DEMAND FORECASTING & MARKET POTENTIAL ANALYSIS.

Market information is a necessary input for successful marketing planning& execution. Information collected from the market helps the organization to estimate the further consumption patterns & hence , can also help in production planning & operations, procurement of raw materials at right time, streamlining of production & distribution process & deciding on the marketing network. Forecasts are not to be confused with guesses.

 Marketer tend to collect information about consumers, their behavioural patterns, & consumption choices & demand patterns. Forecasting & estimation attempts to know the current as well as future demand patterns so that they can forecast demand for different periods of time. Demand forecasting is done for the product category or for the industry , sales forecasting is done for a specific product or brand manufactured by an enterprise.

 Forecasting what will happen in the future. Short term forecast are tactical in nature & typically are a projection for a month to few months or a year. The long term forecast is strategic in nature & covers a period of five years & is used as the basis for building organizations business strategy. Demand forecasting is a process of estimating the future demand or sales patterns of a firm by taking into account the past information , opinion of industry observers & evolving consumption patterns for a desired time period.

Role of Demand Forecasting

Short Term Forecasting

Short term forecasting may cover a period of three months, six months to one year, depending upon the nature of business. Appropriate Production Scheduling: the firm can avoid the problem of overproduction &the problem of short supply by estimating seasonal variation in demand. Suitable Purchase Policy: demand forecasting helps the firm in reducing the costs of purchasing raw materials & controlling inventory by determining its future resources requirement. Appropriate Price Policy: it can be determined depending upon the anticipation of market demand conditions. Setting Realistic Sales Targets for Salesmen : if targets are set too high , they will discourage salesmen. If targets are set unrealistically low levels, the targets will be easily achieved & incentive given by management will prove to be meaningless. Forecasting Financial Requirement : cash requirement depend on demand level & production operations.

Long -Term Forecasting

Long term forecasting covers a period of five, ten or twenty years. Business Planning : starting a new unit or expansion of an existing unit of production requires an analysis of the long term demand potential of the product in question. A multi product firm must ascertain not only the total sales situation , but also the demand & its distribution over various products. Financial Planning : planning for raising funds requires considerable advance notice. Long term forecasts financial are quite essential to assess long term requirements for purchasing machines, raw materials, research & development programs. Planning Manpower Requirements : training & personnel development are long-term propositions , taking considerable time to complete .

Measures of Market Demand

The commonly used units of market measure include measurement of market potential, market demand, market forecast, sales forecast, sales budget, demand estimation. The size of market number of customers available for a product /service. The potential market is a set of consumers who have the interest to buy products & services from the market within a stipulated period. Buying intentions &buying power are necessary preconditions to define a market, known as Available Market (AM). The set of customers who have interest, income,& access &qualify to become the buyers of products & services are called Qualified Buyer Market (QAM).

 A commodity marketer does not make any distinction between category of consumers & sells to everyone in the market. A brand marketer may decide to exclude some part of the market &concentrate only on portion of market. Limitations in resources to build &serve market very often force marketers to concentrate on a specific part of the market. This market is called Target Market(TM). It is this part of the market, which the company decides to pursue to achieve its marketing objectives. Over a period of time the company will be able to sell to a specific part of the target market. This market is known as Penetrated Market (PM)

Market Potential
Market potential is the limit approached by the market demand as industrys marketing expenditures approach infinity, for a given environment. It refers to a upper limit of a market. Example Market potential for newspaper , we need to know number of household, libraries & other institutions.

Market Demand
It is defined with reference to a price & a time period. Demand for a commodity may be defined as the quantity of a commodity that will be bought at a particular price & during a given period or point of time. Market demand means the demand of all the consumers in the market for a commodity at a particular price.

Market Forecast Market forecast refers to estimates of a future sales of a companys product in the market.

Sales Forecasting
Accurate forecasting is essential for to produce the required quantities at the right time & arrange well in advance for the various factors of production. It helps firm to assess the probable demand for its products & plan its production accordingly.

