A market index is a numerical expression indicating the degree to which one or more market factors associated with a given product’s demand is present in a given market segment—usually a given geographical market segment. Market indexes are expressed in relative terms, such as in percentages, rather than in absolute numbers. In analyzing the market for furniture, for example, a market index might contain three factors: population, effective buying income, and number of marriages. In the United States, the most widely used single-factor market indexes are population as a percentage of U.S. total and effective buying income as a percentage of U.S. total. Many companies refine these indexes further by breaking them down into greater detail; for example, the population index is divided into subindexes covering different age groups and the income index into subindexes for different income groups.
Sales and Marketing Management, a trade publication for sales executives, publishes an issue annually giving Buying Power Index (BPI) data by state, county, city, metropolitan area, and even by the suburban components of metropolitan areas. The BPI combines effective buying income, retail sales, and population into a single index using weighting of factors of 5 for income, 3 for retail sales, and 2 for population. This particular combination and weighting of market factors serves as a satisfactory measure of market potential for many consumer-products marketers.
Other marketers construct their own market indexes, including different market factors and using different weighting systems. One producer of lighting fixtures includes data on new housing starts, and a maker of auto seat covers includes motor vehicle registrations. Other market factors frequently used in constructing consumer-goods market indexes are registrations of new automobiles, home ownership, marriage licenses issued, births, and deaths. Marketers of industrial products construct market indexes using such market factors as value added by manufacture, number of employees engaged in certain kinds of manufacturing, number of manufacturing establishments, person-hours worked, total value of shipments of particular items, and capital expenditures for new plant and equipment.
Source: Richard R. Still, Edward W. Cundliff, Normal A. P Govoni, Sandeep Puri (2017), Sales and Distribution Management: Decisions, Strategies, and Cases, Pearson; Sixth edition.