Document 6496720

How to Measure Sales
Against Market Potential
in the Construction Industry
KENNETH R. TELFER
Sales managers of building products selling +o new
construction often ask:
• How can sales be related to market potential?
• How can market penetration be determined?
• How can more realistic
sales goals be established?
Here is a simplified statistical answer to these questions, based on constructioncontracts activity.
for those with sales and research responsiF ORTUNATELY
bilities in the field of new construction, the problem of relating sales to market potential can be tackled more readily and
probably more accurately in the dynamic construction industry
than in many other industries struggling with the same problem.
The explanation lies in the reliability of the economic indicator
with which sales or shipments can be correlated—construction
contracts.
Construction contracts are commitments for future construction. Many a contemplated job never gets beyond the planning
stage. But once a contract is awarded, a commitment has been
made: the job will go ahead. Buying action begins because this
commitment establishes needs; and only when needs exist can
sales be made. A vast series of purchases of products and services to supply those needs takes place as the j'ob progresses from
plans to completion.
Thus, detailed construction contracts as they are accumulated
from month to month for any given area summarize the total
construction activity in any given project type for the particular
area and month in question. In short, these data, expressed in
numbers of projects, square feet of new floor space, or dollar
valuation, reliably represent the entire potential market in new
construction to which a manufacturer, distributor, sales agent,
or dealer can sell his products. Individual firms selling building products, materials, and equipment compete for this known
potential.
It is logical to assume that there is a direct relationship between product sales or shipments; and the amount of building
that takes place of the type that represents a market for that
product. Depending on whether the product goes into a new
project quite early, somewhat in the middle, or during the later
stages of construction, there will be a corresponding time lag
between the construction contract and the point when shipment
is made to the market. Inventory buildup or depletion sometimes
has a bearing on this time factor. Usually an average time lag
can be determined.
When it is found that shipments correlate with the appropriate
construction contracts, and a consistent time lag exists between
contracts and shipments, a firm can measure current sales performance against market potential for individual sales territories,
or in aggregate, and also engage in more accurate quota setting
and forecasting.
35
Journal of Marketin}^, January, 1962
MeaHuring Current Sales Performance
Correlation analysis LS simply a method of measuring the relationship between two sets of factors.
To measure sales performance against market potential, it is first necessary to discover a relationship between the fluctuations in a company's sales
or shipments and the appropriate construction coniracts; next to determine the dependability of the
relationship; Mnd then to obsei-ve the number of
months by which sales, or shipments lag behind
construction contracts..
This much established, there remains merely the
process of dividing construction contracts into the
sales or shipment figures, appropriately lagged, to
obtain the dollars of "take" from the market.
These are the payoff ratio figures. Expressed as
dollars of product sold per thousand dollars of new
construction of the kind to which the company sells,
these sales ratios are completely valid for comparing territories one with another or with the
over-all company ratio of market penetration.
The month-to-month trend of this latter ratio
dearly indi.cates the progress the company makes
in keeping pace with market potential. Those
sales territories showing the lowest dollar of "take"
from the market are disclosed as areas of weak
pcn-formance where management will want to take
remedial action.
Procedure
Three preliminary considerations regarding construction contracts require attention before taking
the few simple steps incident to relating the two
series of data:
1. Careful .selection of the project types representing the market for the product.
2. Determination of the unit of measurementnumbers or projects, square feet of floor area,
or dollar valuation.
•i. Establishment of the geographic area or
areas to hi, studied, This may be a single
county, grraips of counties, a state, groups
of states, or all states.
Example to Illustrate Procedure
The A.R.C. Company, with headquarters in
Newark, sell, s.nd, gravel, cement, concrete, and
cinder block throughout northern New Jersey. It
maintains a branch office in Jamaica, with salesmen selling over most of Long Tsland; and another
branch in Philadelphia, with salesmen covering
all the metropolitan area counties. !t keeps its records by shipment;-:.
A.ii.C. attempts to sell its materials to all nonresidential and residential projects. These provide
or underlie construction contracts for the classification known as Total Building, and are broken out
mto Total Nonresidential and Total Residential
Building-.
