recent expert system models include:
PROMOTER evaluates sales promotions by determining baseline sales (what sales would have been without promotion) and measuring the increase over baseline as-
Analyzing sociated with the promotion.29Marketing
ADCAD recommends the type of ad (humorous, slice of life, and so on) to use given the
Opportunitiesmarketing goals, product characteristics, target market, and competitive situation.30
Ninety Types of Demand Measurement (6 �5 �3)
Consumer interest is not enough to define a market. Potential consumers must have enough income and must have access to the product offer. The available market is the set of consumers who have interest, income, and access to a particular offer.
For some market offers, the company or government may restrict sales to certain groups. For example, a particular state might ban motorcycle sales to anyone under 21 years of age. The eligible adults constitute the qualified available market—the set of consumers who have interest, income, access, and qualifications for the particular market offer.
A company can go after the whole available market or concentrate on certain seg-ments. The target market (also called the served market) is the part of the qualified avail-able market the company decides to pursue. The company, for example, might decide to concentrate its marketing and distribution effort on the East Coast.
The company will end up selling to a certain number of buyers in its target market. The penetrated market is the set of consumers who are buying the company’s product.
These market definitions are a useful tool for market planning. If the company is not satisfied with its current sales, it can take a number of actions. It can try to at-tract a larger percentage of buyers from its target market. It can lower the qualifica-tions of potential buyers. It can expand its available market by opening distribution elsewhere or lowering its price. Ultimately, the company can try to expand the po-tential market by advertising the product to less interested consumers or ones not pre-viously targeted.
Some retailers have been successful at retargeting their market with new ad campaigns. Consider the case of Target Stores.
■ Target Facing stiff competition from top retailers Wal-Mart and Kmart, Tar-get Stores decided to reach more affluent shoppers and woo them away from department stores. The midwestern discount retailer ran an unusual adver-tising campaign in some unusual spots: the Sunday magazines of the New York Times, the Los Angeles Times, and the San Francisco Examiner. One ad showed a woman riding a vacuum cleaner through the night sky. The ad sim-ply said “Fashion and Housewares” with the Target logo in the lower right-hand corner. With the look of department store ads, these hip spots have now gained Target Stores a reputation as the “upstairs” mass retailer. It’s the place where folks who normally shop in a department store wouldn’t feel they were slumming by purchasing clothing along with staples like house-wares, both at good prices.32
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 po-tential.
Market Demand
As we’ve seen, the marketer’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 pro-gram.
Market demand is not a fixed number but rather a function of the stated conditions. For this reason, it can be called the market demand function. The dependence of total market demand on underlying conditions is illustrated in Figure 1-13. The horizontal axis shows different possible levels of industry marketing expenditure in a given time period. The vertical axis shows the resulting demand level. The curve rep-resents the estimated market demand associated with varying levels of industry mar-keting expenditure. Some base sales (called the market minimum, labeled Q1 in the figure) would take place without any demand-stimulating expenditures. Higher lev-els of industry marketing expenditures would yield higher levels of demand, first at an increasing rate, then at a decreasing rate. Marketing expenditures beyond a cer-tain level would not stimulate much further demand, thus suggesting an upper limit to market demand called the market potential (labeled Q2 in the figure).
The distance between the market minimum and the market potential shows the overall marketing sensitivity of demand. We can think of two extreme types of markets, the expansible and the nonexpansible. An expansible market, such as the market for racquetball playing, is very much affected in its total size by the level of industry mar-keting expenditures. In terms of Figure 1-13(a), the distance between Q1 and Q2 is rel-atively large. A nonexpansible market—for example, the market for opera—is not much affected by the level of marketing expenditures; the distance between Q1 and Q2 is relatively small. Organizations selling in a nonexpansible market must accept the mar-ket’s size (the level of 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 company’s product).
It is important to emphasize that the market demand function is not a picture of market demand over time. Rather, the curve shows alternative current forecasts of market demand associated with alternative possible levels of industry marketing ef-fort in the current period.
Market Forecast
Only one level of industry marketing expenditure will actually occur. The market demand corresponding to this level is called the market forecast.
Market Potential
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 “very high” 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 “for a given market environment” is crucial. Consider the market poten-tial for automobiles in a period of recession versus a period of prosperity. The market Analyzing potential is higher during prosperity. The dependence of market potential on the en-Marketing vironment is illustrated in Figure 1-13(b). Market analysts distinguish between the po-Opportunities sition 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.
Company Demand
We are now ready to define company demand.
■ Company demand is the company’s estimated share of market demand at alternative levels of company marketing effort in a given time period.
The company’s share of market demand depends on how its products, services, prices, communications, and so on are perceived relative to the competitors’. If other things are equal, the company’s market share would depend on the size and effectiveness of its market expenditures relative to competitors. Marketing model builders have developed sales-response functions to measure how a company’s sales are affected by its marketing expenditure level, marketing mix, and marketing effectiveness.33
Company Sales Forecast
Once marketers have estimated company demand, their next task is to choose a level of marketing effort. The chosen level will produce an expected level of sales.
