market potential of different cities, states, and nations. Two major methods of as-
sessing area market potential are available: the market-buildup method, which is used
primarily by business marketers, and the multiple-factor index method, which is used
primarily by consumer marketers.
Market-Buildup Method. Themarket-buildup methodcalls for identifying all
the potential buyers in each market and estimating their potential purchases. This
method produces accurate results if we have a list of all potential buyers anda good
estimate of what each will buy. Unfortunately, this information is not always easy to
gather.
Consider a machine-tool company that wants to estimate the area market poten-
tial for its wood lathe in the Boston area. Its first step is to identify all potential buy-
ers of wood lathe in the area. The buyers consist primarily of manufacturing
establishments that have to shape or ream wood as part of their operation, so the
company could compile a list from a directory of all manufacturing establishments
in the Boston area. Then it could estimate the number of lathes each industry might
purchase based on the number of lathes per thousand employees or per $1 million
of sales in that industry.
An efficient method of estimating area market potentials makes use of the Stan-
dard Industrial Classification (SIC) Systemdeveloped by the U.S. Bureau of the Census.
The SIC classifies all manufacturing into 20 major industry groups, each with a two-
digit code. Thus number 25 is furniture and fixtures, and number 35 is machinery ex-
cept electrical. Each major industry group is further subdivided into about 150 industry
groups designated by a three-digit code (number 251 is household furniture, and num-
ber 252 is office furniture). Each industry is further subdivided into approximately
450 product categories designated by a four-digit code (number 2521 is wood office
furniture, and number 2522 is metal office furniture). For each four-digit SIC num-
ber, the Census of Manufacturers provides the number of establishments subclassified
by location, number of employees, annual sales, and net worth. The SIC System is
currently being changed over to the new North American Industry Classification Sys-
tem (NAICS), which was developed by the United States, Canada, and Mexico to pro-
vide statistics that are comparable across the three countries. It includes 350 new
industries, and it uses 20 instead of the SIC’s 10 broad sectors of the economy, changes
reflecting how the economy has changed. Industries are identified by a six-digit rather
than a four-digit code, with the last digit changing depending on the country. The
first information based on the new system will be published in early 1999 in the new
Economic Census data.^35
To use the SIC, the lathe manufacturer must first determine the four-digit SIC
codes that represent products whose manufacturers are likely to require lathe ma-
chines. For example, lathes will be used by manufacturers in SIC number 2511 (wood
household furniture), number 2521 (wood office furniture), and so on. To get a full
picture of all four-digit SIC industries that might use lathes, the company can use
three methods: (1) It can determine past customers’ SIC codes; (2) it can go through
the SIC manual and check off all the four-digit industries that, in its judgment, would
have an interest in lathes; (3) it can mail questionnaires to a wide range of compa-
nies inquiring about their interest in wood lathes.
The company’s next task is to determine an appropriate base for estimating the
number of lathes that will be used in each industry. Suppose customer industry sales
are the most appropriate base. For example, in SIC number 2511, ten lathes may be
used for every $1 million worth of sales. Once the company estimates the rate of lathe
ownership relative to the customer industry’s sales, it can compute the market po-
tential.
Table 1.7 shows a hypothetical computation for the Boston area involving two SIC
codes. In number 2511 (wood household furniture), there are six establishments with
annual sales of $1 million and two establishments with annual sales of $5 million. It
is estimated that 10 lathes can be sold in this SIC code for every $1 million in cus-
tomer sales. The six establishments with annual sales of $1 million account for $6
million in sales, which is a potential of 60 lathes (610). Altogether, it appears that
the Boston area has a market potential for 200 lathes.
The company can use the same method to estimate the market potential for other
Gathering Information
and Measuring
Market Demand^123