As to the significant unit of measurement:
A.B.C. relates its materials shipments to the number of square feet of Total Building in each of
the three areas to be studied, since the floor area
of most buildings has a direct bearing on the
quantities of the company's materials that are
needed. To use dollar volume of construction contracts as the statistical unit of measurement in
this instance could be somewhat misleading, since
high-cost buildings would not necessarily require
more building materials of the kind sold by A.B.C,
than low-cost structures.
Having selected Total Building, with breakouts
for Total Nonresidential and Total Residential as
the proper project classification to represent the
total potential market; square feet of floor area
as the best unit of measurement; and northern
New Jersey, Long Island, and Philadelphia and
vicinity as the three areas to be studied, the setting: up of a continuing procedure now involves
five basic steps. These steps are fundamental to
all correlation studies.
It is not unusual to employ similar steps in relating two series of data. But to many in the
management of iarge and small businesses serving
new construction, the concept of applying this
method to construction contracts as representative
of market potential is unique. Its reliability is
authenticated by the accuracy of construction eontract data m reflecting the total market of available business.
First, it is necessary to combine all throe branch
areas, and relate total shipments to Total Buildmg. The same procedure is repeated with respe^H
to detailed studies of each branch: first, for branch
.shipments to Total Building in the branch area
next for branch .shipments to the Nonresidential
market, and again to the Residential market in
the branch area. Detailed to this extent, weak and
strong area, of .selling become readily ;,pparent.
Step 1
Post monthly figures in thousands of square feet
of Total EuiJdin,^ for a period of four to five years
(Table 1). This represents an adequate period over
which to determine correlation, and observe the lajr
time between shipments and construction contracts'
• ABOUT THE AUTH"O"R7 "K7ni^;fhX
Telfer has been a Marketing Con-.ul+ani
in New York for the last ten years with
the F. W . Dodge Corporation.
His previous experience was as an
Assistant to the President of the Crowell-Co)l;er
Publishing Company; and
subsequently, as owner and publisher of
the East Hartford Gazette, New England's
oldest, continuously
published,
weekly newspaper.
. . " ^ " / ' I l ' / T r ^ , ^'' ^•^•^- '" f^^^t-f'"g from the HarAB d
t i 1 ^"''"''^ A d - ' " ' ^ ' - ^ - . . following an
A.B. degree cum laude from Oberlin
College.
37
How to Measure Sales Against Market Potential in the Construction Industry
TABLE 1
A . B . C . COMPANY
PRODUCT
(UHIT
Yr.-
Honth
January
f«bru«ry
Harch
Atrl)
Hay
Juna
July
5«pt«al>ar
Octobar
Novainbar
Dmevtbtr
YEAR
Ho.
April
Mar
July
»UOU.^t
Saptembgr
Octobtr
Noveirbar
Deombcr
YEAR
$
):
Yr.M.T.
447
754
827
776
874
895
868
875
880
757
629
8995
16495
15939
22902
22051
22616
16360
22797
15310
17696
21253
1599!
23248
^32658
Yr.. 1955
H.T.
Ha.
487
687
739
715
822
767
809
849
779
760
480
502
739
785
952
1082
910
917
940
870
878
7(0
9795
Mo.
18870
18332
24899
24991
32662
26249
22908
16869
21553
24208
24208
25380
281129
Yr.-
I Northern New Jersey
Area8:\ Long Island
^^Philadelphia and Vicinity
Yr.M.T,
235033
237426
239423
242363
252409
262298
262409
263968
267828
270780
^278997
281129
Ho.
Yr.-
1957
Yr.M.T.
M.T.
1958
Yr.M.T.
Ho.
Ho.
M.T.
497
9111
497
9499
559
9874
341
519
9453
8933
9937
565
656
9854
662
9459
529
8800
820
9495
786
8766
784
9853
1001
9902
961
9455
898
8703
1042
9862
804
9217
969
8868
877
9829
921
9261
885
8832
94f
9823
852
9J72
869
8849
767
9650
870
9275
877
8856
962
9742
963
9276
820
8713
864
9728
722
9134
680
8671
543
9563
520
91)3
9561
9111
Northern K. J. and Long Island, N. Y. countiea; Philadelphia
vicinity counties of BerkSj Bucks, Chester, Dauphin,
Delaware, Lancaster, Lehigh, Montgomery, Northampton,
Philadelphia, and York.
