Industrial Marketing Management 35 (2006) 431 – 445

A diagrammatical template for business market demand estimation

Lindsay Meredith*
Faculty of Business Administration, Simon Fraser University, 8888 University Drive, Burnaby, British Columbia, Canada V5A 1S6

Received 8 October 2004; received in revised form 5 April 2005; accepted 2 May 2005
Available online 11 July 2005

Abstract

This article describes a template that can help guide managers through a minefield of complex product interactions and demand drivers on
the way to producing a realistic demand estimation. It is based on many years of consulting and conducting postmortems to find out what
went wrong when demand forecasts have gone awry.
A menu of troublesome variables that make up a rogue’s gallery of the worst offending causes of estimation error are presented. The
premise being, if we are aware of the potential trouble spots in demand estimation, we are likely to avoid some of the more serious problems
that plague market projections.
A diagrammatical template is presented that shows these troublesome variables and where they enter into the demand evaluation process.
Next, the template components are introduced to show how the various product interactions and drivers that affect demand estimation are
used and how they impact market projections. Throughout, a list of dos and don’ts are provided along with a sufficient number of real-life
disaster stories to reinforce the issues.
D 2005 Elsevier Inc. All rights reserved.

Keywords: Demand estimation; Forecasting; Cannibalization; Indirect substitutes; Attribute comparisons

1. Introduction demand estimation. Many years of consulting expe-

Many firms, both small and large, encounter problems in
methodically estimating market demand for their products
and services. The issue is crucial because realistic sales
demand estimation is a fundamental building block upon
which revenues and costs are based. In fact, sales revenue is
the first line on the company’s profit and loss (P&L)
statement. An error in estimating that first figure will bias
the accuracy of all the remaining items in the P&L statement
and ultimately the company’s pro forma capital costing
exercises.
The demand estimation model was developed for two
reasons:
(a) Practical corporate experience as well as literature
reviews indicate a need for an organized approach to
rience led to the conclusion that the greatest demand
estimation failures in business marketing arise from
those variables that we simply neglect to consider
(errors of omission) as opposed to those we factor in
but fail to analyze correctly (errors of commission).
The framework suggested here is intended especially
to combat errors of omission through both a checklist
of factors to evaluate as well as a sequence in which
they should be considered.
(b) Corporate planners are often well equipped with an
array of finance, accounting, and statistical forecasting
techniques for long-term planning. They often, how-
ever, do not have access to an analytical framework
for purposes of evaluating the company’s total product
offering viz. longer term competitive positioning. It is
this latter factor, however, that is often the most
crucial in determining the firm’s long-term viability.

* Tel.: +1 604 291 5554. Given the preceding statement, a major thrust of this
E-mail address: meredith@sfu.ca. paper is to suggest that management should, in addition to
0019-8501/$ - see front matter D 2005 Elsevier Inc. All rights reserved.
doi:10.1016/j.indmarman.2005.05.002
432 L. Meredith / Industrial Marketing Management 35 (2006) 431 – 445
employing the traditional tools of forecasting and monitor-
ing, make every attempt to assess
– indirect impacts on their product offering—such as
derived-demand factors, complementary products, indi-
rect substitutes, and product cannibalization.
– comparative advantages and disadvantages of their total
product offering relative to that of their actual and
potential competitors.
The need for this expanded approach is becoming ever
more apparent as the competitive arena continues to grow
from regional, to national, to international in scope. The
implications of this trend are twofold. Firstly, competition
can be brought to bear from a much greater range of
competitors who have various forms of comparative
advantage—be it cheap labor or technological sophistica-
tion. Secondly, international competition and the trend to
distant market development forces the firm to consider
longer forecasting/planning horizons. Trends such as these
mean that the firm must try to assess a greater range of
factors that will ultimately affect demand for their specific
products.
Much of the earlier literature in the area of demand
evaluation deals with the application of specific techniques
(e.g., Moyer, 1968; Armstrong, 1970) and/or predictor
variables (Boyd, 1974). Industrial marketing texts (Hutt &
Speh, 2001; Haas, 1992) and Dwyer and Tanner (2002),
while addressing a wider range of demand evaluation issues,
often separate them into specific topical areas such that the
interaction of the evaluation components or their application
to demand estimation are somewhat obscured.
A major thrust of the current literature moves along the
vector of customer maintenance and development strategies
with a special focus on value-added propositions to protect
customer equity. A very good treatment of this can be seen
in Anderson and Narus (2004). This is clearly most
appropriate given the current level of international as well
as Internet customer poaching that has made protection of
the business-to-business (B2B) marketer’s customer base a
paramount management activity.
A much earlier and more generalized version of the
model presented here was also developed in Gross, Banting,
Meredith, and Ford (1993). The problem with that analysis
lay in not explicitly incorporating Economic Value to
Customer (EVC) concepts, macro-based environmental
drivers, and cannibalization risks. Moon, Mentzer, and
Thomas (2000) introduced a customer demand planning
process at Lucent Technologies that used a sales forecasting
audit to identify areas in the company where demand
forecasting inputs could be improved. One of their
conclusions was that forecasting could be improved by first
using quantitative (regression and time series) techniques
and then adjusting results by using qualitative inputs
(employee judgement) to enhance the statistical results.
Their article, to some degree, helps to set the stage for the
approach introduced here. The purpose of the model
presented in this article is to provide a diagrammatical
template to aid managers in estimating the market demand
for new or existing products and services as well as to
identify specific variables that can be particularly problem-
atic in contributing to demand estimation errors. As with
Moon et al., this model can be used as a guide for, or adjunct
to, existing quantitative estimation techniques.
2. A diagrammatical model for demand estimation
The model is designed to aid in evaluation of both extant
and new markets. The signs ‘‘+, , and N/A’’ which appear
in the model are to be interpreted as follows:
(a) ‘‘+’’ indicates data input reflecting conditions that are
expected to exert a positive effect on the firm’s actual
or potential available market.
(b) ‘‘ ’’ indicates an expected negative impact on the
firm’s actual or potential market.
(c) ‘‘N/A’’ means that the variable in question either does
not exist or is not applicable to the market under
consideration.
A few caveats regarding the model are required. Compo-
nents of the diagram are most ideally suited to analysis of
larger geographical or national markets. This is because data
are most readily available at those levels. Although rapidly
changing because of better information collection systems,
data shortage problems related to smaller markets might limit
application of some of the concepts presented.
The model is not directly concerned with the statistical
issues underlying demand forecasting tools like regression
or time series analysis. Rather, it focuses on a number of
significant demand drivers that will help identify variables
and guide data collection used in statistical forecasting
efforts.
Finally and most importantly, managers should at least
consider the elements of the model in their deliberations
regarding markets. Quantification of some model compo-
nents may well be difficult but this is preferable to
committing errors of omission which may lead to disastrous
consequences.
The model framework is presented in Fig. 1. This is
followed by a discussion of each of the model compo-
nents represented by the boxes in the diagram. Applied
examples are provided where appropriate, for purposes of
clarification.
2.1. Total market (box 1)
The total market for a product or service is comprised of
domestic production, imports, and exports. Note the negative
sign on the export component. The reason for excluding
exports is that production destined for trading areas other
 L. Meredith / Industrial Marketing Management 35 (2006) 431 – 445 433