Sales Budget
It is a program designed for stipulated time that highlights the selling expenses & the anticipated sales quantitatively & in value terms. It is a statement aimed at comparing the revenue , net profits, sales volume & the selling expenses relating to a product or entire business. There are two key issues The quality of sales force , The size of sales force

 Demand forecasts may be passive or active. The former predicts the future demand by extrapolating the demands of the previous years in the absence of any action by the firm. These forecasts are used only to assess the impact of new policies on the market. These forecasts are more meaningful , as they take into account the likely changes in the relevant variable in the estimating future demand. Demand forecast method vary acco0rding to whether they apply to a large aggregate , such as the whole economy (macro forecasts) or to a component of this aggregate , such as an industry or a company(micro forecasts).

 Macro forecasts are based on national income , production, general price level, etc. These forecasts help the Government in implementing price control policy, export-import policy, etc. Macro parameters like levels of GNP, rate of interest, savings, investment, taxation, Government expenditure, unemployment, prices, income & population are a few macro variables of concerns.

Steps in Demand Forecast6ing

These steps present a systematic way of initiating, designing,& implementing a forecasting system. Identification of objectives, Nature of product & market, Determinants of demand, analysis, Analysis of factors, Choice of factors,

Identification of objectives,
Be clear about the uses of forecast data & how it is related forward planning. Choose the type of forecast short run, active or passive, conditional or non conditional,etc.

Nature of Product & Market,

It is necessary to examine the product under consideration carefully, whether it is consumer goods, perishable goods, durable. While analyzing the demand for finished goods, demand for corresponding raw materials& intermediate goods should be analyzed. The elasticity of demand depends on their relative importance in the price of the final product. Time factor is crucial determinant in demand forecasting. Perishable commodities can be sold over a limited period of time. The forecasting of demand must consider the stage at which the product is introduction -slow rise in sales, growth rapid rise in sales with acceptance of the products, maturity & saturation maximum sales or, obsolescence &decline sales taper off with introduction of substitute products,

Determinants of demand, analysis,

Depending on the nature of forecasts, different determinants will assume different degree of importance in different demand function. It is important to consider socio-psychological determinants, specially demographic, sociological & psychological factors affecting the demand.

Analysis of factors,
It is customary to classify the explanatory factors into Trend factors, Cyclical factors, Seasonal factors Random factors

Choice of Method
This depend on the nature of products. Then data is collected make the forecast. The choice depends The degree of accuracy required, reference period of the forecast, complexity of the relationship postulated in the demand function, available time for forecasting exercise, availability of data, size of cost budget for the forecast, etc.

METHODS OR TECHNIQUES OF DEMAND FORECASTING

Forecasting Methods

Survey Method

Statistical Method

Survey Method
Surveys are conducted to know about the intentions of consumers (individuals, firms, or industries),opinions of experts or of a markets. There are two types of surveys Census- all consumers /experts/markets are surveyed, Sample- selected subset is surveyed, These methods are suitable for short term forecasts due to nature of consumers intensions . The important survey methods are Consumer Survey Method Collective Opinion Method Reasoned opinion (Delphi)Method Market Experiments Method

Consumer Survey Method

This can be one of the important methods of forecasting. In this method a firm can ask consumers , what & how much they are planning to buy at various prices of the product for the forthcoming time period. He survey may involve a complete enumeration of all consumers of the given product, whose demand is to be forecast. If there are n consumers in all , each demand Di, then the total demand forecast will be,

Collective Opinion Method

This method is also called sales-force polling. Salesmen or experts are required to estimate expected future demand of the product in their respective territories &sections. The estimates of individual salesmen are average consolidated to find out the total estimated sales & then reviewed by the top executives to eliminate the bias of optimism on the part of some salesmen & pessimism on the part of others. The revised estimates further examined in the light of factors like proposed changes in selling prices, product designs,advertisemet programs, expected changes in competition, changes in secular forces like purchasing power, income distribution, employment, population, etc. This method is called collective opinion method as it takes advantage of the collective wisdom of salesmen , department heads like production manager, sales manager, marketing manager, & top executives.

Reasoned Opinion (Delphi)Method

The Delphi Method is based on a structured process for collecting and distilling knowledge from a group of experts by means of a series of questionnaires interspersed with controlled opinion feedback. Delphi method has been developed in order to make discussion between experts possible without permitting a certain social interactive behavior as happens during a normal group discussion and hampers opinion forming. The Delphi method has been widely used to generate forecasts in technology, education, and other fields.