9062
9117
9102
9060
9236
9444
9459
9538
9603
9593
9714
9795
Yr.-
1955
1956
Ho.
TOTAL BU;LlflHfi
tr.- 1954
M.T.,
SHEET
t1.T.
Ho.
843!
8391
8458
8546
8607
8659
8787
8846
8872
8973
8970
8995
M-SQ.FJ.) Ind:
Tr.- 1953
TOTAL WORK
BUILDING MATERIALS - SHIPMEHTS
1(13
eoij
8452
MOVING
1954
4311-
Mo.
Januarj'
Fobrusry
March
M-
1953
CONTRACTS (UHlT
Honth
12-MOUTH
M.T.
1956
Mo.
22097 284356 23948
21467 287491 25209
32086 294678 32182
29192 298879 34567
23963 290!80 30972
26320 290251 24! 82
34537 301880 258! 4
24488 ^ 0 9 4 9 9 24867
21825 30977! 20085
25833 311396 21440
24018 311206 20151
30243 316069 18344
316069
J0I76I
Step 2
Post monthly dollar shipment figures, in thousands, for the ^ame period of time. See upper half
of Table 1, The two series of data are thus contained on a single sheet; and as figures for future
months become available, they may be posted to
the same sheet.
Step 3
Convert these figures for both sets of data into
12-monlh.s moving- totals or 12-months ending- figures, as they are more properly called. This eliminates the se;isonal element which exists in all
new construclhm. ennhllng the true trend to hecome diseernible. Table 1 shows the process
whcroby 12-months ending figures are obtained by
adding the new month to the total ^or the preceding- twelve, and subtracting- the same month a year
ago,
Step 4
Plot the two series of 12-moriths ending figures
on separate sheets of semi-logarithmic tracing
paper. Semi-log paper makes it possible to match
the rate of change, up or down, of the two completely different series of data, regardless of their
Yr.-
1957
M.T.
Mo,
317920
321662
321758
327133
334142
332004
323281
323660
321920
317527
313660
301761
!6489
14340
25664
20856
24582
24351
22638
23125
20036
21690
21769
13776
249316
M.T.
294302
283433
276915
263204
256814
256983
253807
252065
252016
252266
253884
249316
Yr,- 1958
Mo,
14098
14034
18409
19509
24423
20628
24770
27261
27238
27459
22678
Yr.M.T,
»o.
H.T.
246925
246619
239364
238017
237858
234135
236267
240403
247605
253374
254283
magnitudes, on an exactly comparable basis. When
the construction contract sheet is superimposed
over the shipments sheet, and the two tracings
compared, the construction-contracts sheet may
be moved to the right until the curves of both
series most closely coincide. It only remains to
i)bperve the numbiar of months by which the
shipments curve lags behind the construction contracts curveFi'jure I shows the two series on a consolidated
graph, with construction contracts foreshadowing
a market for A,E.G. Company materials three
months in advance of shipments. When construction contracts are recorded for January, for example, shipments are made to those jobs in
April. That is why the first point on the chart
for construction contracts is the 12-months ending figure for January, 1954; and the first point,
on the same vertical line for shipments is the
12-months ending figure for April, 3954,
As the 12-months ending figures are plotted
for al! the months in 195'1, 1955, 1956, 1957 and
1958, this Jead-lagr relationship continues until
the iast 12-months ending figure of construction
contracts extends three months beyond the last
12-months ending figure for shipments.
38
Journal of Marketing, January, 1962
70J.
.1
•J
1 1 1
1 1 1
—
j
J
]—
Kewarfc and No. K.J. cojTitiBs:
Phlla. anil lurraunding counties;
Long Island, K. T.
—
Unit!
601.
