Demand Forecasting

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Meaning of demand forecasting

- Predicting future demand for a

product

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 Purpose of demand forecasting
• To avoid overproduction or underproduction
• Making it easier for a firm to take decision
about what price to charge, how much to
spend on advertising, how many workers it
should employ, whether to add a new plant
etc.
• It helps the firm in making a better decision
regarding purchase of raw materials and how
much money it needs to borrow from outside.

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Determinants of demand forecasting -1
• Non-durable consumer goods
- purchasing power- depends on the
disposable personal income
- price of the good
- demography – depends on the size and
structure of the population

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Determinants of demand forecasting -2
• Durable consumer goods
- choice between using it longer by repairing it
or replacing it
- Price and credit conditions
-requirements for using it
example- roads for automobiles
- family characteristics (nuclear or joint)
- total demand = new + replacement

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Determinants of demand forecasting -3

• Capital good ( goods used in the production

process) it is a derived demand

- growth prospects of the user industries

-norm of consumption of capital good per unit of
installed capacity
- velocity of their use

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 Type of forecasting
• Short-term – may be a few months from now
• Long term – usually two years or more
• Macro-level – About the whole economy
• Industry-level – Considers only one industry
example – automobile industry
• Firm-level – one firm in any industry
example – Maruti-Suzuki

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 Choice of techniques
• Among the different techniques available for
demand forecasting, the choice depends on
- purpose
- plausibility
- availability of data
- expertise

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 Two Main Methods
• Survey methods

• Statistical or Quantitative methods

Each method has its own limitation,
advantage, drawback and cost associated with
it.

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 Survey methods
• Two broad categories of survey methods
- Consumer survey methods through interviews
- it involve getting information from potential
consumers about their intentions for buying the
good in future.

- Opinion poll methods

- it relies on the opinions of the experts, sales
representative and market experiments.

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 Consumer survey methods
• This can take three different forms

(1) Complete enumeration

(2) Sample survey
(3) End use method

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 Complete enumeration method

• Everybody is included and based on their

answers about how many units they are
willing to purchase in future a value for total
probable demand is calculated

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 Limitations
• Can be done only where the market is
concentrated in certain region or locality
otherwise it would be costly in terms of time
and money.
• Consumers’ may mislead or are not sure
about their future plan
• Consumers’ plan may change or they may not
have enough information

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 Sample survey method
• Only a few potential consumers are included
• Direct interview, telephonic interview or
mailed questionnaire
• Benefits of this method
- simple, less costly in terms of time and money
than complete enumeration
- used for individuals or organizations who have
planned their expenditure in advance
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 limitations
• Should not be used alone, it should be used
along with the statistical (quantitative)
method
• People may refuse to participate in it solely
because of time involved or loss of privacy.
• It is not easy to get a representative sample

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 End-Use method
• Used mainly for industrial inputs.
• There are four stages in this method
- identify all the possible users
- find suitable technical norms of consumption
(per capita, per unit of investment, per
unit of production etc.)
- getting the targeted levels of output
- aggregate the product-wise or use-wise

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 Advantages of end-use method
• You can get greater details about the demand
in terms of size, types. Other methods only
provide the aggregate figure.
• It is possible to trace and pinpoint in future,
where and why the actual demand deviated
from the forecasted value.
• You can make suitable revisions time to time.

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 Opinion poll methods
• There are three possible ways of doing it

- Expert opinion method

- Delphi method
- Market studies and experiments

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 Expert-opinion method
• Sales representatives or professional experts
of different regions are contacted and based
on their opinions the market demand is
forecasted.

• To get the overall probable demand, the

demand forecasting for different regions are
added together

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 Advantage and limitation
• This method is simple, quick and inexpensive.
• One of the drawback of this method is that it
relies on the skills and experiences of the
experts of different regions. In some cases,
the experts lack the required skills and
experience.
• Experts’ opinion could be biased.

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 Delphi method
• Developed by the RAND Corporation
• Experts begin with their own forecasts.
• Experts are provided the estimates given by
the other experts and the assumptions behind
those estimates.
• Experts may revise their own forecast.
• A figure is reached after you consolidate the
revised estimates of all the experts.
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 Benefits of Delphi method
• Delphi method can be used for cross-checking
the information
• Information used by the experts in getting the
forecast may be based on the statistical
methods.
• It is inexpensive in terms of time and money

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 Market studies and experiments
• Some representative markets are selected
based on similar features – population,
income, culture etc.
• Conduct market experiments by changing
prices, advertisement expenditures etc. that
could affect the demand function.
• The change in demand as a result of the
experiment is recorded and a conclusion is
drawn about all the markets.

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 Consumer clinics
• Controlled laboratory experiment is done by
giving consumers some money which they
have to spend.
• Suitable change is made in prices, packages,
branding etc.
• Consumers response to these changes are
recorded and then a conclusion is reached.

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 limitations
• Extremely expensive
• Usually carried out on a small scale
• Experiments are done under the controlled
conditions so the conclusion may not be valid
under uncontrolled condition
• Temporary price increase may results in the
permanent loss of customers

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 Steps in demand forecasting-1
• Nature of the forecast
- short-term or long-term
- conditional or unconditional
• Nature of the product
- final or intermediate
- durable consumer, nondurable consumer, capital
• Determinants of the demand – income,
advertisements, price of the good, price of the
related goods
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 Steps in demand forecasting-2
• Specification of the model
- linear, log-log, log-linear, quadratic etc.

• Choice of techniques

• Testing the accuracy of the model

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