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STUDY GUIDE FOR MODULE NO. ___ 5

MARKET STUDY
MODULE OVERVIEW

As discussed earlier, there are presently no standardized parts or aspects of a feasibility study that
have been universally accepted and observed. Usually, the investors define the particular sections, including
the arrangement, format and even the details to be included in the study. In case an investor does not define
the specific requirements and details of the study, the promoters or the consultancy offices conducting the
study follow their own format.
In this subject, the following major aspects of a feasibility study are adopted and arranged based on the
sequential flow of data and information:
1. Market study
2. Technical study
3. Management study
4. Financial study
5. Socio-economic study
The whole process starts with a proper evaluation of the market study. The findings and conclusions
reached in the market study serve as the basis for defining the requirements of the technical study. This is
usually followed by a management study to determine the most appropriate and effective organization in
attaining the objectives. As the proponent moves on to the next phase, he/she may review and modify the
findings if there are new developments that warrant changes in the recommendation.
Once the three major aspects are completed-market, technical and management- the proponent may
proceed and collate the findings, projections, assumptions, and professional opinions and express them in
monetary terms in the financial study. The financial study will reflect the probable result of the operating
performance, the needed amount of investment, and the level of working capital.
There are feasibility outputs that do not categorically divide the whole study into different major
sections, but simply indicate a side heading that describes the content of that section.

MODULE LEARNING OBJECTIVES

After this chapter, the students must be able to

 Learn and identify the objectives, nature ,and concept of a market study

 Determine the major areas of a market study and how a demand study is conducted

 Identify and understand the different forecasting tools

 Discuss how to conduct a supply study and the demand-supply analysis

 Determine the factors that affect the setting of selling price

 Analyze the best marketing program

LEARNING CONTENTS (title of the subsection)

Introduction

Market study is the lifeblood of the feasibility study. It focuses on the study of demand, supply, the
gap between demand and supply, the price, and the marketing program. The primary aim of the market

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study is to determine whether there is an existing demand, and that such demand is not presently served
and cannot be served by the existing supplier in the near future.
In case it has been proven, based on data, figures, information, facts, and results of evaluation that
there is no available demand for the proposed product or services, the study may be terminated at this
point. The proponent may find difficulty in proving the viability of other areas because there is no available
market in the first place.
We all know that “market” is a place where sellers and buyers meet. It exists if there are available
sellers and willing buyers, but it ceases its existence the moment one party is absent. There is exchange that
takes place in the market; hence both parties should be present. However, when we talk about feasibility
study, this is not the real meaning of the term “market”.
Rather the term ‘market study” in a feasibility study refers to the study of demand, supply and price.
It will give definite and straightforward answer to the question, “ Is there a potential demand for the
products or service?”

Objectives of the Market Study

The market study is conducted to determine if there is:

 potential demand for the product or service;

 to determine the size and growth of total annual demand;
 to evaluate the annual supply situation;
 to identify the possible entry of competitors;
 to determine the possible market share of the products or services;
 to establish a pricing policy; and
 to define the appropriate marketing program

Five Major Sections of Market Study

A. Study of Demand
The first study in the market study is the study of demand. The proponent needs to analyze if there is
demand for the proposed product or service. There is a very close link between the study of demand and the
industry analysis. The data provided in the industry analysis may be utilized in the study of demand.

The term ‘demand” in feasibility study has two major connotations. It may refer to either a) past
demand or b) future demand.
The demand figure is expressed in an annual basis. Hence, if the data for the past demand for motor
vehicles is 28,000, the figure represents the total annual demand in terms of units of vehicles for the previous
year or years. In this case, the demand is expressed in terms of sales quantity. The demand can be
expressed also in terms of usage or consumption, like for example, the demand for cement products.
In order to avoid confusion among the readers of the feasibility study, there should be a proper
modifier when the term ‘demand’ is used, particularly in the market study. If demand refers to consumption in
the past, the term ‘past demand’ should be used. However, if the term refers to the projected usage or
consumption, the term ‘future demand’ is appropriate.