»
IPH
50
3
-
Dallirg
2
C KST il T 0
th
0
ing T t a l
f
ot>l It side t
40 _
al 8 1 di 9
\
enti
d
1
—
t
0
1 C
20,.
1
.
—
•
, ^
•
r*-
'
•
,—-—
~
———-^
.' ——^-.J
- ^ - ^
•
-
_
^
—
9
1 ^
—^—
•
ip
7
L—
u-—•
1
—
._
_
•
—
^
-
HI
—U
j
--,
D|
I ( M A » In iy A S 0 K 0| J F M A M Jn 1, As
-
-
0 N
0 jj
s
/
' /
-
1
z
S
0
NDJJ
F M A H I o l y f l S O H C
Djj F M A M J n J ^ A S O N D
-
I
-
1
-
-
1
_
-
1
-
37.32
36.88
36.07
1
j
6,671
g
8,858
.i
B.832
36. 12
s
3,933
36.21
33.28
35.19
!
9.172
9.275
9,276
9,217
9,728
30.06
i
o
29.91
29.07
30.05
o
30.78
I
-
-
-
q
1
3
11 s s 1 1 1
]
k 11
11
Oct
il
_
- -
1
31.93
31.78
s
_
—
1
9.795
9.a74
9.937
9,861
9.863
9,902
9,962
9,829
9,823
9.650
32.87
32.38
?
9,603
9,593
1
•
I
_[
-
-
-
1
-
9.117
9. 102
9,060
9.236
9,111
33.98
33.59
B,970
33.82
36. 17
8,787
s
s
966 e
8,6iT^
8,607
'
?
^
-
'-
-
1
SHIPMENTS
A
;
-
'
•»
30
al ui
M A hi Jn J
-
s
-
i;
F
A K In Jy A S 0 N
• ^
-
o
T
-A
ae I
-^
•^—
f
-
• M B
3*
K
I
F M
O§
^=
---^
—
8,766
8.703
'-
-
-[
A U In J, A S 0 N D J F H A M In J) A S o n 0 J F U A U In Jj A 3 0 N D11 F U A M In !> A s 0 N
1<<H
ISiS
t
I'JSt
i
1951
1
_
1
_
1
1 f M A M Jo Jl * S 0 H D^l J F H A M Jn J» A S 0 H
COD
riOd
CO
•TS
M FMEITS
p
\ — • — •
•—-s
8_
ii
_—-"^
-'^^__—
1
.
e
j
1
I2
11 I I
i 8
ss
il
t
283,133
1
317.627
313,660
1
323,231
323,660
c
3I6.0B9
317.920
3 21,662
321,758
327,133
!
309,199
290,180
267,825
270,780
I
s !
262,103
236,033
CONSTRUaiON
CONTRACTS
-
d
s
FIGURE
U1
1=
r
sa
o
T
1
I
y
H
^'
\
\
S
1
J;
—
i
a
s 1
1 •i
1. A.B.C. Company—shipments of buildinf? materials—selected territories vs, total building;.
Step 5
The final step indicates the extent to which
sales are penetrating the market. It is simply the
ratio between construction contracts and shipments, obtained by dividing one into the other,
lagged three months in every instance.
In this way, current sales performance is measured against market potential. The ratios reflect
the dollars of product sold per thousand square
feet of floor area.
Inspection of the three columns of figures at
the bottom of the chart in Figure 1 shows the
computations. The 12-months ending figure for
January contracts is divided into the 12-months
ending figure for April shipments, to disclose
$36.36 of materials sold per thousand square feet
of floor area. As these ratios are continued, and
plotted on the arithmetic scale immediately above,
it is evident that the company is losing ground
in its shipments to the total available market.
This loss of market penetration moves downward from 1954 almost uninterruptedly until the
low point of $29.07 is reached in mid-'56. From
here on, the company begins to acquire an in-
How to Measure Sales Against Market Potential in the Construction Industry
HEWARK
Total Bldg.
Non Res.
PHlLADaPHIA
Total Bldg.
JAMAICA
Total Bldg.
Non Res.
Res.
Hon Res.