■ The company sales forecast is the expected level of company sales based on a chosen marketing plan and an assumed marketing environment.
The company sales forecast is represented graphically with company sales on the vertical axis and company marketing effort on the horizontal axis, as in Figure 1-13. Too often the sequential relationship between the company forecast and the company marketing plan is confused. One frequently hears that the company should develop its marketing plan on the basis of its sales forecast. This forecast-to-plan sequence is valid if “forecast” means an estimate of national economic activity or if company demand is non expansible. The sequence is not valid, however, where market demand is expansible or where “forecast” means an estimate of company sales. The company sales forecast does not establish a basis for deciding what to spend on marketing. On the contrary, the sales forecast is the result of an assumed marketing expenditure plan. Two other concepts are worth mentioning in relation to the company sales forecast.
A sales quota is the sales goal set for a product line, company division, or sales representative. It is primarily a managerial device for defining and stim-ulating sales effort.
Management sets sales quotas on the basis of the company sales forecast and the psychology of stimulating its achievement. Generally, sales quotas are set slightly higher than estimated sales to stretch the sales force’s effort.
■ A sales budget is a conservative estimate of the expected volume of sales and is used primarily for making current purchasing, production, and cash-flow decisions.
The sales budget considers the sales forecast and the need to avoid excessive risk. Sales budgets are generally set slightly lower than the sales forecast.
Company Sales Potential
Company sales potential is the sales limit approached by company demand as company marketing effort increases relative to competitors. The absolute limit of company de-mand is, of course, the market potential. The two would be equal if the company achieved 100 percent of the market. In most cases, company sales potential is less than market potential, even when company marketing expenditures increase consid-erably relative to competitors’. The reason is that each competitor has a hard core of loyal buyers who are not very responsive to other companies’ efforts to woo them.
ESTIMATING CURRENT DEMAND
We are now ready to examine practical methods for estimating current market demand. Marketing executives want to estimate total market potential, area market potential, and total industry sales and market shares.
Total Market Potential
Total market potential is the maximum amount of sales that might be available to all the firms in an industry during a given period under a given level of industry marketing effort and given environmental conditions. A common way to estimate total market potential is as follows: Estimate the potential number of buyers times the average quantity purchased by a buyer times the price.
If 100 million people buy books each year, and the average book buyer buys three books a year, and the average price of a book is $10, then the total market potential for books is $3 billion (100 million �3 �$10). The most difficult component to estimate is the number of buyers in the specific product or market. One can always start with the total population in the nation, say 261 million people. The next step is to eliminate groups that obviously would not buy the product. Let us assume that illiterate people and children under 12 do not buy books, and they constitute 20 percent of the population. This means that only 80 percent of the population, or approximately 209 million people, would be in the suspect pool. We might do further research and find that people of low income and low education do not read books, and they constitute over 30 percent of the suspect pool. Eliminating them, we arrive at a prospect pool of approximately 146.3 million book buyers. We would use this number of potential buyers to calculate total market potential.
A variation on this method is the chain-ratio method. It involves multiplying a base number by several adjusting percentages. Suppose a brewery is interested in estimating the market potential for a new light beer. An estimate can be made by the fol-lowing calculation:34
Demand for the new light beer �Population �personal discretionary income per capita �average percentage of discretionary income spent on food �average percentage of amount spent on food that is spent on beverages �average percentage of amount spent on beverages that is spent on alcoholic beverages �average percentage of amount spent on alcoholic beverages that is spent on beer �expected percentage of amount spent on beer that will be spent on light beer
Analyzing Area Market Potential Marketing Companies face the problem of selecting the best territories and allocating their marketing budget optimally among these territories. Therefore, they need to estimate the market potential of different cities, states, and nations. Two major methods of assessing area market potential are available: the market-buildup method, which is used primarily by business marketers, and the multiple-factor index method, which is used primarily by consumer marketers.
Market-Buildup Method. The market-buildup method calls for identifying all the potential buyers in each market and estimating their potential purchases. This method produces accurate results if we have a list of all potential buyers and a good estimate of what each will buy. Unfortunately, this information is not always easy to gather.
Consider a machine-tool company that wants to estimate the area market potential for its wood lathe in the Boston area. Its first step is to identify all potential buyers of wood lathe in the area. The buyers consist primarily of manufacturing establishments that have to shape or ream wood as part of their operation, so the company could compile a list from a directory of all manufacturing establishments in the Boston area. Then it could estimate the number of lathes each industry might purchase based on the number of lathes per thousand employees or per $1 million of sales in that industry.