ENVIRONMENTAL 2 TOTAL MARKET 1 DERIVED DEMAND 3

SCAN +, -, N/A +, -, N/A

- Macro-determinants Domestic Production +,N/A

Imports +, N/A - End-use market evaluation
- Industry determinants - Demand driver analysis
Exports -, N/A

MARKET 5
TEMPORAL 4 COMPLEMENTARITY
PARAMETERS +, -, N/A +, -, N/A
- Dependency on sales of
- Market change proxies external firms and
- Innovation diffusion industries

CANNIBALIZATION 6 SALES ORIGIN 7

-, N/A ANALYSIS

- Product/service based - Market expansion +, N/A

cannibalization - Market share increase +, -, N/A
- Distribution channel - Cannibalization -, N/A
cannibalization

INDIRECT 8 INDIRECT 9 DIRECT 10 DIRECT 11 COMPANY 12 COMPANY 13 COMPANY 14

SUBSTITUTES SUBSTITUTES SUBSTITUTES SUBSTITUTES PRODUCT PRODUCT PORTFOLIO
-, N/A -, N/A -, N/A -, N/A +, -, N/A +, -, N/A CONGRUENCY

- Static/dynamic - Comparative - Static/dynamic - Comparative - Static/dynamic - Comparative - Product/service

analysis of: advantages & analysis of: advantages & analysis of: advantages & cross-selling
disadvantages disadvantages disadvantages potential +, -, N/A
- price & volume in marketing - price & volume in marketing mix - price & volume in marketing mix
market trends mix market trends market trends - Cannibalization
- competitors’ - competitors’ - company’s potential +, -, N/A
market share market share market share
estimates estimates estimate - Micro-
complementarity
+, -, N/A

ECONOMIC VALUE 15
TO CUSTOMER
ANALYSIS
- Incremental valuation of
competitive advantages and
disadvantages by customers
and/or segments

COMPANY’S 16
MARKET POTENTIAL

- Company sales and market share

estimates
- Sales and market share forecasts
- Integration to executive level
strategic marketing positioning
objectives

Fig. 1. Demand estimation.

