Demand Forecasting

Demand forecasting is the activity of estimating the quantity of a product or service that consumers will purchase. Demand forecasting involves techniques including both informal methods, such as educated guesses, and quantitative methods, such as the use of historical sales data or current data from test markets. Demand forecasting may be used in making pricing decisions, in assessing future capacity requirements, or in making decisions on whether to enter a new market.

Methods Of Demand Forecasting

A) Survey
For forecasting the demand for existing product, such survey methods are often employed. In this set of methods, we may undertake the following exercise.

a) Consumer survey
1)

Sample survey: Under this method, the forecaster selects a few consuming units
out of the relevant population and then collects data on their probable demands for the product during the forecast period. The total demand of sample units is finally blown up to generate the total demand forecast. Compared to the former survey, this method is less tedious and less costly, and subject to less data error; but the choice of sample is very critical. If the sample is properly chosen, then it will yield dependable results; otherwise there may be sampling error. The sampling error can decrease with every increase in sample size

2)

Consumer enumeration: - In this method, almost all the potential users of

the product are contacted and are asked about the future plan of purchasing the product in question. The quantities indicated by the consumers are added together to obtain the probable demand for the product.

b)

Opinion poll Method

The opinion poll methods aim at collecting opinion of those who are supposed to possess knowledge of the market e.g. sales representative, professional marketing experts and consultants. The opinion poll method include 1)

Expert opinion method: - Firms having a good network of sales

representative can put them to work of assessing the demand for the product in the

areas that they represent. Sales representative, beings in close touch with the consumers are supposed to know the future purchase plans of their customer, their reaction to the market changes, their response to the introduction of new products and the demand for competing products. They are, therefore, in a position to provide an estimate of likely demand for their firms product in the area. The estimates of demand thus obtained from different regions are added up to get the overall probable demand for a product. 2)

Delphi Method: - Delphi method is used to consolidate the divergent expert

opinions and arrived at a compromise estimate of future demand.

Under Delphi method the expert are provided information on estimates of forecast of other experts along with the underlying assumptions. The experts may revise their own estimates in the light of forecast made by other experts. The consensus of experts about the forecasts constitutes the final forecast.

B) Market Experiment Market Experiment can help to overcome the survey problems as they generate data before introducing a product or implementing a policy. Market Experiments are two types:1) Test marketing:2) Controlled experiments:1)

Test marketing

In this case, a test area is selected, which should be a representative of the whole market in which the new product is to be launched. A test area may include several cities and towns, or a particular region of a country or even a sample of consumers. More than one test area can be selected if the firm wants to assess the effects on demand due to various alternative marketing mix. Advertising or packaging can be done in various market areas. Then the demand for the product can be compared at different levels of price and advertising expenditure. In this way,

consumers response to change in price or advertising can be judged.

2)

Controlled experiments

Controlled experiments are conducted to the test demand for a new product launched or to test the demands for various brands of a product.

They are selected some consumers

C) Statistical
It is the best available technique and most commonly used method in recent years. Under this method, statistical, mathematical models, equations etc are extensively used in order to estimate future demand of a particular product. They are used for estimating long term demand. They are highly complex and complicated in nature. Some of them require considerable mathematical background and competence.
1.

Trend Projection Method:

An old firm operating in the market for a long period will have the accumulated previous data on either production or sales pertaining to different years. If we arrange them in chronological order, we get what is called time series . It is an ordered sequence of events over a period of time pertaining to certain variables. It shows a series of values of a dependent variable say, sales as it changes from one point of time to another. In short, a time series is a set of observations taken at specified time, generally at equal intervals. It depicts the historical pattern under normal conditions. This method is not based on any particular theory as to what causes the variables to change but merely assumes that whatever forces contributed to change in the recent past will continue to have the same effect. On the basis of time series, it is possible to project the future sales of a company. 2. Regression:
These involve the use of econometric methods to determine the nature and degree of association between/among a set of variables. Econometrics, you may recall, is the use of economic theory, statistical analysis and mathematical functions to determine the relationship between a dependent variable (say, sales) and one or more independent variables (like price, income, advertisement etc.). The relationship may be expressed in the form of a demand function, as we have seen earlier. Such relationships, based on past data can be used for forecasting. The analysis can be carried with varying degrees of complexity. Here we shall not get into the methods of finding out correlation coefficient or regression equation; you must have covered those statistical techniques as a part of quantitative methods. Similarly, we shall not go into the question of economic theory. We shall concentrate simply on the use of these econometric techniques in forecasting.

Moving Average When time series analysis does not reveal a significant trend of any kind,the moving average method may beused to smoothen the series This is very simple and flexible method for measuring trend
3.