The section “Study Demand’ in the market study usually reflects the analysis of past demand. Past
demand is the total cost of goods sold or consumed, may it local or foreign, during the previous year or years.
For example, a study that determines the total past demand for cars will add up all cars locally
assembled or produced and the number of imported cars.
The proponent of the study should exercise due care and diligence in determining what constitutes
the total demand for a certain product.

On the other hand, future demand simply refers to the projected demand for a product for local
consumption or projected production and projected number of units to be imported. The data on past demand
may serve as basis for determining the future demand or the proponent may use other basis of projection.
There is no definite rule on what base to use to project future demand. The proponent may use the trend of

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the product itself or the trend of a similar product if the proposed product is new in the market. The
professional judgment of the proponent is very significant in this stage of project feasibility study.

Let us take the hypothetical figures on cars.

How is the future demand for cars computed?

In this case, the proponent may use two bases to determine future demand. The first option is to use
the actual data on cars purchased for the past five or ten years. The percentage of yearly increase or
decrease will be determined, and the future demand is computed using the forecasting tools( forecasting tools
are: simple moving average, weighted moving average, arithmetic straight line, arithmetic geometric curve,
high-low point method, least square method).
The other base that may be used by the proponent is the population data. This base can be used to
project future demand once the proponent has determined that the population is the major user of cars in the
Philippines. In this case, the proponent can use the purchased trend of the population of the Philippines for
the past five or ten years. Using the appropriate projection tools the proponent can now determine the future
demand for cars.

It should be emphasized that demand is not similar in all aspects with market share.

Major Processes in the Study of Demand

In studying future demand, the proponent needs to consider the following major processes, such as:
a. Identify the consumers,
b. Gather information on total past demands
c. Evaluate past demand patterns,
d. Forecast future demands, and
e. Evaluate future demand projections.

The presence of demands for a certain product or service does not guarantee that the proposed business is
absolutely feasible, but it is only a favorable indicator that the project is feasible.

Identify the consumers

In identifying consumer, the proponent use the market segmentation marketing approach. Meaning,
the customers are classified according to their behavioral or descriptive characteristics such as type of
consumers, income classification, use of the product or services, location, and age.
Another major concern that must be considered when applying the market segmentation approach is
the close link between the type or nature of the proposed product or service and the type of consumers that
the project aims to cater to. Some studies failed in the end because they did not identify correctly the real
consumers of the product. Always remember that the end users of the product may either be industrial users
or individual consumers.
One element that contributes to the correct segmentation process is the measuring gauge or the
particular yardstick used in segmenting the market. This yardstick of segmentation is the basis for classifying
the consumers.
Sample guide in determining the appropriate yardstick to segment the consumers.

A study whether there is demand for Yardstick to use in segmenting the market
Sporting goods Age
Automobiles Income
Heavy equipment Type of industry
Utility vehicles Travelling public

It must be made clear that market segmentation, as a marketing tool, does not determine the demand
for the product or service. Market segmentation only identifies the probable consumers of the product based
on a particular criterion. From a wide range of probable consumers, market segmentation reduces the
demand base to specific consumers.
Identifying the consumers or market means identifying who will use the product.

For example, a feasibility study is conducted to determine the viability of constructing a banana chips
factory in Cotabato province. The broad question is “ Is there a demand for banana chips?”

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To answer this, several other questions must be answered.

First, who is the consumer of banana chips? This question identifies the specific consumers of the
banana chips. It can be observed that the question is applicable to everybody since all people in Cotabato
eats banana chips. However, the proposed project cannot produce banana chips that will serve everybody.
The project has limitations. It has limited resources, limited funding requirements or limited manufacturing
capacity. Because of the limitations, there is a need to determine specific consumers by way of market
segmentation. The best way is to categorize the population of Cotabato according to age as the best
descriptive characteristic. The proponent has to get the total population data of Cotabato province classified
according to age. Assuming the data provided by the government agency appears as follows:

Age bracket Population

1-9 yrs old 3,500
10-18 yrs old 8,000
19-27 yrs old 5,000
28-36 yrs old 4,200
37-45 yrs old 2,800
46-54 yrs old 1,900

At this stage of the study, the proponent has already limiting his study of demand to a specific
consumer. In case the proponent decides to limit his study to 10-18 years old as the primary consumers, then
interviews or gatherings of data through questionnaires should be conducted within that age range only.
It is highly emphasized that the market segmentation is only a marketing tool that determines the
specific consumers of the product where the study of demand is concerned.