than the market of concern should not be counted in
estimating the size of the total market. Failure to exclude
the proportion of domestic production that is exported would,
of course, lead to an overestimation of the total market size in
the trading area of interest. The N/A designation becomes
relevant in the innovative product situation since prior data
regarding the product class will be nonexistent. In that case,
the analysis focuses on the concept of indirect substitutes that
the innovation is designed to replace.
– Example: When Oriented Strand Board (OSB) was
invented by the forest products industry, an estimate
for its total market potential in the construction industry
was determined by using data for the plywood sheathing
434 L. Meredith / Industrial Marketing Management 35 (2006) 431 – 445
market because that was the product class from which the
innovation (OSB) was intended to steal market share.
– Similarly, in the computer components manufacturing
industry, the market for an innovation like computer
discs (CDs) could initially have been estimated by
looking at the demand for existing indirect substitutes
such as floppy discs that the CDs were designed to
displace.
It is also useful to access supply-side industry output
shipments data as well as demand-side information,
since the former can offer good estimates of demand as
long as there are no large stocks of inventory held in the
market. Inventory stocks can cause overestimation
errors if buyers are not in fact consuming the product
but, rather, stock piling for future use.
– Example: Shipments data collected prior to an antici-
pated strike will grossly overstate the true size of a
market as buyers stockpile in anticipation of the coming
supply shut-down. Either supply- or demand-side data
can provide an estimate of market size. In the best of all
worlds where supply- and demand-side information
sources are available, both should be employed as
cross-checks for each other.
The Total Market box and all the other boxes in the
diagram can be generalized to smaller markets by
counting only the production, exports, and imports that
are relevant to the city or regional market of concern.
2.2. Environmental scanning (box 2)
2.2.1. Macro-determinants
The big picture stage of the demand analysis is evaluated
here. Macro-Determinants are major trends that have over-
riding effects on markets and are not easily subject to
manipulation by the firm. These include
– socio-cultural effects such as psychographic variables
that measure attitudes toward the environment and life-
style trends such as healthy living. Raw material
extractors in the oil and mineral refining sectors, for
example, have been heavily impacted by shifting
environmental attitudes of consumers.
– economic determinants like interest rate changes,
recessions, and currency-driven trends such as offshore
sourcing for production. Example: The manufacturing
sector has been heavily involved in the offshore
sourcing of production because of cheaper overseas
assembly costs.
– politico/legal trends that affect the deregulation of
industries like the airlines or the financial sector; trading
blocks like NAFTA and the European Union; and
environmental laws. The structure of the auto-manufac-
turing industry, for example, has been greatly influenced
by NAFTA in terms of locating production plants.
– demographic trends causing major shifts in consumption
like the increased use of health care products by aging
baby boomers or the increasing purchasing power of
teenagers and pre-teens. The pharmaceuticals industry
closely monitors the pathologies associated with the
increase of the aging population as a means of
anticipating rising demand for their heart- and stroke-
related drugs.
– technological trends like massive computerization,
materials technology advances, and biochemical inno-
vation in pharmaceuticals (Kotler, Cunningham, &
Turner, 2001). Of particular concern here are innovations
that embody both product and process changes. DVDs
store movies both through a different process (digital vs.
analog) as well as a different product class (disks vs.
video-tape). Product/process embodied change dealt a
lethal blow to the VHS recording industry. Consider as
well the impact of e-mail on both the long-distance
telephone business and the postal service.
Macro-determinants can produce positive or negative
impacts or have no relevance at all to the analysis. The real
danger of these trends is that their major impacts can occur
in very distant markets or in far-removed parts of the
distribution channel and yet create a ripple effect that has a
significant impact on the company’s markets.
Example: The music industry is in a state of financial
chaos because they failed to anticipate the technological
impact of file sharing and computer literacy among their
youthful target market. To make matters worse, they have
resorted to a strategy of threatening lawsuits against their
potential distribution channel members like the file-sharing
sites and Internet providers, when in fact, they should be
learning how to exploit the new technological reality with
which they are confronted.
2.2.2. Industry determinants
The next step down in the Environmental Analysis leads
to an evaluation of Industry Determinants (Porter, 1985).
Variables at the beginning of this checklist are obvious.
Others that follow are more subtle but should not be
underestimated viz. their impact on demand.
– Market size: this can be proxied by sales dollar revenue,
unit sales volumes, number of final customers, and
number of direct buyers. Which variables to use? All of
them, if possible, because they each capture a different
aspect of market demand that could prove important. For
example, unit sales present an uninflated estimate of
market size that is free from price effects bias. Sales
revenue, on the other hand, captures both unit sales as
well as price volatility resulting from inventory surpluses/
shortages when demand and supply are out of balance.
– Market growth: proxies industry sales potential and
provides insights into stages of the industry’s product
life cycle.
– Negotiation power: focuses on who has the balance of
bargaining power—the buyer or the seller. Monopoly
 L. Meredith / Industrial Marketing Management 35 (2006) 431 – 445
or monopsonistic (single buyer) positions may offer
the best opportunities for dominance. Oligopoly or
oligopsony may similarly convey primacy in the
buyer/seller relationship. Product-based primacy occurs
when the buyer is heavily dependent on the seller’s
product. When your product is used as a complement
to the sales of another firm’s product, however,
complementary sales dependency results and a preca-
rious trading position can result. Example: The sales
of avionics systems are heavily dependent on the sales
of aircraft.
– Risk management: This is a vital factor because it
captures the effect of market diversification. A horizon-
tally integrated firm with sales spread over a number of
different markets may achieve better risk control than a
firm with all sales concentrated in a single industry.
– Research and development (R&D): The R&D commit-
ments in some industries may exert massive risk with
regard to firm survival. Major concerns are lost capital
investments in the wrong technology when an innova-
tion shift occurs, rapid technology obsolescence, and
very expensive R&D outlays just to remain competitive.
Examples of disasters abound: Beta vs. VCR; IBM OS2
Warp vs. Microsoft Windows; and overcapacity invest-
ments in the communications industry.
2.3. Derived demand (box 3)
Derived demand refers to the effects that end-user
demand can have on industrial and business products. It
is not possible to understate the importance of this variable.
The problem develops when B2B suppliers concentrate
only on their direct customer instead of looking past them
to see what kind of market effects are evolving in the final-
user markets. The best assumption to make is that your
direct customer is marketing myopic and that you must
therefore look beyond them to monitor your customer’s
customers.
Sometimes, you may have to look two or more levels
down the distribution channel to adequately scan your
marketing environment for threats or opportunities. The
premise behind examining derived demand is that whatever
impacts your customer will ultimately impact you. Without
a doubt, this variable accounts for some of the most serious
errors of omission where executives admit that they just did
not see the market threat coming.
Example: A multinational minerals producer was seri-
ously considering a $6 million addition to increase plant
capacity until research of the derived-demand market
(electrical toys, flashlights, and hand-held appliances)
indicated that manufacturers were switching away from
the battery types that used the multinational’s mineral
output. In this instance, the marketing vice president
concluded that the shifting demand for battery types caused
by the consumer sector manufacturers would impact
adversely on the multinational’s battery manufacturing
435
customers and ultimately on demand for their own product.
The contract for expansion was terminated at the last
possible moment.
Derived demand affects forecasting in two important
respects:
(a) Long-term planning for major additions to capital
plant and equipment that, in turn, imply long-term payouts
for the firm are contingent upon determining the health of
key markets over time. The condition of industrial markets
is very often dependent on consumer markets. The industrial
product planner must be aware of market trends in the
consumer sector that will ultimately exert an impact on the
demand for the industrial product.
Example: A major commercial bank suffered an
$800,000 loss when one of their best low-risk customers
suddenly declared bankruptcy. Their customer supplied
linens to small motels and hotels that serviced the lower to
mid-range priced market. When a major recession occurred,
the consumers in this market suffered the most and
immediately scaled back expenditures on travel. The bank’s
customer sold only to this market, and when the derived
demand from the low- to mid-priced consumer tourism
market failed, the small motels/hotels defaulted on their
accounts payable to the linen supplier—who in turn
defaulted on the bank’s loan. The chief loan’s officer for
the commercial bank now routinely evaluates derived
demand when considering the risk associated with loan
applications.
(b) Short-term forecasting of sales volume can often be
aided by a careful review of derived-demand factors in order
to obtain leading indicators. The advantage of this approach,
given the acquisition of reliable indicators, allows the firm
to fine tune, to a degree, production levels and prices so that
inventories remain in balance.
Example: Forest products producers monitor interest
rates, loan applications, building permits, and housing starts
(in that order) in efforts to predict short-term demand for
structural wood products.
The importance of derived demand to the firm is a
function of both the degree of impact exerted by such
demand as well as the number of alternative markets
available to the industrial marketer. Industrial marketers
dependent on a single end-use market should be very wary
of derived-demand issues.
