Market evaluation

Market evaluation implies measurement; consequently, we are talking of precisely measuring the market you are in through its past, present and future performance. Measurement of the past and present is not too difficult but you have to be able to measure the future and that is a whole lot more difficult.

 

Most markets are fickle because they are driven by ordinary people like you and me.  Even commodities that have, over the years, had the best brains monitoring their fortunes, leave the same brains dumbfounded when the demand changes - Look at gold.  Whenever the value of gold moves one way or the other, analysts scrounge around for a reason.  It seems that gold moves up and down for precisly the same reasons.

You, therefore, need to evaluate the market to measure how you can increase your sales.

Do you drop prices?  Do you put more reps. on the road?  Do you advertise more?  Do you expand your market by exporting?  What are the costs of sales going to be to move the extra production into a market that is only growing at a fixed rate?  These are just a few of the questions that require answers.  In effect , you need to measure the intention to buy your products.

The measurement of intention-to-buy is fraught with problems.  A lot of those people that you are going to talk to in a market research may quite readily give you their assurances that they will buy from you but reality may prove a terrible disapointment.

Consequently, before a marketing project is intiated it is vital that someone carries out a market evaluation.  Call it a feasability study, if you will, or a market research survey or whatever - but no project should be started without someone sitting down and doing his sums in terms of the likely volume and value of product that the market can absorb as well as the likelihood of people buying from him specifically.

From these figures will be determined the size of the project, its timing, its location, the type of goods to be produced and the type of machines that will be required.  From this flows the material requirements and their sourcing and ultimately the men that will be running the enterprise.  The financial considerations are clearly as important as any marketing considerations.

Consequently, a whole lot of informatiion is required before decisions can be made whether to launch the project at all.  From what I have said so far you may have noticed that two sets of evaluations are required.  The one to measure what is happening in the market and the other to measure why it is happening.

Finding out what is happening will give you the structure of the market while finding out why it is happening will be essential for your marketing executives to work out their strategies. The market can be likened to an iceberg with only one-fifth of its volume above water.  The bit above the water line is the visible part and illustrates what is happening and the bit below the waterline is the invisible - why it is happening.

The first step in the evaluation process is an exploratory stage.  It is often initiated in the the company’s board room by management, who will either decide to kill the idea or that it warrants further investigation after the initial market numbers have been established and discussed.

Moving out of the board room, we need to get into the market to do a market research survey, in fact, we need to do at least four market research surveys. The first market research survey will be to look for any published information that is available.  We call this Desk Research.  It is secondary information because it has already been gathered by someone else prior to publication.  Previous reports on the industry, company annual reports, editorials that have appeared in journals and newspapers, statistics, bulletins - are all sources of information.

There are also electronic libraries that offer information on most subjects on an international basis.  Subscribers are able to tap into these and obtain a wealth of data. Secondary sources are relatively cheap to gather and provide fast information.  But in South Africa secondary information is hard to come by.  In fact, it is almost non-existant in many industries. The mining industry is one of the very few well documented markets but even there, if one looks for the market size for certain types of underground equipment, there are no published figures.

Another problem is that secondary information is historical and cannot predict the future unless someone has devised a predictive model for the industry. Published sources also have the problem of frequently not offering the information in the format and detail that the user requires.  Whatever their shortcoming, secondary sources are worth looking at.

The second market research survey after Desk Research is to do a descriptive market survey - we need to describe the market in terms of how it is structured and what is it likely to look like in future.  Who is buying the products?  What distribution methods are being used?  Who are the decision makers? 

We also need to establish who the competitors are, both local and foreign in terms of imported products.  Or, if we are concerned with world markets, then from the point of view of who are the major players overseas.  In other words, any information that will reveal and lay open the market structure.

This leads us to the third survey - a quantitative market survey to establish market size, broken down into product types or grades, applications and areas, growth,etc

The fourth type of market research survey that needs to be done and, which is often ignored by most companies, is a qualitative market survey.  In Marketing Research terminology this refers to the perceptual and attitudinal side of the market.

