Multipliers Demystified

Nov. 1, 2003
Scattered throughout EW's Regional Factbook are scores of numbers called multipliers. Understanding where they come from and how they are used is critical

Scattered throughout EW's Regional Factbook are scores of numbers called multipliers. Understanding where they come from and how they are used is critical for correct market and customer analysis.

An often-used tool for estimating a market's size or an account's potential is a multiplier. A multiplier is a marker in terms of dollars or usage that you can use to figure out the potential for business.

We at Electrical Wholesaling have been providing multipliers for the markets electrical distributors serve since 1979. Recently, interest in these multipliers and how to use them has skyrocketed because it has become increasingly important to conduct market research in order to target markets effectively. Your competitors are doing it already. Your manufacturers are demanding you get on with it. Today, with the availability of huge databases of prospect names at low cost, it's not only advisable and feasible to do market and customer analysis, it's also cost-effective.

The multiplier itself expresses the business available, in units or in dollars, for each unit of some other economic factor connected with the company or market in question. Often an employee count is the economic factor used. Multipliers work like this: If electrical contractors in an area employ 755 people, the potential for sales to electrical contractors there would be 755 times the electrical contractor multiplier of $46,895 or $35,405,725. If a particular electrical contracting firm employs 15 people, its purchases of materials through electrical distributors could be estimated at 15 times the electrical contractor multiplier, or $703,425.

National multipliers. The simplest way to ascertain what a company or market might be worth in electrical product sales is to use Electrical Wholesaling's national multipliers. Each multiplier is a dollar figure that represents the average amount of electrical products electrical distributors sell to each type of customer. It puts these sales in terms of a factor that increase or decreases with economic conditions and applies to all firms of the same classification. Usually this "economic factor" is something such as number of employees or households-some kind of data that is easy to find.

We provide national multipliers on p. 30 of this article. They will prove adequate for most situations.

Regional multipliers. The national multipliers furnished in this issue will work in many circumstances, but in reality the multipliers for every region will vary, even by type of end-user company. To make a "custom" multiplier that may fit your market area better, follow this basicmethod, which shows how to construct a regional multiplier for the electrical contractor market. The same idea applies by state, by metropolitan area, by end-user market or by product.

First, you find the sales figure for your region from our Regional Factbook, then you select the corresponding electrical contractor percent from the Customer Mix chart on p. 54. You multiply the two to get dollar sales for electrical contractors in that region.

Next, you divide the sales figure you just calculated by the number of electrical contractor employees in the region (also found in the Regional Factbook). The result is a regional multiplier for the electrical contractor market.

You can take this same approach to create a multiplier using your own data. You need a total dollar figure for the type of market you want to make the multiplier for, as well as an appropriate economic factor and a count for it. Multipliers have to be created from a full year's worth of data, and both the sales and employee (or economic factor) figures should be from the same year. If you are putting together multipliers from locally available data, you might find the data is a year or two old. To make them current with 1999 or 2000, you "bring them forward" by the rate of change in electrical distributors sales that occurred or are predicted for the intervening years.

In some cases, you might not want to use even a regional or state-level multiplier, if your market area isn't like the rest of the region-for instance, a relatively rural county included in the MSA of a large urban city. You can attack this problem by creating the multiplier using data from an area that seems more akin to yours. If it's more residential/light commercial, you might use multipliers developed from data for the Mountain states. The data from the East North Central states will serve for any highly industrialized area. It's okay to choose what seems to fit to make your multiplier, even if it's not labeled for your region.

Custom multipliers. You can bypass our data altogether and make multipliers from your own customer records. Using your own records takes advantage of your experience with your market and having information readily available. For example, if you have a number of similar-type customers, such as auto parts plants or small contractors, you can tailor multipliers from your own internal records of annual sales. But be aware that you will be judging the potential of a particular customer type based on your company's performance with customers of that type, and that performance may or may not be typical. As one distributor notes, "Basing any market analysis on just your own sales history only tells you what you are getting, not what you are missing."