The +, , and N/A designations for the derived-demand
category indicate the range of influence this factor can exert
on the industrial market.
2.4. Temporal parameters (box 4)
This analysis concentrates on the dynamic as opposed to
static aspects of the market. It is important to focus on
market change variables because of their destabilizing effect
on the demand estimation. This is especially important
where longer time horizon-based forecasts are conducted
(Vining et al., 2001).
436 L. Meredith / Industrial Marketing Management 35 (2006) 431 – 445
A number of variables capture market change:
– Market expansion and contraction are proxied through
rates of change in user segments and channels of
distribution. Rapid market expansion causes an upward
revision of the demand estimation while market
contraction implies a downward bias.
– Technology dependency assesses the extent to which the
competitive structure of the industry is driven by
technological change. The speed of innovation diffusion
and the R&D commitment (both capital as well as
research positions) within an industry are good indica-
tors of technology-based competition and the associated
market volatility that often accompanies it. This variable
is especially important in the computer storage device
sector and the pharmaceuticals manufacturing industry,
for example.
– Product life-cycle (PLC) approximations, while a very
generalized indicator, still provide valuable insights into
expected industry growth, entry and exit of competitors,
as well as the expected structure of the marketing mix.
Temporal periods of greatest concern are the market
growth phase where product introductions determine
the direction of industry best practices and market
saturation where price competition and a shake out of
competitors occur. The steel-manufacturing sector, for
example, went through a devastating shake-out period
where price competition pushed many firms into
bankruptcy.
– Specialization ratios provide an indication of the extent
to which sales in one industry are in fact being supplied
by firms from a different industry classification. A rapid
increase in this ratio means that the sales of firms within
one industry are quickly being usurped by invading
firms from other industries. The ratio changes a
manager’s focus from intra-industry direct competitors
to potential external threats that might damage or even
eliminate their entire industry. Competitors in the
express letter courier business, for example, quickly
realized they had much more to fear from invading
Internet providers than from each other.
– Specialization ratios should also be considered when
evaluating industry concentration ratios that are used to
gauge the amount of business controlled by the largest
firm(s) in an industry. The concentration ratio (a
measure of market power) may well overestimate the
dominance of the largest firms in an industry if the
specialization ratio indicates a substantial volume of
sales coming in from other industries. Commercial
banking, for example, may appear to be highly
concentrated but the picture changes quickly when the
penetration of life-insurance firms into the commercial
loan aspects of the banking business are considered.
The +, , and N/A designations indicate the range of
influence this factor can exert on market expectations.
2.5. Complementary products (box 5)
The impact of complementary products on demand for a
firm’s output varies both by degree and direction of
dependency. Complementary products must be seriously
considered when sales of the company’s output is dependent
on sales of the complementary product (Schocker, Bayus, &
Kimet, 2004).
Example: Demand for LCD monitors is mainly a
function of computer sales. Contrarily, computer sales are
not wholly dependent on sales of LCD monitors. In
general, then, a strong negative cross-elasticity of demand
with dependency running from the firm’s product to the
producer of the complementary product implies that
trends in the complementary product market should be
carefully monitored. This is especially so if the firm is
heavily dependent on sales of the complementary industry
and does not have a diversified sales base. For a
discussion of complementary as well as substitute
products and their interactions, please see Bucklin,
Russell, and Srinivasan (1998) and Russell and Peterson
(2000).
As with the derived demand category, a + sign for the
complementary product’s evaluation would indicate an
expected positive impact on the manager’s estimate of
total market size. This might occur where the comple-
mentary product market is expanding and, as a result,
creating a growth in demand for the firm’s product. A
negative sign would indicate the reverse situation. An N/
A designation would result if (a) there were no
complementary product relationships; (b) if the relation-
ship were of a very minor degree; or (c) if the direction
of dependency ran totally from the complementary
product to the firm’s product.
2.6. Cannibalization (box 6)
Cannibalization occurs when one product or service
achieves part or all of its sales growth by taking market
share from another product/service. It most commonly
occurs between products within the same company but the
definition here is expanded to include inter-firm and inter-
industry cannibalization as well. This is because innova-
tions in products and services are capable of eliminating
not only individual product sales and firms but entire
industries as well. Example: Consider the impact of the
transistor on the vacuum tube industry or the effect of
digital data storage devices on analogue data storage
electronics.
At the corporate level, a firm may, as result of cannibal-
ization, inadvertently compete with itself for sales. It is an
all too common problem that can cause serious difficulties
in forecasting the real sales and profit contribution of a
product or a department—especially if some of those gains
are achieved at the expense of another group in the same
company.
 L. Meredith / Industrial Marketing Management 35 (2006) 431 – 445
Experience shows that cannibalization is especially
prevalent in large corporations due to one or more of the
following:
– the sheer size of the firm (especially multinationals);
– the width and depth of extensive product lines;
– the complexity of international distribution channels;
– multiple distribution channels servicing the same target
markets;
– the firm’s inability to prevent resellers’ markets from
developing; and
– the corporate penchant for structuring divisions and
departments as independent and isolated profit and loss
centers without considering their effect on other
corporate business units.
Product/service-based cannibalization becomes a prob-
lem because the victim brand very often has a higher margin
and selling price than that of the attacker brand. The result is
that the high margin sales are sacrificed and replaced by an
increase in sales of a product with a lower margin. In effect,
the company trades market share between its own two
brands and, with each transaction, usually replaces a higher
margin sale with a lower margin sale.
Example: A large brewery active in the US market
requested some statistical analyses in an attempt to discover
why one of their flagship brands had suffered a double-
digit fall in market share. Regression analysis showed that
the villain was not a competitor’s brand but rather the
introduction of one of their own fighting brands. The
brewer maintained two fighting brands that it used for price
wars against other competitors’ cheap brands. Unfortu-
nately, one of the fighting brands with its low price (and
low margin) turned out to be the culprit that was stealing
market share from its own high-priced flagship brand. The
price spread between their fighting brand and their flagship
brand got too large and consumers began switching to the
low-priced fighting brand (Meredith & Maki, 2001).
Channel-based cannibalization problems can develop in a
number of ways:
– Direct sales from company plant operations or head
office are often used when larger sales volumes are at
stake. These, however, can sometimes cannibalize the
smaller sales volumes of the company’s regional branch
and warehouse outlets that are selling the same product.
The branch managers subsequently find they are
competing against a product from their own organiza-
tion that has found its way through a different channel
into the same market place. The result is that one
distribution channel inadvertently cannibalizes the sales
of the firm’s other distribution channel.
– When reseller’s markets develop, a more complicated
and very lethal version of cannibalization can evolve. A
common way of eliminating substandard quality output
from plant production is to discount the price and sell
437
the reject material to re-manufacturers who are equipped
to handle it. They either remove the substandard
material and sell the remaining stock at market value
or remanufacture the substandard material to bring it up
to grade before selling it.
Example: Approximately 50 managers of a large North
American heavy steel producer were being cautioned
about this form of cannibalization when one of the
group yelled across the lecture hall, ‘‘Do you hear what
he (the professor) is saying, Harry, you @#$$%%?’’
Apparently, the re-manufacturers were buying the
company’s reject grades of steel, reworking/culling it
and selling the upgraded material back into the market
against the steel mill’s regular grades in its normal
distribution channel. The only difference was that the re-
manufacturers were undercutting the steel mill’s price by
15%. To make matters worse, the re-manufacturers even
took pains to ensure that some of the pieces they sold
retained the steel company’s original brand and grade
stamp as an indicator of the steel quality they were
selling.
Hopefully, this demonstrates how easily one distribution
channel can turn into an unintended competitor and begin to
cannibalize a company’s main distribution channel.
Not all cannibalization is destructive and the result of
company error. Chandy and Tellis (1998) rightly point out
that a willingness to cannibalize old products (especially in
fast-changing technological markets) may sometimes mean
the difference between survival and evolving with the new
market vs. extinction because the old market was made
obsolete by technological change. The logic behind delib-
erate cannibalization is that the existing product or
customers in a given channel are doomed anyway so the
manager is better off to commit to the new product or
customer group. This is because if the firm does not
cannibalize its own product or channel, competitors will
steal the firm’s market share anyway. By cannibalizing their
own product, at least, the company maintains a position in
the marketplace with their new product or channel
customers.
Example: Weldwood, the world’s largest producer of
plywood, was confronted with a profound technological
threat in the early 1970s. Particle board and oriented strand
board were making many plywood applications obsolete
because these newer technology products were much
cheaper to manufacture. Weldwood knowingly cannibalized
some very substantial portions of their plywood sheathing
business by getting into the manufacturing of particle board.