Simply by asking whether you would rather do business with China, Nigeria or the UK indicates immediately that you have perceptions about the countries as trading partners, the qualility of their products and the likelihood of you being paid.

One of the problems with evaluating a market is that it may be large enough to be attractive and can be growing strongly but it may, nevertheless, be extremely difficult for a new supplier to penetrate simply because of existing agreements and historical associations between suppliers and their customers.

Consequently, perceptions in the market place are going to determine whether a new supplier can, in fact, get into the market at all, no matter how big it is and how fast it is growing.  So we need to measure customer' perceptions and attitudes to the companies they deal with and to the new company.  The market research survey has to uncover the barriers to entry into the market.

Since most market evaluation that is carried out is to measure size of markets, I will indicate a few ways of doing this.

  • Obtain published trade figures from central statistical services, industry associations, market surveys and any pertinent reports that you are able to lay your hands on.
  • Obtain unpublished trade figures from competitive suppliers, consultants and experts in the market.
  • Find a suitable index that is measureable which will give a clue to the market you are investigating, e.g If you are doing a survey on the market for doors, you may find it easier to obtain information on door frames, door locks, wood veneers used on doors, building plans passed, etc.
  • Obtain macro economic information such as growth in domestic electricity consumed which could be an indicator of the number of houses being built and could be indexed to the demand for doors.
  • Obtain micro economic indicators such as building plans passed and using an indexof number of doors per house - calculate door market.
  • If local import figures are difficult to obtain, then look for overseas export figures.
  • Talk to experts in the market.
  • Interview users through a sample survey and find out their consumption, then extrapolate to the total population of users.
  • Find out market shares of suppliers and if you know the sales of at least one of them then the market share translated into sales will allow you to extrapolate to the total market.

 

Since you must be very careful not to be misled by wrong information or by using a wrong index, use various approaches as described above for establishing market size.  If one or more of the estimates are materially different, look at your figures again until you have eliminated all doubts about the accuracy of your findings.

When doing market evaluations we are also frequently called on to carry out forecasts which, despite sophisticated techniques, are still very much an art rather than a precise science.  Forecasting is as old as man himself but became popular in the times of the old Testament prophets.  Obviously, as the length of the forecast increases, so does the inaccuracy of the forecast.

By their very nature, short term forecasts can be repeated frequently and the accuracy of the forecasts can be  refined until they give results within a few percentage points of the actual.

Long term forecasting requires more skill and experience in the market.  It relies heavily on the use of correctly identified basic trends and it lends itself to mathematical modelling.

In industrial markets one of the toughest problems faced by the reseacher is to forecast technological change.  Changes in the products that are manufactured as well as changes in the applications of the products.

I have found that the best way to forecast is to ask enough people in the industry what they think is going to happen.  Even to the extent of asking them to quantify their forecasts such as asking them to give a percentage growth.

A version of this method is called the Delphi Technique.  Delphi is an ancient Greek town where the oracle of Apollo was located.  The Greeks used to visit the oracle to hear what the future had in store for them.

The Delphi  Technique involves taking a representative sample of people in the industry, be they suppliers or users of the products.  The market survey would obtain their views about future prospects.  The findings are analysed to arrive at a consensus opinion.  The next step is to approach the same people again and show them the conclusions of the first survey.  They would then be asked to  review their opinions or estimates.  In this way, a new and possibly better prediction is arrived at.

Another qualitative approach is “gut-feel”.  This should under no circumstances be laughed at because no matter what the quantitative results are, “gut feel” counts for most of the forecast decisions.

The quantitative approach involves various mathematical techniques from a simple fitting of trend lines to elaborate mathematical models.

Many of  the quantitative forecasting techniques were developed as a result of World War 2.  Operations Research had its beginnings in those days.   These techniques have been helped along by developments in electronic information technology.

One of the most common quantitative forecasting method is Time Series Analysis, which is basically the plotting of historical data, over time and extrapolating the trend line into the future.

