Discuss the type of information required for market and demand analysis.

Ans. The exercise of project appraisal often begins with an estimation of the size of the market. Before a detailed study of a project is undertaken, it is necessary to know, at least roughly, the size of the market because the viability of the project depends critically on whether the anticipated level of sales exceeds a certain volume. Many a project has been abandoned because preliminary appraisal revealed a market of inadequate size. This chapter is divided into the following five sections dealing with various aspects of market and demand analysis.

1. Information required for market and demand analysis

2. Secondary sources of information

3. Market survey

4. Demand forecasting

5. Uncertainties in demand forecasting

Information required for market and demand analysis

The principal types of information required for market and demand analysis relate to-

(i) Effective demand in the past and present

To guage the effective demand in the past and present, the starting point typically is apparent consumption which is defined as-

Production + Imports – exports – changes in stock level

In a competitive market, effective demand and apparent consumption are equal. However, in most of the developing countries, where competitive markets do not exist for a variety of products due to exchange restrictions and controls on production and distribution, the figure of apparent consumption may have to be adjusted for market imperfections. Admittedly, this is often a difficult task.

(ii) Breakdown of demand

To get a deeper insight into the nature of demand, the aggregate (total)market demand may be broken down into demand for different segments of the market. Market segments may be defined by (i) nature of product, (ii) consumer group, and (iii) geographical division.

Nature of product— One generic name often subsumes many different products: steel covers sections, rolled products, and various semifinished products; commercial vehicles cover trucks and buses of various capacities etc.

Consumer groups— Consumers of a product may be divided into industrial consumers and domestic consumers. Industrial consumers may be sub-divided industry-wise. Domestic consumers may be further

divided into different income groups.

Geographical division— A geographical breakdown of consumers, particularly for products which have a small value-to-weight relationship and products which require regular, efficient after-sales service is helpful.

(iii) Price - Price statistics must be gathered along with statistics pertaining to physical quantities. It may be helpful to distinguish the following types of prices: (i) manufacturer’s price quoted as FOB (free on board) price or CIF (cost, insurance, and freight) price, (ii) landed price for imported goods, (iii) average wholesale price, and (iv) average retail price.

(iv) Methods of distribution and sales promotion

The method of distribution may vary with the nature of product. Capital goods, industrial raw materials or intermediates, and consumer products tend to have differing distribution channels. Further, for a given product, distribution methods may vary. Likewise, methods used for sales promotion (advertising, discounts, gift schemes, etc.) may vary from product to product.The methods of distribution and sales promotion employed presently and their rationale must be studied carefully. Such a study may explain certain patterns of consumption and highlight the difficulties that may be encountered in marketing the proposed products.

(v) Consumers

Two categories of information about the consumers may be required: demographic and sociological information, and attitudinal information. Under the first category, information on the following is required: age, sex, income, avocation, residence, religion, customs, beliefs, and social background. Under the second category, information on the following is required- preferences, intentions, attitudes, habits, and responses.

(vi) Governmental policy

The role of government in influencing the demand and market for a product may be significant. Governmental plans, policies, legislations, and fiats which have a bearing on the market and demand of the product under examination should be studied. These are reflected in: production targets in national plans, import and export trade controls, import duties,export incentives, excise duties, sales tax, industrial licensing, preferential purchases, credit controls, financial regulations, and subsidies/penalties of various kinds.

(vii) Supply and competition

It is necessary to know the existing sources of supply and whether they are foreign or domestic. For domestic sources of supply information along the following lines may be gathered: location, present production capacity, planned expansion, capacity utilization level, bottlenecks in production, and cost structure. Competition from substitutes and near-substitutes should be examined because almost any good may be replaced by some other good as a result of changes in relative prices, quality, availability, promotional strategies, consumer taste, and other factors.