Better that Weldwood should cannibalize their own sheath-
ing market and at least continue to derive sales from it than
see their entire sheathing market eroded by a host of new
particle board manufacturers.
The real difficulty in deciding whether to cannibalize
your own product is that the firm must commit to a new and
often unproven product or process technology that implies
438 L. Meredith / Industrial Marketing Management 35 (2006) 431 – 445
abandoning what may still appear to be the old tried and
proven product in the market place. Added to this is the
turmoil created in the channel when current customers
perceive their supplier to be introducing a cannibal product
that may hurt sales of the old product with which they are
familiar. Even worse, if current customers perceive their
supplier to be selling the new cannibal product through a
different channel, they will likely perceive this as a threat to
their own livelihood.
Detection of unintended cannibalization at early stages is
important because the manager must react quickly to defend
against the market share loss of the victim product. The
cannibalization process can be seen by graphing the sales
growth of the attacking product against the sales decline of
the victim product. The classic pattern that emerges is
similar to that in Fig. 2, where the unit sales growth of the
attacking product shows an almost mirror image of the sales
units lost by the victim product. Also, as the cannibalization
process begins to pick up momentum, the rate of sub-
stitution between the victim and the attacking products often
increases. This can occur with the increasing speed of
diffusion the attacking product may acquire as it becomes
better known and achieves greater market penetration. A
classic example can be seen in the water quality treatment
industry where smaller filtration systems used on just one
tap, cannibalized the sales of full house-plumbed systems.
Identification of the data pattern is most easily seen at the
industry-wide level because the confusing pattern of
individual brand sales are eliminated as we aggregate up
to the broader product class category. This is where the
Sales These infection points signal the onset
Unit of accelerated cannibalization of the
Volumes victim brand by the attacking brand.
t t+n
Time
Victim Product
Attacking Product
Fig. 2. Cannibalization sales data pattern.
substitution of the victim product by the attacking product is
more easily seen.
The effect of a cannibalizing product on the victim
product or channel will be either negative if it derives
sales by stealing market share to feed its own sales growth
or negligible if the cannibalizing impact is limited, hence,
the designations in box 6 of negative ( ) or not applicable
(N/A).
2.7. Sales origin analysis (box 7)
The origin of current or expected demand enters the
evaluation because it helps to focus attention on the
difficulty that is likely to accompany the generation of
future sales. If the demand estimation is based on the
assumption of stealing market share from other competitors,
the sales forecasts may need to be tempered because
competitors may fight to protect their market shares. In that
scenario, the market power and brand equity of competitors
should be examined in some depth.
In the opposite case where competitors have a product or
service advantage, the sales forecast has to be adjusted
downward by the amount of market share that they are
expected to take from the business marketer’s firm. Shifts in
market share can therefore produce positive (+), negative
( ) or no effect (N/A) on the demand estimation.
Demand forecasts where sales are derived from market
expansion can produce either positive impacts on future
sales estimates or have no effect if the market expansion
fails to develop—hence, the (N/A) designation. Managers
should be especially careful when forecasting market
expansion that involves discontinuous innovations with
which customers have little or no prior experience. This is
because diffusion of discontinuous innovations can be
unpredictable from a temporal standpoint. The innovation
can impact through changes to the product, the process by
which it is made, or some combination of the two. As
mentioned previously, if the innovation involves both
product and process impacts, market growth can be volatile,
causing serious sales forecasting problems.
Sales can, of course, originate in whole or in part from
cannibalization as mentioned in box 6. If a planned
cannibalization is under consideration, a useful part of the
pro forma profit and loss exercise is to factor in estimates of
the sales revenue loss that the company’s victim brand will
incur and to subtract that from the estimated revenue that the
new cannibalizing product is expected to generate. This
forces managers to explicitly account for the fact that some
of the sales for the new cannibalizing product will be
derived from one of the firm’s other products.
2.8. Indirect substitutes (boxes 8 and 9)
Boxes 8 and 9 are designed to make the industrial
marketer aware of the dangers posed by indirect substitutes
for the firm’s product. As a general rule, managers are far
 L. Meredith / Industrial Marketing Management 35 (2006) 431 – 445
more likely to fall prey to indirect substitute effects than
threats from direct substitutes. This is because most firms
are well aware of direct competitors who deliver the same
products and services as themselves. What they fail to do is
look beyond their own industry to external threats from
other industries. The last two decades especially, have been
characterized by inter-industry raiding. For example, courier
services like UPS and Fed-Ex invaded traditional postal
delivery. The couriers’ markets were then invaded by
communications providers who in turn have been placed
under competitive pressure by Internet and network
suppliers. Indirect substitute threats are perhaps even more
profound in materials handling technologies. Steel, alumi-
nium, and plastics manufacturers routinely eye each other’s
markets in the search for new applications and products
advantages that lie outside their home industry. Steel roof
manufacturers have, for example, taken market share from
the wood-roofing producers. On the other hand, aluminium
producers have been able to take market share from the steel
industries that supply car parts for auto manufacturing. The
plastics manufacturers have been able to take market share
from both steel and aluminium producers in the auto parts
manufacturing business.
The most common difficulty associated with addressing
this issue is one of aggregation. The definition of an indirect
substitute when considered in too wide a context creates a
complex and cumbersome evaluation problem. Contrarily,
too narrow a definition may cause the manager to exclude
potential threats that could have serious consequences for
company sales, especially if the indirect substitute has
comparative advantages. Where management feels even a
remote possibility of substitution exists, the product should
be investigated further.
Observation of distant markets can be useful if indirect
substitutes have been known to penetrate those trading
areas, the implication being that successfully introduced
substitutes – especially discontinuous innovations – will ulti-
mately diffuse to most other markets.
Box 8 focuses on the static and dynamic aspects of the
indirect substitute’s market penetration. The static data
establish the current size of the of the indirect substitute
market in dollar value, unit volumes, and market share.
The dynamic analysis examines the trend performance of
these same variables except that their rate of change is of
primary interest. Market trend information is useful
because the analyst can gain insight into how quickly
the indirect substitute is capturing market share from the
product class it is displacing. Data in terms of both price
movements and units sold allows for analysis of market
volatility.
Example: The market analyst of a large multinational
was asked to evaluate the future sales potential of a wood
sash and door mill which the corporation was considering
for purchase. While the growth trend in this product class
was certainly acceptable, suspicion was aroused when the
trend in residential housing starts was found to be far in
439
excess of that shown by the wood sash and door industry.
Since the two products are complementary, growth trends
should have been somewhat similar. A check of indirect
substitutes quickly revealed that the metal window frame
and door producers were in fact the cause of the differing
growth rates. The fabricated metal producers were effec-
tively displacing competition from the wood manufacturers.
Needless to say, the mill was not purchased. Six months
later, it went into bankruptcy.
In box 9, the analysis examines the comparative
advantages and disadvantages of the indirect substitute.
Using the information from box 8, an effort should be made
to determine whether producers of the indirect substitute
have increased their sales and market share over time and if
so, through what particular competitive advantages. A
convenient starting point for this approach is an evaluation
of the controllable variables in the marketing mix, i.e.,
product, price, distribution, and promotion that comprise the
total product package. A template for this analysis as well as
that of boxes 11 and 13 is provided in Table 1.
Example: Approximately $3 million were invested in a
mill to produce exotic wood panelling such as Indian
Rosewood, Zebra Wood, and Teak for sale in a large eastern
city where selling prices ranged between 25and425 per
sheet. The company, however, failed to investigate Japanese
entrepreneurs who were producing imitation grained panels
for the same market. Their selling prices, however, were
between 5and20 per sheet. The company did not believe the
products were even indirect substitutes until their mill went
into bankruptcy. Only then did further market research
indicate consumers could not differentiate the two products
from a distance of 8 ft. Since the Japanese producers were
able to imitate the exotic wood quality at a fraction of the
cost, contractors naturally chose to install the cheaper of the
two alternatives.
The danger of this indirect substitute should have been
anticipated. Industry journals were extolling its technolog-
ical advantages and it was already cannibalizing sales of
traditional panelling in Japan. The signs in boxes 8 and
9 indicate that the impact of indirect substitutes, if they
exist, should be used to scale down the size of the total
market available. N/A applies in the absence of such
substitutes.
2.9. Direct substitutes (boxes 10 and 11)
Managers are much more familiar with problems of
direct substitution because direct competitors usually have
an ongoing impact on the firm. Direct competitors represent
a highly visible ever-present threat to the firm’s sales and
further, often employ the same technology and competing
products/services. As a result, managers often have a better
idea about competitors’ market shares and major compara-
tive advantages and disadvantages than they do about
indirect substitute competitors. Care has to be taken,
however, to ensure this is the case since knowledge about
440 L. Meredith / Industrial Marketing Management 35 (2006) 431 – 445