Another method is Regression Analysis, which measures the degree of association between a criterion (dependent variable) and a predictor (independent variable).

Another technique that is sometimes used is Bayesian Analysis whereby probabilities are allocated to certain events occurring such as of certain sales targets being achieved.  These can be refined as more information is obtained until we are relatively confident of the results.

Input-Output Analysis is yet another technique.  This is based on tables which show the flow of goods and services betweeen all the different sectors in the economy and shows the effect any industry's demand is likely to have on every other industry.

Difficulties are sometimes encountered in forecasting.  When data are in doubt, the consequences of using faulty facts must be tested.  A Sensitivity Analysis is used to speculate about outcomes of different scenarios.  Usually the most optimistic scenarios and the most pessimistic are looked at - a sort of boom or bust comparison.

Monte Carlo is the name given to another technique applied to problem solving.   Unlike the previous techniques where human judgement is called for, Monte Carlo involves the generation of  random numbers to select events from a probable distribution of occurrences.

Add to these techniques the in-depth knowledge that the reseacher should have of the market and one should arrive at reasonable forecasts.

The further your product is from the end use market, the more difficult it is to forecast.  As an example, forecasting becomes infinitely more complex when the demand for certain basic raw materials such as chromium, with its many uses and many markets that affects its uses, is required.

There are many more forecasting techniques.  You will find different consultants with their own pet ways of forecasting the future demand for your products but, in the final analysis, don't forget your own expert assessment, even to the extent of opening your office window and sticking your wet finger out to test the direction of the wind.

I touched on the need for expert insight of the reseacher in the market he is investigating.  This brings me to the question whether the reseacher should be a commercial consultant like myself or someone in your own industry who has several years of experience with the product.  There are advantages and disadvantages of using either type of person.

An in-company person knows his product but, in practise, often lacks the experience and exposure to the many types of problems that invariably manifest themselves when doing marketing research.  The in-company reseacher is often a loaner who has no support staff to assist in carrying out the project.  Working on his own he may take several months to carry out the investigation, compared with several weeks by a research company.

The in-house reseacher may also not have suitable computer software to analyse the data.  On the positive side, there is no doubt that, as an expert in his market, he is the best person to analyse and interpret the results.

Taking the research company into consideration, it has all the advantages that are negative to the in-company researcher and all the disadvantages that are positive to your researcher.  Clearly, the best situation, therefore, is that the in-company individual should work together with a professional market researcher.  If the cost of taking on a consultant frightens you, please believe me that the cost of tying up a staff member for several months is equally if not more expensive.

I would now like to turn to budgeting for market evaluation.  It's going to cost you something whether you do the evaluation internally or hire outside help.  Normally, if the survey is carried out internally, no budget is set and the company does not even knowwhat the exercise has cost;  however, if the evaluation exercise is contracted out, the consultant will quote.

In most instances,the budgetted amount determinesthe the methodology that an external researcher adopts for evaluating the market.  This is somewhat like placing the cart before the horse because the researcher is limited by the available funds in what he can achieve;  however, if carried out internally,there are rarely financial limits set although there may be time constraints.

Summarising - we have talked of an exploratory research stage usually carried out by the directors together with senior management within the confines of their Board Room.

The next is a desk research stage where published sources of information are looked for.  This leads to a descriptive research stage which, as the term implies,will descrbe the market in terms of who is buying and for what application.

The following is a quantitative research stage that sets out the market parameters in terms of market size, market shares, growth, etc.

And, finally, there is the qualitative research stage which is going to tell you what the attitudes and perceptions of your customers are going to be, not only to your company but to your competitors as well.

I also briefly touched on various forecasting techniques mentioning that there are quantitative as well as qualitative techniques.  We tend to favour the qualitative techniques because they are more people based - information obtained from people in the market place.  I tend to get very nervous if I have to base a forecast on past events and the opinions of the few experts on likely scenarios without going out into the market to talk to suppliers, specifiers and users of the products - this involving at least 100 and sometimes 300 interviews.

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