An efficient method of estimating area market potentials makes use of the Stan-dard Industrial Classification (SIC) System developed by the U.S. Bureau of the Census. The SIC classifies all manufacturing into 20 major industry groups, each with a two-digit code. Thus number 25 is furniture and fixtures, and number 35 is machinery ex-cept electrical. Each major industry group is further subdivided into about 150 industry groups designated by a three-digit code (number 251 is household furniture, and num-ber 252 is office furniture). Each industry is further subdivided into approximately 450 product categories designated by a four-digit code (number 2521 is wood office furniture, and number 2522 is metal office furniture). For each four-digit SIC num-ber, the Census of Manufacturers provides the number of establishments subclassified by location, number of employees, annual sales, and net worth. The SIC System is currently being changed over to the new North American Industry Classification Sys-tem (NAICS), which was developed by the United States, Canada, and Mexico to pro-vide statistics that are comparable across the three countries. It includes 350 new industries, and it uses 20 instead of the SIC’s 10 broad sectors of the economy, changes reflecting how the economy has changed. Industries are identified by a six-digit rather than a four-digit code, with the last digit changing depending on the country. The first information based on the new system will be published in early 1999 in the new Economic Census data.35
To use the SIC, the lathe manufacturer must first determine the four-digit SIC codes that represent products whose manufacturers are likely to require lathe ma-chines. For example, lathes will be used by manufacturers in SIC number 2511 (wood household furniture), number 2521 (wood office furniture), and so on. To get a full picture of all four-digit SIC industries that might use lathes, the company can use three methods: (1) It can determine past customers’ SIC codes; (2) it can go through the SIC manual and check off all the four-digit industries that, in its judgment, would have an interest in lathes; (3) it can mail questionnaires to a wide range of compa-nies inquiring about their interest in wood lathes.
The company’s next task is to determine an appropriate base for estimating the number of lathes that will be used in each industry. Suppose customer industry sales are the most appropriate base. For example, in SIC number 2511, ten lathes may be used for every $1 million worth of sales. Once the company estimates the rate of lathe ownership relative to the customer industry’s sales, it can compute the market potential.
Table 1.7 shows a hypothetical computation for the Boston area involving two SIC codes. In number 2511 (wood household furniture), there are six establishments with annual sales of $1 million and two establishments with annual sales of $5 million. It is estimated that 10 lathes can be sold in this SIC code for every $1 million in cus-tomer sales. The six establishments with annual sales of $1 million account for $6 million in sales, which is a potential of 60 lathes (6 �10). Altogether, it appears that the Boston area has a market potential for 200 lathes.
The company can use the same method to estimate the market potential for other
Past-Sales Analysis
Sales forecasts can be developed on the basis of past sales. Time-series analysis consists of breaking down past time series into four components (trend, cycle, seasonal, and erratic) and projecting these components into the future. Exponential smoothing con-sists of projecting the next period’s sales by combining an average of past sales and the most recent sales, giving more weight to the latter. Statistical demand analysis con-sists of measuring the impact level of each of a set of causal factors (e.g., income, mar-keting expenditures, price) on the sales level. Finally, econometric analysis consists of building sets of equations that describe a system and proceeding to fit the parame-ters statistically.
Market-Test Method
Where buyers do not plan their purchases carefully or experts are not available or re-liable, a direct market test is desirable. A direct market test is especially desirable in forecasting new-product sales or established product sales in a new distribution chan-nel or territory.
1 Three developments make the need for marketing information greater now than at any time in the past: the rise of global marketing, the new emphasis on buyers’ wants, and the trend toward nonprice competition.
2 To carry out their analysis, planning, implementation, and control responsibilities, marketing managers need a marketing information system (MIS). The MIS’s role is to assess the managers’ information needs, develop the needed information, and dis-tribute that information in a timely manner.
3 An MIS has four components: (a) an internal records system, which includes in-formation on the order-to-payment cycle and sales reporting systems; (b) a mar-keting intelligence system, a set of procedures and sources used by managers to obtain everyday information about pertinent developments in the marketing en-vironment; (c) a marketing research system that allows for the systematic design, collection, analysis, and reporting of data and findings relevant to a specific mar-keting situation; and (d) a computerized marketing decision support system that helps managers interpret relevant information and turn it into a basis for market-ing action.
4 Companies can conduct their own marketing research or hire other companies to do it for them. Good marketing research is characterized by the scientific method, creativity, multiple research methods, accurate model building, cost–benefit analysis, healthy skepticism, and an ethical focus.
5 The process consists of defining the problem and research objective, developing the research plan, collecting the information, analyzing the information, and pre-senting the findings to management. In conducting research, firms must decide whether to collect their own data or use data that already exist. They must also de-cide which research approach (observational, focus-group, survey, behavioral data, or experimental) and which research instrument (questionnaire or mechanical in-struments) to use. In addition, they must decide on a sampling plan and contact methods.
6 One major reason for undertaking marketing research is to discover market op-portunities. Once the research is complete, the company must carefully evaluate its opportunities and decide which markets to enter. Once in the market, it must prepare sales forecasts based on estimates of demand.
and low company market budget are 0.30, 0.50, and 0.20, respectively. How might the forecaster arrive at a single-point sales forecast? What assumptions are being made?
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