Table 1
Supplier performance evaluation
Marketing mix attributes Attribute importance Performance evaluation
weighting value Vendor’s firm Competitor 1 Competitor 2
(total allocated
points = 100) Evaluation score Weighted Evaluation score Weighted Evaluation score Weighted
(5 = excellent; score (5 = excellent; score (5 = excellent; score
1 = poor) 1 = poor) 1 = poor)
Column A Column B Column C Column D Column E Column F Column G
(column A  B) (column A  D) (column A  F)
Product
Quality 18 5 90 1 18 4 72
Innovative products 8 3 24 2 16 4 32
Service support quality 7 4 28 1 7 3 21
Customized production 5 5 25 1 5 3 15
ability
Warrantees 2 4 8 1 2 3 6
Total comparative scores 40 175 48 146
product

Price
Price competitiveness 3 1 3 5 15 2 6
Favorable credit terms 4 3 12 4 16 3 12
Low switching costs 3 1 3 5 15 2 6
Low life-cycle costs 10 2 20 5 50 3 30
Total comparative scores 20 38 96 54
price

Distribution
Good conflict resolution 2 5 10 2 4 4 8
history
Delivery reliability 6 2 12 2 12 5 30
Just in time capability 5 1 5 3 15 5 25
E-transaction capability 7 4 28 2 14 1 7
Total comparative scores 20 55 45 70
distribution

Promotion
Relationship management 10 5 50 2 20 3 30
orientation
Co-operative advertising 4 1 4 3 12 2 8
potential
Web-site effectiveness 5 5 25 3 15 1 5
Advertising effectiveness 1 2 2 2 2 4 4
Total comparative scores 20 81 49 47
promotion
Aggregate comparative ~100 ~349 ~238 ~317
scores