Gather Information on Total Demand

After identifying the potential customers of the proposed product or service, the next step in the study
of demand is to gather the necessary information about the total demand.
This is the most costly phase of the study of demand, and it has plenty of drawbacks and there is no
substitute to this process nor it can be discarded.

The proponent has to settle the following questions:

 Where can the demand data be gathered?
 How can the desired data be gathered?
 How large should be the desired data?

Where to gather the demand data?

The information on total demand can be obtained from manufacturers, retailers; trade associations;
Bangko Sentral ng Pilipinas (BSP); Department of Finance (DOF); Department of Trade and Industry (DTI);
National Economic and Development Authority (NEDA); National Statistics Office (NSO); Bureau of
Customs(BOC); other national government offices; universities and colleges; local government units and
offices; existing and prospective users of the product.

How to gather the desired information?

The proponents or promoters of the study may use the survey, interview, questionnaire, observation,
or testing as mode of gathering information about the demand for the product or service.
The instrument to be used in gathering the desired information must be carefully reviewed, corrected,
and refined by the proponents. Assistance of experts in the field of study should be sought ( examples;
accountants, analysts, engineers, etc..). Likewise, in case a questionnaire is administered to gather the
desired information about the demand from existing or prospective consumers, the contents should be tested
as to their validity and reliability. This means that each item in the questionnaire should be critically evaluated
by experts in the field of the study, whether they are appropriate or not, or whether they need further
refinement.

How large should the desired data be?

This question is referring to the sample size in a given population to ensure the reliability of the data
gathered.
For example, in the proposed study to build a banana chips factory, what is the expected sample size
of the respondents to be interviewed, if the total population segmented according to age between 12 and 28 is
125,000, and only 5% is the margin of error?

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Try Slovins Formula to determine the appropriate number of sample size. Slovins formula is used to
calculate the sample size (n) given the population size (N) and a margin of error (e).

Slovins Formula:
n= N/1 + (N*e*e)
where:
N = Total population
n = sample size
e = margin of error

n= 125,000/1 + (125,000 * (.05*.05)

= 125,000/1 + (125,000 * 0.0025)
= 125,000/ 1 + 312.50
= 125,000/313.50
= 399

This means that out of 125,000 existing and prospective consumers of banana chips with ages
ranging from 12 to 28 , at least 399 or .32% (399/125,000) should be provided with questionnaires or included
in the survey.

Drawbacks in gathering information

Some of the limitations in data gathering are:

 businesses are hesitant to provide the necessary data;

 the quality of data from interview and questionnaires are sometimes questionable;
 data gathering is time consuming, costly and maybe incomplete and outdated.

Most agencies expected to provide the needed data in the conduct of feasibility studies do not have
the data themselves. In case they have, their data are oftentimes outdated. For example , a study conducted
to determine the viability of establishing a banana chips factory in the province of Cotabato, the proponent
would be interested in the following demand data such as the total number of consumers in the province;
percentage of consumers eating banana chips; total number of packages of banana chips consumed in the
province; and how often consumers eat banana chips during the day.
The absence of the data base from various agencies and offices that are expected to be depositories
of updated data is the worst predicament in the conduct of a feasibility study.