Res.
t: :!. Newark. Philadelphiji iin<i Jjimaica bianehes.
t-reasing share o±' the available business. A new
hig-h of $37.82 in market penetration is achieved
in August of 1958.
The subsequent falloff during the next two
months may only be temporary; and for good
and sufficient reasons well known to management
—disruption of selling actively hy vacation schedules, a strike, inclement weather and the like.
Tf the eatise is unknown, however, this two
moTiths' decUru: t^mivda a warning note to A.B.C.'s
top management to look into all aspects of sales
activity for signs of a letdown in selling efficiency, possible loss of patronage owing to late
deliveries, or lower price quotations by competition. Analyses <vf individual sales territories
would appear to be indicated.
Sales Perforiiunicc By I crritories
During- the last year covered by this study,
note that tbe A.B.C. Company averaged approximately $3G.5i) of product sold per thousand square
feet of flour area to Total Building.
The Newark office averas^^'ed approximately SCO
for the same period to Total Building. This outstanding performance record may be explained
in part ;)t least by what is known ;is S.P.F- (Sales
Propinquity F a d o r i . K.P.F. Ls presumed to enable a home ofiice location to sell proportionately
greater volume \o its local area than branch
office areas. Advances are i'e;jris t ered for all
Newark ratio curves: shipments vs. Total Biiiiding, Nonrc'sidcntial. and Residential 'Figure 2 ' .
Res.
Penetration ratio
While not nearly a.s high as Newark, Philadelphia nevertheless shows an average of $34 in
shipments vs. Total Building, about equal to the
company's 5-year average, and reflects a good
selling job of holding position even to the point
of improving it, in the face of a declining construction market. Figure 2 reveals that if any
additional effort were deemed necessary to boost
sales in this branch, it would take the direction
of inquiry into sales to the Nonresidential Market.
Jamaica turns out to be the only branch with
a poor showing. During the most recent three
months, two things happened: The 12-months
ending construction contracts definitely moved
upward, while 12-months shipments declined. The
result, of course, is a sharp drop in the penetration ratio curve of shipments vs. Total Building (Figure 2). Undoubtedly this is responsible
for the faUoif in tde over-all company operation
(Juring the latest month or two.
Further insight into this loss of market penetration is gained from the fact that while the
penetration ratio curves in both Nonresidential
and Residential have slipped recently, the decline
is more pronounced and of longer (iuration in
trouble spot that management should first take
the Residential segment. It is, therefore, in this
action. Many factors could account for this slippage, including the noed £m- adding more manpower or even the transfer or replacement of
salesmen :n this hi]?hiy competitive Long Island
mai'ket.
40
Journal of Marketing, January, 1962
Setting Sales Quotas and Estimating
Future Business
Quota setting is a function of forecasting.
Quotas are baaed on the volume of business estimated for future months. It has been seen that
construction contracts led the A.B.C. Company's
shipments by three months. In itself this is a forecast—a forecast which, in effect, has already been
made. A glance at the company's chart, Figure 1,
gives a rough preview of what may happen to shipments some three months hence if they follow
the course pursued by construction contracts.
To obtain a more specific and accurate forecast
in terms of estimated dollars of shipments, however, the ratios are projected three months ahead
on the penetration-ratio portion of the chart.
Each of the three projected ratios is then multiplied by the corresponding 12-months ending figure for construction contracts. This reverses the
process by which the earlier ratios were obtained.
The results are the estimated dollars of shipments (in 12-months ending figures) that may be
expected for each of the succeeding three months,
assuming selling efBciency continues at the same
rate and that competitive conditions remain about
the same.
In sum, a statistical approach can be helpful
in the setting of sales quotas, at least for the
period of months represented by the lead-lag
relationship of a correlation, and for a projection beyond that point.
Most companies selling to new construction
place their chief reliance on field reports and
personal observations weighed and adjusted,
where necessary, by management judgment in
the light of past sales, knowledge of industry
conditions, and analyses of sales expenses to
sales volume. A statistical approach, employing
lead-lag correlation of two key series of data
dealing directly with performance and market
potential, can assist in preparing more realistic
quotas.
