What is Market Feasibility Study and The Basic Steps Involved?


By: Site Engineer, Staff

full bio

The market study is one of the most important aspects of a feasibility study since it is herein that the nature and the extent of the problem towards which the project is directed are identified and quantified.

The market study involves:

  • An assessment of the resulting demand-supply gaps;
  • An assessment of past and present demand and supply conditions and characteristics;
  • An assessment of present and future behavior of the demand and supply conditions and characteristics;
  • A provision of the ground-work for the subsequent assessment of;
  • Costs, which depend upon the alternative project sizes, locations and technical processes that flow from the specification of the problem; and
  • Benefits of their identification and measurement.

The Essential Steps in Market Study

The approach to follow in carrying out a market study for a proposed project consists of the following steps:

Step I

Define the market envisaged for the project output both in the sectoral and geographical contents.

From the sectoral viewpoints, the two broad categories are the Consumers’ Demand and the Producers’ Demand.

The consumers’ demand for the project output is determined by the amount of the output needed by buyers who make direct use of the product for consumption purposes.

The producers’ demand is a derived demand derived in the sense that it is demand expressed by the extent and levels of use to which the project output is to make in producing another final product.

From the geographical viewpoint, the territorial boundary in terms of regions, provinces, municipalities or some other terms of reference must be delimited as precisely as possible to determine the size of the geographical area in which the project can exercise its influence. It is within such geographical boundaries that data will be collected for the project study.

Step II

Estimate the total demand (both satisfied and unsatisfied demand) for the project output. In achieving these objectives do the followings:

Stage 1:

This is the principal determinants of demand for the particular goods/services under consideration, which can then be used to derive a reasonable approximation of the corresponding level of total requirements.

In the case of consumer demand the strongest determining factors will in general be:

  1. Per capita income, and
  2. Population

The higher the levels of these two variables the greater the total requirements of the project output will tend to be:

  1. Price of the proposed project output;
  2. The relative prices of other goods/services, particularly of those performing the same function with the proposed project output.

In the case of producer (investment) demand, the producers will want the goods/services provided by the project only insofar as it is needed in the production/distribution of their output. Their demand for the output of the proposed project-exists because demand also exists for their product.

Their demand for the project output thus depends:

  1. Ultimately on the level of demand for their product, and
  2. On the scale of the operations of the producers-buyer of the project output

Hence, a consideration of the ultimate sources of demand for these producers’ final output is important in achieving a correct assessment of the determinants of the producer’s demand for a proposed project output.

Stage 2

The next thing is to evaluate the determinants of demand identified in Stage I above. To aid the evaluation of the determinants of demand for purposes of subsequent projections, we need to study the characteristics of the past and present demand for the project output.

Quantitatively, the data to consider include:

  • Competing products and of sources of supply
  • Per capita income.
  • Population in the geographical area of influence of the project
  • Income distribution levels and growth of influence of past and present demand
  • For marketed goods, prices of the projects and those of the competing products
  • Whatever else may be relevant to gain a fuller understanding of the situation
  • Geographical distribution of income levels past and present demand

The above should be supplemented by such qualitative data such as:

  • Consumer types and behaviors;
  • The marketing system;
  • Trends in government policies and their effects; and
  • Other such relevant considerations.

Stage 3

Project the current situation into the project’s lifetime.

The steps in projections include:

The first step in projection is usually that of forecasting. In making a forecast, future variables are derived under the assumption that the same forces operating on demand for the project will continue to operate and in the same ways:

  1. By a simple extrapolation of the historical trend of demand
  2. By (i) First obtaining the impute coefficient (in cases where the project’s output can reasonably be considered as an input in the production process of the user entity)

(ii) Projecting using entity’s production level, and

(iii) Deriving the demand for the project’s output based on the coefficient.

  1. By making necessary inter-regional/inter-markets comparison: in doing this, regions must not only be selected with caution but at a given point in time must also be comparable.
  2. d) By: (i) Incorporating into a (set of demand equations), the principal determinants identified in Stage 1

(ii) Then projecting the values of the determinants and

(iii) Deriving the corresponding level of demand for the project’s output

Conversion of Forecasts, Derived Into Projections

The forecast thus derived above are then converted into projection by bringing in modifications that may result from consideration of the followings:

  1. Possible changes in a structural relationship in the demand over the projections period. Where possible, this would include changes in the technical coefficient arising from technological change.
  2. Possible shifts in economic policy and their corresponding effects
  3. Possible changes that the project itself may induce. If any change is expected from this source, then, two sets of projections would emerge under the assumption that the project is non-existent, and the other under the assumed operation of the project.

Step III

Evaluate the existing supply conditions of the proposed project output. The approach to adopt may be described in the following stages:

Stage I

Investigate if in the first place there is any supply source at all.

Stage II

If so examine such sources of supply, particularly:

  • Their combined output
  • Their distribution methods and pattern
  • Their capacities and capacity utilization
  • Their costs; and
  • Other relevant characteristics

As in the case of the study of demand, have these data, on a historical basis. Also, I have some knowledge of the effects of economic policy on these variables.

Stage III

Using the approach and considerations essentially similar to those relating to demand, project the supply of the project’s output into the project’s lifetime. But, in the case of supply, make two sets of projections for each policy assumption, one with the project, and the other without the project.

In the case of demand, with and without projections are necessary only when the project itself is expected to generate changes in demand.

Step IV

Measure the extent of the current gap in demand for the proposed project output

The above may be achieved in stages.

Stage 1

Consolidate the information so far obtained in the past and current demand and supply conditions and obtain a measure of the current gap in the demand for the proposed project’s output.

Pinpoint, also, the underlying reasons for whatever bottlenecks may currently exist, to allow for achieving proper solutions to such problems.

Stage 2

Determine the extent of future needs (net demand) and the distribution of the project’s output. This can be achieved by consolidating the projected demand and supply levels without the project. This serves as a starting point for the identification of alternative sizes, locations, and specifications of the proposed project.

The additions to supply provided by the project’s operations is narrow and altogether close up the projected gap between demand and supply. Some additions, in turn, generate the benefits that would determine whether or not the costs that the project would involve would be justified.


Don’t forget to share this post!

Whatsapp Share Icon