Evaluate Past Demand Patterns

The third step in the study of demand is the evaluation of past or historical demand. The historical
demand data is not the absolute determinant in evaluating the demand situation. An increasing pattern of past
demand does not necessarily imply that the trend will continue in the future. It may happen that an increase in
demand is mainly due to the implementation of government project or due to temporary government
intervention. Like for example in the case of cement products considerable increased in 2013 and may
continue up to the year 2015 because of government programs on road rehabilitation and concreting
nationwide. The proponent has to consider this phenomenon in evaluating the demand pattern. Apparently,
the demand data become abnormal because of government intervention.

Therefore, in evaluating the data, the proponent must consider;

 the pattern of demand;
 government programs influencing the demand;
 fiscal and monetary policy of the national government; and
 trends in the world market.

Forecast Future Demand

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The fourth major step in the study of demand is projecting the future demand. In forecasting future
demand, only the demand pattern that has been adjusted should be considered. In other words, abnormal
data resulting from government programs, effects of wars and natural disasters, fiscal and monetary directions
of financial institutions, and other external factors that may directly or indirectly affect the projection should be
removed from the historical study of demand data.
The proponent can choose what forecasting tool to be used in projecting future demand. Some of
which are: simple moving average; weighted moving average; arithmetic straight line; arithmetic geometric
curve; high-low point method; and least square method. These are just projection tools and the results they
produce remain as forecast.

Evaluate Future Demand Projection

It is the final step in the study of demand. Before any final projection of future demand can be done,
the data must first be critically evaluated. The different forecasting tools may produce different predicted
values using the same baseline data. It is imperative that the proponent thoroughly reviews the results before
these are used to determine whether there is demand or none.

The proponent should likewise review:

a.) The projection methods used to determine future demand, and

b.) The projection base used in predicting future demand.
In reviewing the projection method, the behavior of the past demand must be considered. The
historical demand should be plotted in a two-dimensional graph to get the pattern of past demand. In case a
uniformly-increasing pattern is indicated, the arithmetic straight line may be used. However, in case the actual
demand appears to be increasing, but the percentage of increase is more or less constant, then the geometric
curve may be applied.
The nature of the product should also be carefully considered by reviewing the relationship between
the product and its usefulness. For example, a study on the demand for rice should be based on population
data. Similarly, the demand for cars is directly related to the income of individuals.
The output of the projection is not considered as the final data base, and may be adjusted due to
external factors. It is appropriate to check the results of the projection against those of other offices interested
in the same subject area.
Remember that nothing is absolute when conducting a feasibility study; everything is just a forecast.

Study of Supply

The study of supply answers the question who provides the products?

When studying supply, the following processes may be followed:

1.) Conduct a thorough study about the competitors;

2.) Gather information on historical supply;
3.) Evaluate supply growth patterns;
4.) Forecast future supply; and
5.) Evaluate the result of future forecast

Conducting a thorough study about the competitors. Future competitors are existing businesses that aren’t in
the marketplace yet but it could enter at any time. They usually target your market with the same or similar
value proposition but deliver a different product. They should be identified and a complete information about
them must be available.
Competitors like buyers or consumers should be classified and properly segmented. They must be
segmented according to size; whether they are domestic or foreign; and their coverage area. When we say
according to size, we are referring to paid-up capital. When the capital base is lower than P3,000,000, the
business is micro or small enterprise. Those with capital base ranging from P3,000,000 to P350,000,000 are
considered as small to medium enterprise; and those with total resources above P350,000,000 are
considered large corporations. Other factors for classifying businesses according to size may include number
of employed manpower, gross sales during the period, and the amount of business and income taxes paid.

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The type of competition should also be studied well because it greatly influences the marketing
strategies to be adopted. There should also be an in-depth study of the areas covered by the competitors,
whether their presence is felt at the national or regional level.
The feasibility study should also include a section on competitor analysis although it may not be as
deep and as detailed as those adopted in preparing a business plan.