Applications of Method
Faced with rising competitive pressures and
mounting costs, most firms today recognize the
need for improved sales controls. They are looking for new ways to measure sales performance,
and new means to make more accurate sales
predictions.
In a market as large and complex as the giant
construction industry, relatively few are interested in the total market. Most companies selling
within the new construction market become specialized with respect to size, product mix, areas
of operation, and type of business; and hence
their needs for market information are correspondingly specialized.
To determine their market potential, they need
only those project types in construction contracts
that represent the market to which they sell. In
measuring sales performance against market
potential, they need construction contracts expressed in the unit of measurement best suited
to their type of business. Their sales areas may
be limited to a single county or group of counties, or they may cover the nation, broken out
into major sales districts—and for this they need
the data that construction contracts can supply
along county and state lines.
The A.B.C. Company, selected to ilustrate statistical procedures for large and small firms in
the method under consideration, also sei'ves id
illustrate the specialized market informational
needs of individual concerns. Obviously other
firms would require different market data.
A ceramic tile manufacturer, for examjjle. selling nationally through distributors and tile contractors, would still work with square feet as
the best unit of measurement for market potential, as there is a direct relationship between
sizes of various buildings and square feet of tile
required. Since he sells relatively little tile to
Manufacturing Buildings, however, he would exclude this large category from his project data.
Construction contracts have been found to lead
shipments by five months in the tile industry.
A leading manufacturer of hospital operating
equipment, sterilizers, and surgical supplies finds
that booked orders follow square feet of hospital
construction contracts very closely with a 4months lag, and that shipments move similarly
with excellent correlation ten months after
contracts.
A steel company selling pipe and road fabric
to sewage systems, roads and highways, airports
and landing strips (with an average lag of about
two months behind construction contracts) would
express its share of this market in terms of tons
of product per thousand dollars of specific engineering contracts.
One- and two-family houses and apartments
are an important market for a boiler or furnace
manufacturer. Since he sells but one boiler or
furnace to a house or apartment building, units
or numbers of houses and apartment buildings
are his yardstick for measurement. The same set
of conditions pertain to the manufacturer of
"central plant" residential air-conditioning equipment.
Again, a manufacturer or large distributor of
bathtubs and bathroom fixtures can work equally
well with dollar figures or fioor area, since larger
houses and apartments require more bathrooms.
These examples typify some of the ways in
How to Measure Sales Against Market Potential in the Construction
whicli specialized market information can be used
in a simplified statistical approach to a more
systematic control over sales. Forecasting, tieasonally adjusted, can be employed by the skilled
researcher to give this method added benefits.
There is, however, no easy push-button method
for forecasting". As a means for predicting future
sales, at least to the extent of the lead-lag relationship between two series of data, this method
41
Industry
serves a useful purpose in helping management
to make better judgments.
In all this, there is helpful guidance in measuring sales efficiency; locating weak distribution
districts and controlling sales more scientifically;
planning raw material stocks and finished goods
inventories; allocating advertising expenditures
by areas; and setting more realistic quotas and
sales goals.
MARKETING MEMO
Capital Investment
A recent study conducted by the author has revealed that a
majority of the nation's largest business firms fail to employ a
theoretically sound approach to the expenditure of funds for
capital investment. These firms fail to recognize two basic principles which economists regard as unarguable.
They are:
(1) that time has economic value,
(2) that the mere rapidity with which an investment is recovered is not an indication of the profitability of the
investment.
—Donald F. Istvan, "The Economic Evaluation of Capital Expenditures," The
Journal of Bttsme.'^.s, Vol. 34 (January,
1961), p. 45.
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are available (as lonci a--^ supply lasts) at
$1.00
1.50
1.80
Four to 99, each
First 100
Additional lOO'f
.? .50
40.00
20.00
Quantity Discount
Special prices for large quantities.
Send your order to:
AMERICAN MARKETING ASSOCIATION
27 East Monroe Street, Chicago 3, Illinois
Duplication, reprinting, or republication of any portion of the JOURNAL OF
MARKETING is strictly prohibited unless the written consent of the American
Marketing Association is first obtained.