The Market Demand Function
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 program. Market demand is not a fixed number, but rather a function of the stated conditions. For this reason, we call it the market demand function. Its dependence on underlying conditions is illustrated in Figure 3.2(a). 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 represents the estimated market demand associated with varying levels of marketing expenditure.
Some base sales—called the market minimum and labeled Qj in the figure—would take place without any demand-stimulating expenditures. Higher marketing expenditures would yield higher levels of demand, first at an increasing rate, then at a decreasing rate. Marketing expenditures beyond a certain level would not stimulate much further demand, suggesting an upper limit called the market potential and labeled Q2 in the figure.
Markets and Market Potential Two extreme types of markets are the expansible and the nonexpansible. The size of an expansible market is greatly affected by the level of industry marketing expenditures. As shown in Figure 3.2(a), the distance between Qj and Q2 is relatively large. The size of a nonexpansible market is not much affected by the level of marketing expenditures,
FiGURE 3.2 Market Demand Functions
so the distance between Q1 and Q2 is relatively small. Organizations selling in a nonexpansible market must accept the market’s size—the level of primary demand for the product class—and direct their efforts toward winning a larger market share for their product, that is, a higher level of selective demand for their product.
Remember that the market demand function is not a picture of market demand over time. Rather, it shows alternate current forecasts of market demand associated with possible levels of industry marketing effort. Only one level of industry marketing expenditure will actually occur. The market demand corresponding to this level is called the market forecast. This forecast shows the expected demand, not the maximum 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 potential for automobiles. It’s higher during prosperity than during a recession, as illustrated in Figure 3.2(b). Companies cannot do anything about the position of the market demand function, which is determined by the marketing environment. However, they influence their particular location on the function when they decide how much to spend on marketing.
Company Demand and Sales Forecast Company demand is the company’s estimated share of market demand at alternative levels of company marketing effort in a given time period. It depends on how the company’s products, services, prices, and communications are perceived relative to the competitors’. Other things equal, the company’s market share depends on the relative scale and effectiveness of its market expenditures. 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.12
Once marketers have estimated company demand, they choose a level of marketing effort. The company sales forecast is the expected level of company sales based on a chosen marketing plan and an assumed marketing environment. We represent the company sales forecast graphically with sales on the vertical axis and marketing effort on the horizontal axis, as in Figure 3.2.
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 stimulating sales effort, often 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, primarily for making current purchasing, production, and cash flow decisions. It’s based on the need to avoid excessive risk and is generally set slightly lower than the sales forecast.
Company sales potential is the sales limit approached by company demand as company marketing effort increases relative to that of competitors. The absolute limit of company demand is the market potential. The two would be equal if the company captured 100 percent of the market. In most cases, company sales potential is less than the market potential, even when company marketing expenditures increase considerably. Each competitor has loyal buyers unresponsive to other companies’ efforts to woo them.