Gathering information on historical supply. Data on historical supply refers to information on similar products
produced by existing firms. In case the proposed project will sell a new product not presently existing in the
market, the data on other similar products may be considered as historical supply. Data should include local
production and importation. The presentation of supply data in tabular form may appear as follows:

Local production xxxxxxx

Imported goods xxxxxxx
Total annual supply xxxxxxx

The proponent may source available information from the following agencies: 1.) Department of Trade
and Industry (DTI). This agency may provide information about the different trade names engaged in the
industry. 2.) Bureau of Customs (BOC). It is an agency under the Department of Finance, may supply the list
of importers or exporters, including the volume of products that the business proposes to undertake. 3.)
Bangko Sentral ng Pilipinas. 4.) National Statistics Office (NSO), and others.

Evaluating supply growth pattern. Similar to the study of demand, any abnormal supply data should be
discarded in order that the supply pattern produces reliable meanings to prospective users. Abnormal data
may tend to increase supply in a short period. For example, the total supply of canned goods will appear very
high during times of internal wars or conflicts. This data will mislead interested users if included in the study.

In evaluating the historical supply growth pattern, the proponent may consider the following guide questions:
1.) Is the supply pattern increasing or decreasing?
2.) Does the percentage of increase remain constant?
3.) Are there government projects that significantly influence the supply growth pattern?
4.) Are there new uses for the product?
5.) Are there moves from the private sector that will significantly influence the supply?

Forecasting Future Supply

In predicting future production of supply for the next three to five years, the total production of all
producers of goods should be used and not their individual production. For example, if there are three existing
producers of the goods, the total production of these producers should be used to predict expected supply in
the future. The same forecasting tool should be applied when future demand is predicted. There must be
consistency of forecasting tool to be used.

Evaluating the Result of Future Forecast

Evaluating the supply data is the last step in conducting study of supply. However, the result of the
forecast may not be the final data to be used in determining whether there is enough supply or none. The
predicted output may either be increased or decreased depending on how favorable are the expected external
elements that may directly or indirectly affect the supply pattern.
The predicted values of future supply should be presented in tabular format. Each table should be
accompanied by an accurate, brief, and clear description of the presentation.

Demand-Supply Analysis
This is the third part of the market study. The findings in both the demand and supply studies are
combined in this sub-section and usually presented in tabular form. The proponent may follow the steps in
presenting this sub-section.

1. A comparison in tabular presentation is made between demand and supply data.

2. A computation of the difference between the predicted demand and supply is made.

In case the predicted demand is higher than the predicted supply, then there is demand.
under this situation, the proponent may proceed to the third step. However, if the predicted
supply is higher than the forecasted demand, then there is no demand for the proposed

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project or product. The proposed project or product may be aborted or discarded at this
level.

3. Determine the expected share in the market. As a new entrant to the market, the proposed
project or product usually gets its market share from unsatisfied demand. The expected share in the
market will determine the production volume of manufacturing processes.

Sample tabular form of demand-supply analysis.

Year Projected Demand Projected Unsatisfied

Supply Demand/Excess
Supply
2015 125,000 121,800 3,200
2016 156,250 146,160 10,090
2017 198,875 179,778 19,097
2018 252,000 221,127 30,873
2019 325,080 279,986 45,094
Total 1,057,205 948,851 108,354

This data indicates that the projected demand for the next five years is increasing; hence, there is a
bright prospect for the proposed project. Second, the projected supply is likewise increasing, but the amount
of increase is not sufficient to satisfy the projected demand. This trend may continue to exist in the future if the
suppliers will not increase their plant capacity. Once the suppliers increase their plant capacity, the demand-
supply gap will decrease. Impliedly, higher demand-supply gap is favorable to the proposed business.

4) The business may consider the difference between supply and demand as its immediate market
share data under the following conditions:

1.) that the existing suppliers have utilized fully their plant capacities; and
2.) that there are no expected new entrants to produce the same product.

LEARNING ACTIVITY 1

1. You have been requested to make a study on the viability of producing pastilles candy made of milk
and other local and imported ingredients.

Required:
a. Identify and discuss the market of this study.
b. How will the market be segmented in this study?
c. What does total demand represent in this study?

