Area Market Potential
Because companies must allocate their marketing budget optimally among their best territories, they need to estimate the market potential of different cities, states, and nations. Two major methods are the market-buildup method, used primarily by business marketers, and the multiple-factor index method, 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. It 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 lathes in the area, primarily manufacturing establishments that shape or ream wood as part of their operations. The company could compile a list from a directory of all manufacturing establishments in the 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 North American Industry Classification System (NAICS), developed by the U.S. Bureau of the Census in conjunction with the Canadian and Mexican governments. 58 The NAICS classifies all manufacturing into 20 major industry sectors and further breaks each sector into a six-digit, hierarchical structure as follows
51 Industry sector (information)
513 Industry subsector (broadcasting and telecommunications)
5133 Industry group (telecommunications)
51332 Industry (wireless telecommunications carriers, except satellite)
513321 National industry (U.S. paging
For each six-digit NAICS number, a company can purchase business directories that provide complete company profiles of millions of establishments, subclassified by location, number of employees, annual sales, and net worth. To use the NAICS, the lathe manufacturer must first determine the six-digit NAICS codes that represent products whose manufacturers are likely to require lathe machines. To get a full picture of these, the company can (1) identify past customers’ NAICS codes; (2) go through the NAICS manual and check off all the sixdigit industries that might have an interest in lathes; and (3) mail questionnaires to a wide range of companies inquiringabout their interest in wood lathes.
Market-Buildup Method The market-buildup method calls for identifying all the potential buyers in each
market and estimating their potential purchases. It 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 lathes in the area, primarily manufacturing establishments that shape or ream wood as part of their operations. The company could compile a list from a directory of all manufacturing establishments in the 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 North American Industry Classification System (NAICS), developed by the U.S. Bureau of the Census in conjunction with the Canadian and Mexican governments. 58 The NAICS classifies all manufacturing into 20 major industry sectors and further breaks each sector into a six-digit, hierarchical structure as follows
51 Industry sector (information)
513 Industry subsector (broadcasting and telecommunications)
5133 Industry group (telecommunications)
51332 Industry (wireless telecommunications carriers, except satellite)
513321 National industry (U.S. paging
For each six-digit NAICS number, a company can purchase business directories that provide complete company profiles of millions of establishments, subclassified by location, number of employees, annual sales, and net worth. To use the NAICS, the lathe manufacturer must first determine the six-digit NAICS codes that represent products whose manufacturers are likely to require lathe machines. To get a full picture of these, the company can (1) identify past customers’ NAICS codes; (2) go through the NAICS manual and check off all the sixdigit industries that might have an interest in lathes; and (3) mail questionnaires to a wide range of companies inquiringabout their interest in wood lathes.
The company’s next task is to select an appropriate base for estimating the number of lathes each industry will use. Suppose customer industry sales are the most appropriate base. Once the company estimates the rate of lathe ownership relative to the customer industry’s sales, it can compute the market potential Multiple-Factor Index Method Like business marketers, consumer companies also need to estimate area market potentials, but because their customers are too numerous to list, they commonly use a straightforward
index. A drug manufacturer might assume the market potential for drugs is directly related to population size. Ifthe state of Virginia has 2.55 percent of the U.S. population, Virginia might be a market for 2.55 percent of total drugs sold.
A single factor is rarely a complete indicator of sales opportunity. Regional drug sales are also influenced by
per capita income and the number of physicians per 10,000 people. Thus, it makes sense to develop a multiplefactor index and assign each factor a specific weight. Suppose Virginia has 2.00 percent of U.S. disposable personal income, 1.96 percent of U.S. retail sales, and 2.28 percent of U.S. population, and the respective weights for these factors are 0.5, 0.3, and 0.2. The buying-power index for Virginia is then 2.04 [0.5(2.00) + 0.3(1.96) + 0.2(2.28)]. Thus, 2.04 percent of the nation’s drug sales (not 2.28 percent) might be expected to take place in Virginia.