If you do choose to go this route, use customer records for firms from which you are fairly certain you get a good piece of representative business. Then do the following:

First, sort customer accounts into industries using an NAICS list (or an old SIC list, if that's all you have) for the industry designations. The North American Industry Classification System (NAICS) categories replaced the old Standard Industry Classification (SIC) codes.

Next, add up your company's sales for the year for all the customers in each industry group, eliminating one-time or unusual sales.

Then add up all the employees among your customers in each industry group. You can do your own head count or look up employment figures in such sources as Dun & Bradstreet regional directories or Standard & Poor's Corporation Records. Finally, calculate average annual sales per employee for each industry category by dividing sales by number of employees. This number is the multiplier that you can apply to every company of this industry type in the market to determine what each may be worth to your distributorship.

New market multipliers. For markets that you don't sell to right now, whether emerging or established ones, you can make multipliers using one of several approaches: ask people who know, such as manufacturers' reps or engineers familiarwith the business; use the Internet or library research to get a picture of the business; read trade magazines that cover that particular type of business; take someone from the target industry to lunch; do a plant or facility visit; or use a survey. One way or the other, you pick up in-depth information about electrical product usage and sourcing in the target industry. You can then use the data you've collected to create a multiplier for each industry or business type (average dollar sales per firm, dollar purchases of electrical goods per customer employee, potential unit sales per million dollars of customer sales--whatever works for you).

Built-up multipliers. Another method to create an overall multiplier for a customer type or a geographic market is to build one from the bottom up-product type by customer type. With this more detailed method, you work account by account to assess the full potential for each by way of formulas-a combined package of supplier information, distributor records, prior knowledge and detective work. You work one major product category at time for each account, aiming for a justifiable, reasonable dollar figure in each category.

This process might require a detailed on-site or in-plant survey (with the aid of a manufacturer's representative or salesperson). Another possibility is to ask a friendly purchasing agent or contractor. Similarly, you might see what information your own distributorship has available on sales of certain products to several accounts in the same type of business, which you can then apply to your specific account. Finally, you can ask suppliers or reps for the product categories for any research they may have available. Some have already calculated multipliers. Others can give you a new perspective and inside knowledge.

First, select accounts in each type of business you want to study. Prepare a worksheet for each account, noting NAICS code or type of business. Then list the major product groups your company sells. Those accounting for more than 70% of what a typical account buys are: building wire, cord and cable; distribution equipment; commercial/industrial lighting; residential lighting; motor control/factory automation; lamps; wiring devices; conduit, fittings and bodies; boxes and enclosures; fuses; and lugs, connectors and terminations.

Concentrate on these large-volume areas, then lump together the products with small sales. Rather than spend time directly estimating the sales volume of something that is generally less than 1% of sales, let them fall into a broad "Other" category. You can back out the sales later. If an account has a special product need that amounts to big dollars, make a special row for it under "Other."

Then build multipliers product type by product type, using whatever input you can find. You may end up with a jumbled list for an account-$5.00 in lamps per employee, one fuse for each unit shipped, an estimate from a rep for all wiring device purchases. And each time you select a different factor-like units or square feet-as part of your multiplier, you will also have to find out that information about the account in order to complete the calculations and arrive at a dollar potential for each product type listed.

For each account, you then add all the product-category dollar estimates together, adding 30% on top to arrive at a grand total. Divide the dollar figure by the number of employees for the company to get a multiplier. You continue to do the same procedure for each company in the same NAICS designation (in the same type of business). You then look at all the results and select the average multiplier as the one to apply to other companies of this type. With this work, you assess the dollars available from several similar customers to develop a databank of multipliers to apply to many companies.

Any business must grow to survive. That growth must come from increased sales to current accounts and from new accounts. Today's computer based tools allow you to prospect in depth and to leverage current accounts in ways never before possible for small businesses or individuals. Using the multipliers and the methods described here, along with other data in this issue, you have what you need to get started.