LEARNING CONTENTS (title of the subsection)

Market Share

Market share refers to the share of the proposed project in the total demand. It is the ratio of what the
proposed project can sell in relation to the total project demand. Using the hypothetical data above, if the total
future demand requirements for the next five years is 1,057,205, and the present suppliers can only produce
948,851, then there is an unsatisfied demand of P108,354. In this case, the expected market share of the
business for the next five years is 10.25% (108,354/1,057,205), assuming that the existing suppliers have
already fully utilized the capacity of their plant, and that there are no new expected entrants. The expected
10.25% may decrease if the present suppliers of goods will increase their plant capacity. Increase in plant
capacity of production indicates that projected supply will increase and will result to a decrease in the gap
between projected demand and projected supply.

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Study of the Price

This is the fourth part of the market study, and addresses the question- How much is the selling
price of the product or services?

In setting the price of the proposed product or service, the proponent should consider the following
steps:

1.) Compute correctly the cost incurred in making the product considering the three elements of cost
such as direct materials, direct labor and factory overhead.
2.) Decide on the proposed mark up on finished goods.
3.) Compare the proposed selling price with prices of similar products or substitutes.
4.) Make the necessary adjustments if there is a huge difference in these prices.
5.) Determine the history of prices of similar or substitute products.
6.) Determine the expected operating expenses.
7.) Set the selling price after all concerns have been properly studied and evaluated.

Marketing Program

The last section of the market study is the marketing program. It shows the different sets of
coordinated marketing activities designed to achieve the marketing goals. The brief marketing program should
include:

 The target market (may it the business establishment or individuals) ;

 The terms of sale (consignment, cash basis, credit sales with conditions, and others);
 The channels of distribution (wholesalers, retailers, distributors, and even the internet);
 The transportation arrangements;
 The estimated selling price;
 Promotion and advertising activities( social media, word of mouth, discounts, freebies, others);
 The distribution network;
 Packaging( individual, bundle, others);
 Marketing staff; and
 The estimated cost of marketing.

Conclusion
Every major aspect of the study should have a conclusion stating the result of the evaluation. The
conclusion should be supported by figures, amounts and mixture of facts and estimates based on the
professional judgment of the proponent and other parties. A good conclusion for a marketing study should be
made on the following questions: is there a demand?, are there available or enough supply?, is there a gap
between demand and supply?, how much is the expected selling price of the product?, what marketing
strategies should be adopted?.
A good conclusion should be brief, provide straightforward answers to the underlying questions of the
study, and should be convincing but it should never vouch for the attainment of the forecast.

LEARNING ACT

SUMMARY

The proponent should consider the following in conducting demand study: identify the consumer;
gather information on total demand; evaluate future demand; and evaluate the projection of future demand.
It is highly suggested that all data be presented in tabular form with proper descriptions. The
description should be brief and clear.
The projection of future demand using a particular forecasting tool may be presented as an Appendix
so as not to obscure the body with voluminous mathematical computations. Prospective users or investors are
not very much interested in this.
The following procedures should be followed in conducting supply study: first, identify who and where
are the competitors; second, gather information on total goods produced by competitors; third, evaluate the
historical supply pattern; fourth, forecast the supply; and finally, evaluate the projection of future supply.

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Market share refers to the share of the proposed project in the total demand. It is not absolute that the
market share is always equal to the unsatisfied demand. Factors like plant capacity and the amount of capital
base of the proposed project also help determine the expected market share of the project.
Marketing program is the last section of the market study. Only a brief marketing program should be
included in the feasibility study since a detailed program will be included in the business plan once the project
is implemented.

REFERENCES

Books:
Aduana, Nick L. (2015). Writing Project Feasibility Study
Ditablan, Eustaquio (2007). Feasibility Study Handbook
Callahan, Kevin R. G.S. L.M. books (2007) Project Management Accounting: Targeting, Trading, & reporting
Costs and Profitability. Canada John Wiley and Sons
Howard Business Essentials. Managing Projects Large &Small; Howard Business School Press, 2004

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