The weights in the buying-power index are somewhat arbitrary, and companies can assign
others if appropriate. A manufacturer might adjust the market potential for additional factors, such as competitors’ presence, local promotional costs, seasonal factors, and market idiosyncrasies. Many companies compute area indexes to allocate marketing resources. The first two columns show its percentage of U.S. brand and category sales inthese six cities. Column 3 shows the brand development index (BDI), the index of brand sales to category sales. Seattle has a BDI of 114 because the brand is relatively more developed than the category in Seattle. Portland’s BDI is , which means the brand is relatively underdeveloped there
index. A drug manufacturer might assume the market potential for drugs is directly related to population size. Ifthe state of Virginia has 2.55 percent of the U.S. population, Virginia might be a market for 2.55 percent of total drugs sold.
A single factor is rarely a complete indicator of sales opportunity. Regional drug sales are also influenced by
per capita income and the number of physicians per 10,000 people. Thus, it makes sense to develop a multiplefactor index and assign each factor a specific weight. Suppose Virginia has 2.00 percent of U.S. disposable personal income, 1.96 percent of U.S. retail sales, and 2.28 percent of U.S. population, and the respective weights for these factors are 0.5, 0.3, and 0.2. The buying-power index for Virginia is then 2.04 [0.5(2.00) + 0.3(1.96) + 0.2(2.28)]. Thus, 2.04 percent of the nation’s drug sales (not 2.28 percent) might be expected to take place in Virginia.
The weights in the buying-power index are somewhat arbitrary, and companies can assign
others if appropriate. A manufacturer might adjust the market potential for additional factors, such as competitors’ presence, local promotional costs, seasonal factors, and market idiosyncrasies. Many companies compute area indexes to allocate marketing resources. The first two columns show its percentage of U.S. brand and category sales inthese six cities. Column 3 shows the brand development index (BDI), the index of brand sales to category sales. Seattle has a BDI of 114 because the brand is relatively more developed than the category in Seattle. Portland’s BDI is , which means the brand is relatively underdeveloped there
Feeling it was underperforming in a high-potential market, Anheuser-Busch targeted the growing
Hispanic population in Texas with a number of special marketing activities. Cross-promotions with Budweiser and Clamato tomato clam cocktail (to mix the popular Michiladas drink), sponsorship of the Esta Noche Toca concert series, and support of Latin music acts with three-on-three soccer tournaments helped
drive higher sales. Anheuser-Busch later introduced Chelada with pre-mixed Budweiser or Bud Light and
Clamato.
After the company decides on the city-by-city allocation of its budget, it can refine each allocation down to
census tracts or zip+4 code centers. Census tracts are small, locally defined statistical areas in metropolitan areas and some other counties. They generally have stable boundaries and a population of about 4,000. Zip+4 code centers(designed by the U.S. Postal Service) are a little larger than neighborhoods. Data on population size, median family income, and other characteristics are available for these geographical units. Using other sources such as loyalty card data, Mediabrands’s Geomentum targets “hyper-local” sectors of zip codes, city blocks, and even individual households with ad messages delivered via interactive TV, zoned editions of newspapers, Yellow Pages, outdoor media, and local Internet searches.
Hispanic population in Texas with a number of special marketing activities. Cross-promotions with Budweiser and Clamato tomato clam cocktail (to mix the popular Michiladas drink), sponsorship of the Esta Noche Toca concert series, and support of Latin music acts with three-on-three soccer tournaments helped
drive higher sales. Anheuser-Busch later introduced Chelada with pre-mixed Budweiser or Bud Light and
Clamato.
After the company decides on the city-by-city allocation of its budget, it can refine each allocation down to
census tracts or zip+4 code centers. Census tracts are small, locally defined statistical areas in metropolitan areas and some other counties. They generally have stable boundaries and a population of about 4,000. Zip+4 code centers(designed by the U.S. Postal Service) are a little larger than neighborhoods. Data on population size, median family income, and other characteristics are available for these geographical units. Using other sources such as loyalty card data, Mediabrands’s Geomentum targets “hyper-local” sectors of zip codes, city blocks, and even individual households with ad messages delivered via interactive TV, zoned editions of newspapers, Yellow Pages, outdoor media, and local Internet searches.
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