direct competitors and their substitute products can vary
greatly by industry. Past personal experience with the
financial services industry, for example, revealed an appal-
ling lack of knowledge regarding directly competing
substitutes in the commercial banking sector.
Information regarding competitors’ prices, sales vol-
umes, and market shares may, in some cases, prove difficult
to acquire. As a consequence, this information may have to
be deduced indirectly. Estimates, however, can be produced
by a wide range of approaches:
– polling industry players viz. their estimates of the size of
major competitors in a market and then averaging the
individual estimates to reach a consensus;
– interviewing both the customers who buy from an
industry as well as suppliers who provide the factor
inputs to an industry to get an idea of market shares and
volumes;
– making use of industry profiles that are produced both
by private sector organizations (example: Reuter’s
market evaluations) as well as trade associations.
Government commerce departments have also increased
their output of industry market surveys significantly;
– remembering to use the basics, like teaching sales
representatives to take note of competitors’ inventories
when they visit customers’ plants and warehouses;
– creative approaches apply as well. One client combined
his hobby of flying with regular flights over compet-
 L. Meredith / Industrial Marketing Management 35 (2006) 431 – 445
itors’ manufacturing plants, with his camera in hand.
This provided pretty reliable estimates of competitors’
outputs and inventory stockpiles.
The analysis of direct substitutes is similar to that
indicated for indirect substitutes. Knowledge of direct
competitors’ advantages and disadvantages has to be clearly
linked to their sales and market share performance so that a
realistic assessment of the negative impact they have on
demand estimate forecasts can be developed. Failure to
accurately evaluate their competitive threat will lead to
dangerous overestimates of the market demand that the
analyst believes can be obtained.
In summary, data regarding market share and compet-
itive advantage are used to scale down expectations
regarding the total market available. The rationale is that
taking business from direct competition, while certainly not
impossible, is more difficult than garnering sales in a
market of equal size that is free of competitors. As with
indirect substitutes, it is preferable to err on the conserva-
tive side in estimation of total market size. Given the
enviable situation that no direct competition exists, the N/A
evaluation is used.
2.10. Company product (boxes 12 and 13)
Analysis of the total product package offered by the firm
is conducted along the same line as that used for direct and
indirect substitutes. Evaluation of the market trend for the
corporation’s product is used to provide a dynamic
perspective to the market share estimates in box 12—
especially if the market structure is by nature volatile or in a
process of rapid transition. The communications and
electronics industries as well as commodities markets are
good examples. Without such perspective, cross-sectional
market share calculations conducted at some specific point
in time will lack temporal perspective and, as a result, be
misleading.
Evaluation of the competitive advantages and disadvan-
tages related to the company’s total product offering are
conducted in box 13. The evaluation categories are the same
as those suggested for direct and indirect substitutes, i.e.,
product, price, place, and promotion.
Estimation error in box 13 (and similarly in boxes 9 and
11) is a serious concern for two reasons. First, more
qualitative variables enter into consideration with the risk
that personal perceptions will bias the evaluation. For
example, it may be difficult to achieve a corporate
consensus regarding judgments about the company’s service
quality or technical sophistication. Second, corporate
acknowledgment of disadvantages in its marketing mix
can often be tantamount to admission of failure and that,
regrettably, can cost the guilty parties their jobs. This can
consequently make the identification and correction of
disadvantages in the marketing mix a slow and difficult
process.
441
In the evaluation of box 12, the impact of market trends
and changes in company market share can have a positive,
negative or no effect (N/A) on the estimation of the total
market that is forecast to be available to the firm. In the
instance where the firm is considering a new product
introduction, no market trend history will be available—
hence, the N/A option in box 12.
In box 13, competitive advantages of the firm’s total
product offering would make a positive contribution to
estimates of potential company sales while disadvantages
would cause demand estimates to be scaled back. Finally,
company advantages and disadvantages could be such that
they are mutually offsetting or not important enough to
warrant either an upward or downward adjustment to the
total market demand estimate—hence, the N/A designation.
Boxes 9, 11, and 13 focus on the comparison between the
company’s total product package and that of competitors
who produce both direct substitutes and indirect substitutes.
Table 1 is provided as a template to organize and integrate
the information that is acquired from those boxes.
Column A in Table 1 shows the hypothetical importance
weights that a customer or segment might assign to the
attributes of the vendor’s firm and two competitors. The key
to developing realistic estimates is that the attributes and
their weights have to be produced in close consultation with
customers as well as company personnel. Bias can easily
develop if only company personnel are used because they
may well over- or underestimate the importance that
customers assign to particular attributes.
Columns B, D, and F (respectively) rank the performance
of the vendor’s firm as well as the two competitors on the
attributes initially identified under the marketing mix
variables of product, price, distribution, and promotion.
In Columns C, E, and G, a weighted score is produced
so that the vendor’s firm and each of the competitors can be
compared on the individual attributes as well as by product,
price, distribution, and promotion. Finally, the aggregate
comparative scores at the bottom of Table 1 provide the
total relative ranking of the vendor’s firm vs. each of the
two competitors.
Table 1 is designed to organize the qualitative compar-
ison of the indirect and direct substitutes (boxes 9 and 11)
with the vendor’s total product offering (box 13). The
objective is to produce a relative comparison of the various
players in the market based on their performance on the
weighted attributes supplied by the customers.
Three important corollaries flow from the attribute
comparisons of Table 1 and boxes 9, 11, and 13:
(1) Knowing that your firm ranks well in offering a
particular attribute is useful but potentially misleading
if, on a comparative basis, competitors are able to
offer even better performance on the same attribute;
(2) Excellent performance on a given attribute may be
irrelevant if customers attach little importance to that
attribute;
442 L. Meredith / Industrial Marketing Management 35 (2006) 431 – 445
(3) A poor evaluation on a given attribute may be of little
concern if customers do not value that particular
attribute anyway.
So what of importance flows from the output of Table 1?
First, a manager must be aware of their own firm’s
comparative superior ranking on an important (heavily
weighted) attribute because that provides a strong point
from which to launch an attack against competitors. It can
also act as a focal point around which a defensive strategy
might be constructed if, for example, the product was under
threat from a cannibalizing product.
Second, a comparatively poor performance ranking on an
important attribute should sound the alarm because that is a
competitive weakness that, if not corrected, will ultimately
be exploited by competitors eager to steal market share.
Table 1 and the attributes shown under the marketing mix
format are for demonstration purposes only. Depending
upon the B2B market under consideration, the comparative
attributes may vary widely. A technology-based attribute
like innovation potential, for example, might be expected to
carry more weight in the fast-moving electronics or bio-
technology sectors, while price and just-in-time delivery
would be more highly ranked attributes in the commodities
sector. The important thing is to ensure they are the
attributes that the customers – not the vendor – see as
providing value.
2.11. Company portfolio congruency (box 14)
Box 14 focuses attention on the congruency between the
product/service under consideration and the other products/
services that comprise the company’s total market portfolio.
The overriding concern here is to make sure there are no
unanticipated impacts, either positive or negative, that will
affect the performance of other products or services in the
firm’s product portfolio.
Cross-selling potential addresses the cumulative sales
effect that can result from attracting customers with one
product and, based on their positive experience with it,
subsequently introducing them to other products/services in
the firm’s portfolio. The technique can be especially
effective when customers wish to gain a better sense of a
vendor’s products and reliability. Initial purchases are often
comprised of low-cost, low-risk products. Then, based on a
favorable impression, progressively more expensive and
higher risk products/services are bought as the customer
develops a sense of trust and becomes more reliant on the
vendor.
A new product/service should consequently be consid-
ered not only in terms of the demand potential and margin
it can generate, but also its effect on other elements in the
product portfolio. If low margin products can subsequently
contribute to the sale of higher margin items, that
contribution should be factored into the demand evalua-
tion. The cross-selling impacts will most likely be positive
(+) or have no effect, hence, the N/A designation. In an
unlikely but nevertheless possible scenario, the cross-
selling impact could be negative if the new product
evoked an adverse customer experience and, as a result,
caused them to avoid other products in the firm’s
portfolio.
Based on the earlier discussion of cannibalization (box
6), a new product should be evaluated viz. its potential to
derive part or all of its sales growth from a victim brand
in the firm’s product portfolio or from one of the firm’s
distribution channels. The existence of cannibalization per
se is not the problem. Rather, it is an issue if the
attacking brand offers a lower margin than the victim
brand whose sales it is eroding, and if management is
introducing the attacking brand not as a defense against
competitors, but because they failed to realize the damage
they might do to one of the existing products in their
portfolio.
The outcome of this evaluation could be negative ( ) if
the cannibalizing brand does indeed hurt the sales of a
higher margin victim brand or N/A if there is no effect. In
the less likely situation where the cannibalizing brand offers
a better margin than the victim brand it is destroying, there
could be a net positive impact for portfolio congruency.
Micro-complementarity addresses the potential of one
product/service to affect the sales of related products or
services that are used in conjunction with it. It differs from
the cross-selling potential of a product by reason of the
dependency that exists between complementary products/
services. Complementarity implies that the price structure
and sales of one product have the power to affect the sales
of a related product in the firm’s portfolio. Sometimes, the
complementarity exerts mutual causality with product A
affecting product B sales and vice versa. In other cases, the
dependency runs from one product to the related product
on which it totally or partially relies for sales generation.
There are two implications for managers:
(1) Micro-complementarity means that the firm is facing a
joint pricing problem because the price of each
product will affect its own demand but also have the
potential to affect the sales of complement products or
services as well. In this case, a cross-price elasticity of
demand analysis must also enter management delib-
erations. This implies that the firm’s profit max-
imization analysis has to incorporate both products.
Focusing on a single product in isolation could well
place a dependent complementary product in jeopardy
even though it may have a superior margin.
(2) The existence of micro-complementarity should raise
the issue of product or service bundling since the
customer consumes them in conjunction with one
another. Depending on customer price elasticities, it
may be more advantageous to bundle complemen-
tary products or to unbundle them and sell each
independently.
 L. Meredith / Industrial Marketing Management 35 (2006) 431 – 445
The effect of micro-complementarity can be positive (+)
if the complementary product/service exerts a profitable
effect on the product under consideration or vice versa. The
effect can be negative ( ) if the complements serve to
restrict each other’s profitability or N/A will apply if no
micro-complementarity exists.
Examples of firms that are able to capitalize on micro-
complementarity abound. Computer printer manufacturers
