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Innovator Article

New Tool to Measure Consumer Demand

India’s rapidly expanding middle class and steady increase in household disposable income has attracted the interest of multinational retailers like IKEA, Apple, WalMart and Tesco. But estimating consumer demand has been challenging, says Professor Prasad Naik, and the standard methods being used have proved unreliable.

In a paper presented at the Marketing Science Emerging Markets Conference, held at the Wharton School in September, Naik outlined how he and co-authors Shrihari Sridhar, of the Smeal College of Business, and Ajay Kelkar, co-founder and COO of Hansa Cequity of Mumbai, developed a method to accurately estimate consumer demand in India. They then tested and validated their technique using real sales and advertising data for a major Indian brand of hair care products.

India is dominated by small, mom-and-pop stores known as kirana shops that sell a limited assort-
ment of goods in small quantities and also offer consumers credit and home delivery services. These stores, which do not use bar code scanning technology to track inventory or sales, make up 93 percent of the Indian retail universe.

Brand managers have traditionally estimated consumer demand using either data gathered by market research companies that survey a sample of shops nationwide, or internal sales-force reports that measure the quantity of a product bought by retailers from wholesalers, or a combination of both methods. These metrics—known as retail offtakes and secondary sales—are hampered by bias and noise leading to unreli-able data, Naik says.

More importantly, managers tend to ignore this unreliability, making poor assessments of the effectiveness of advertising and promotions. That leads to inaccurate decisions on how much to spend on marketing and how to allocate the budget across various activities.

“Overconfidence in the quality of metrics leads to overspending on marketing activities,” Naik says. “If managers act as if their data are not noisy and do not filter measurement noise, they tend to spend more marketing dollars than are justified.”

Naik says his new method allows managers to filter the noise, accurately estimate true consumer demand and reduce potentially wasteful spending.

He and his co-authors plan to continue their research by generalizing their findings across other regions and investigating how the technique can help managers in their budgeting and allocating decisions.