quickly discovered it was more profitable to sell their
printers at nominal mark-ups and make subsequent profits
on the multiple sales of ink tanks. They also found that
bundling post-purchase computer service contracts could
help lower their initial computer sales prices and allow a
move to life-cycle costing. Manufacturers like Xerox
actively sell copier paper as a complement to their copiers.
2.12. Economic value to customer analysis (box 15)
Economic value to customer (EVC) analysis (Forbis &
Mehta, 1981) and, more recently, Hinterhuber (2004) focus
on value-based approaches in understanding customer
buying behavior. In demand estimation, EVC evaluation
of the firm’s total product package can provide a framework
for aggregating the prior analyses—especially some of the
more qualitative information gained from boxes 9, 11, and
13. Recall that these boxes focused on comparative analyses
of the direct/indirect substitutes and the company’s product
using elements of the marketing mix. EVC is used at this
stage to examine the relative advantages and disadvantages
of the company’s product vs. those of the competitor’s. A
key aspect of the analysis is also that the comparative
advantages and disadvantages will vary by segments as a
well as individual customers.
EVC prescribes the following analytical steps:
(1) Evaluate all of your customer’s costs related to buying
your product. These include your initial purchase
price, the customer’s start-up costs, and their post-
purchase costs in using your product.
(2) Compare the purchase price of your product to the
price of your competitor’s reference product, i.e., the
reference product is the direct or indirect substitute
that constitutes the firm’s main source of competition.
(3) Focus on the incremental value to the customer of
your product vs. your competitor’s reference product.
(4) Set your price based on the incremental value to the
customer of your product vs. the competitor’s
reference product. An important implication of this
is that customers may in fact pay a higher price for the
firm’s product than they will for the competition’s
product based on the perceived incremental value.
EVC is useful in demand estimation first, because it
focuses on the relative comparison among competing
product attributes. The issue is not so much how good or
bad your total product package may be but rather how do
443
customers perceive it compared to competing brands.
Second, EVC places the focus on conducting attribute by
attribute comparisons among brands—even when some of
those comparisons will be difficult because of their
qualitative nature. Third, it allows for perceived differences
in EVC among customers and between segments for the
same product. Fourth, it helps to value a product based on
the individual attributes that comprise the total product
package and sets the stage for pricing on a total product life-
cycle cost basis or on a strategy of customer cost
minimization by unbundling attributes. Last, and most
importantly, EVC moves the value based strategy away
from the consideration of what did it cost us to make toward
one of what does the customer think it is worth.
When conducting the EVC analysis it is also important to
consider the customer’s ability to source the product or
service internally. This can provide a useful estimate of the
value the buyer might place on acquiring the product from
outside the firm vs. supplying it internally. Equally
important is to understand that the customer’s cost and risk
exposure from making vs. buying can change over time and
with experience. Example: At the height of the information
technology (IT) revolution, many firms opted to build their
IT systems internally—until the problems and complexities
of that choice became apparent. Subsequently, IT providers
became popular when firm’s abandoned the make decision
in favor of the buy decision.
2.13. Company’s market potential (box 16)
The company’s estimated sales and market share are a
function of the previous analyses. The algorithm essentially
scales down the firm’s estimated total market demand by the
competitive forces that also vie for a share of that demand.
A very possible outcome of this process is that the estimated
sales/market shares are found to be insufficient to warrant
remaining in the market. Another distinct possibility is that
while current sales estimates appear to be viable for the firm,
the forecasted future sales performance is inadequate in
terms of generating an acceptable return on investment. In
fact, in a substantial number of real world business to
business cases, the conclusion generated by the demand
estimation algorithm has been either that the firm should not
enter the market under consideration, or in those situations
where the company was already in the market, that it should
exit at the earliest opportunity. The value of the demand
estimation here is that it motivates the company to begin an
orderly retreat from the market as opposed to being caught
in a market rout when sales collapse.
While the firm’s market potential evaluation in box 16
addresses the key issue of ‘‘Is there viable demand in the
market of concern?’’, the analysis must ultimately integrate
directly with the big picture of aggregate corporate strategic
positioning objectives. In the final analysis, it is possible, for
example, to determine that a viable market exists but that
developing it would be inconsistent with aggregate market-
444 L. Meredith / Industrial Marketing Management 35 (2006) 431 – 445
ing or corporate-wide strategic objectives. If the demand
estimation has been done properly up to this point, the
analyst can answer that question because the advantages of
the firm’s total product package as well as the necessary
EVC deliverables to the customer have already been
defined.
The culmination of the analysis in box 16 sets the stage
for (a) rejecting the outcome of the completed demand
estimation; or (b) accepting the viability of the project
evaluation and moving into the more traditional aspects of
market planning and positioning. Much has been written on
those issues and does not bear repeating here. Experience
clearly shows, however, that where due diligence has been
done in the demand estimation phase, development of the
marketing plan becomes markedly easier because the
relevant parameters have been identified. Poor front-end
work in the demand estimation invariably resurfaces as a
frustratingly difficult and ill-defined marketing plan. To
quote an old line, garbage in –garbage out.
3. Managerial implications and caveats
Predecessors of the template prescribed here have been
used in many different sectors and by firms ranging from
small start-ups to corporations with sales measured well into
the billions of dollars. The greatest commonality that has
emerged in those applications is the changing role of
importance played by the analytical boxes in the model. Not
only will their importance vary by industry, their relevance
will change from firm to firm within the same sector. What
is the management implication? Do not assume, for
example, that because indirect substitutes are not important
for your industry that they are also irrelevant for your firm
as well. Each of the analytical boxes should be considered in
turn and, if they are found to have no implications for the
company, fine. The important part is that the potential threat
was specifically considered before it was discounted, as
opposed to just being assumed away.
A number of important caveats in using the template also
have managerial implications:
(1) Current company products and services usually have
their associated corporate champions. They can often
pressure sales analysts and planners to revise their
estimates of current market size upwards in order to
justify a continuation of the firm’s product line.
(2) In the case of forecasted sales, pressure to paint a
rosier future market picture than appropriate may
also be exerted.
(3) A similar caution exists in the case of new markets
where the firm is considering entry. The most
common problem with the procedure is ensuring that
the projected sales revenue that the company must
acquire for profitability is actually realistic. Econo-
mies of scale for purposes of reducing operating
expenses often occur at larger output volumes.
Consequently, there may exist an in-built tendency–
fostered by corporate product champions – to over-
estimate likely corporate market share or volume in
the search for the optimal operating range and
acceptable ROI.
The validity of the entire pro forma profit and loss
exercise rests on producing a realistic and achievable sales
volume estimate at the outset. Needless to say, given
overestimates of either new or current markets, when reality
fails to materialize, planners are clearly in the line of fire
when the corporate postmortem is conducted to determine
why the demand estimation was misleadingly optimistic.
4. Conclusions
Specific as well as more general conclusions arise from
this discussion. At the macro-level, academic institutions are
at fault for their failure to deal with the issue of demand
estimation. A look through most B2B as well as introduc-
tory marketing texts should confirm this allegation pretty
quickly. When professors do handle the issue, it is often on a
piecemeal basis so that students do not see how all the
component parts fit together or even that many of the
concepts they learn can be applied to evaluating markets.
Again at the macro-level, corporations may need to focus
more on the front – end exercise of producing quality
demand estimation work because that is the first figure on
the pro forma profit and loss statement. It bears repeating
that the first figure on the page is an estimate of sales and it
is antecedent to all of the calculations that follow. If that
estimate is faulty, all of the numerous pro forma capital
costing scenarios will be flawed as well.
Last, for the demand estimation procedure to function
effectively, a corporate culture needs to exist that can
effectively tolerate negative outcomes. This can be difficult
after significant resources have been spent on a new
proposal and even harder if the estimation process leads to
the conclusion that the firm should abandon one of its long-
established existing product lines. The inability of corpo-
rations to handle product elimination decisions has a long
and well-known history (Kotler, 1965; Hise, Parasuraman,
& Viswanathan, 1984).
At the firm-specific or micro-level, it is still a safe
generalization that companies know their direct competitors
best. Many of the shocks that produce significant market
upheaval, however, now come from outside the firm’s
sector. There is a need to focus more environmental
scanning on potential threats that originate from industries
outside the company’s home sector and from foreign
producers.
Corporations should also try to make more use of their
front line personnel in gathering the data and opinions
needed as inputs to the demand estimation. Sales represen-
 L. Meredith / Industrial Marketing Management 35 (2006) 431 – 445
tatives and branch personnel are the eyes and ears of the
firm in the market environment. These staff are often the
first to encounter evidence of new market threats or
opportunities and also the most likely to have an accurate
assessment of customers’ views regarding the company, its
products, and services. An additional advantage of using
front line staff during the data input stage is the buy-in to the
project that is achieved and the resulting down-stream
commitment to making it work.
Finally, a by-product of the demand estimation process is
the stress that is created when managers are asked to
compare their product/service to that of competitors and
explicitly detail their department’s disadvantages. Senior
management has to create a climate where frank compar-
isons are tolerated; otherwise, vital competitive information
will be withheld. The result will be a demand estimation
analysis that is dangerously misleading.
Further research in the area of demand estimation is
clearly needed. In the broad context, more work should be
done on the synthesis of the many concepts that should be
combined from marketing, economics, and logistics, to
name just a few. On a micro-level, the concepts of derived
demand, indirect substitutes, and scanning foreign potential
competitors could well be developed. These concepts all
offer techniques that contribute to the development of an
early warning system. The premise being that market threats
that are detected early enough allow time for defensive
strategies if necessary. Early warning systems can also help
to discover market opportunities and allow time to capitalize
on them as well.
Much work remains to be done in refining this analysis.
As with most things, however, doing the basics thoroughly
is a first important step. If this template helps to avoid the
disaster of even one error of omission then the effort has
been worthwhile.
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Lindsay Meredith is a professor of Business Marketing in the Faculty of
Business Administration at Simon Fraser University. He has over 20 years
of business marketing consulting with industrial multinationals and all
levels of government. Scholarly work includes numerous business market-
ing and management journals and a co-authored business marketing text.
He has completed over 900 media interviews worldwide on business
marketing and strategy.