 The Delphi method is a systematic, interactive forecasting method which relies on a panel of independent experts. The carefully selected experts answer questionnaires in two or more rounds. After each round, a facilitator provides an anonymous summary of the experts forecasts from the previous round as well as the reasons they provided for their judgments. Thus, experts are encouraged to revise their earlier answers in light of the replies of other members of their panel. It is believed that during this process the range of the answers will decrease and the group will converge towards the "correct" answer. Finally, the process is stopped after a pre-defined stop criterion (e.g. number of rounds, achievement of consensus, stability of results) and the mean or median scores of the final rounds determine the results

 First applications of the Delphi method were in the field of science and technology forecasting. The objective of the method was to combine expert opinions on likelihood and expected development time, of the particular technology, in a single indicator. One of the first such reports, prepared in 1964 by Gordon and Helmer, assessed the direction of long-term trends in science and technology development, covering such topics as scientific breakthroughs, population control, automation , space progress, war prevention and weapon systems. Later the Delphi method was applied in other areas, especially those related to public policy issues, such as economic trends, health and education. It was also applied successfully and with high accuracy in business forecasting.

Market Experiments Method

Under this the main determinants of the demand of a product like price, advertising, productdesign,packaging, quality, etc, are identified. These factors are then varied separately over different markets or over different time periods holding other factors constant. The effect of the experiment on consumer behaviour is studied under actual or controlled market conditions , which is used for overall forecasting purpose.

Survey Methods

Consumer Survey Method

Collective Opinion Method

Reasoned opinion (Delphi) Method

Market Experiments Method

Statistical Method

Time Series Analysis

Regression Analysis

Statistical Method
These methods make use of historical data as a basis for extrapolating quantitative relationships to arrive at the future demand patterns &trends. Statistical method are based on scientific ways of estimation , which are logical ,unbiased, &proved to be useful. These methods are cannot be used for forecasting the demand for new products & products, which have ,short existence due to data problem.

Graphical Method Semi Average Method Moving Average Method Least Square Method

Time Series Method

Time Series Analysis

It is a arrangement of statistical data in a chronological order in accordance with its time of occurance.The data may be presented in the form of table or a graph. Time series analysis can be used for demand forecasting by first evaluating ,extracting &interpreting its various components, so as to make it understandable & explainable. The four components are Trend, Seasonal Variations, Cyclical Variations, Residual Variations Depending on the nature, complexity &extent of the analysis required , there are various types of models that can be used to describe time series data.

 Trend- it shows the underlying ,long-term tendency of the data ,

which may be result of basic developments in population, capital, technology,etc. any event of future period can be forecasted using trend line.

Seasonal Variation- these are short term cyclic fluctuations in

the data about the trend ,which is measured in an interval in a year. The word season can have different meanings, it may be related to weather ,holidays, customs, festivals, fashions, etc. Here , a series fluctuates according to seasons of the year.

Cyclical Variations in this case the length of cycle is

generally longer than one year. Study of variations is essential for predicting the turning points in business cycles. Cyclical variations are affected by swings in general economic activity , wherein recovery & boom are followed by recession & depressions &vice versa.

Residual Variation these are disturbance due to

unforeseen events such as weather conditions, illness, strikes, lockouts, riots, fires,wars,transport breakdown, & many more.

Graphical Method
This method gives the basic tendency of a series to grow, decline, or remain steady over a period of time. This method is useful in forecasting Indias population, demand for cement, textiles, steel, paper, where the future is not too much different from the average past. The period of time in the trend analysis is always a long time period. Trend can be both linear & non linear. If the time series values are plotted on a graph , one can pass straight line depicting the trend such that the values will fall on or near the line. This line may be drawn up to the present period or the period for which the data is available.

 If the values of the variables are such that they cluster around a non linear path, we get a curvilinear or non linear trend. Non linear trend can be either quadratic or cubic. Study of trends enables managers &firms to forecast their business in the long run & to plan future operations without the formal knowledge of economic theory & the market.

Semi Average Method

According to this method the data is divided in to two parts, preferably with same number of years. The average of first & second calculated separately.These average is called semi-averages. Semi-averages are plotted against the middle point of respective time periods covered by each part. The line joining these points gives the straight line trend fitting the given data.

Moving Average Method

When time series analysis does not reveal a significant trend of any kind ,the moving averages method may be used. This method consist of obtaining a series of moving averages of successive overlapping groups of time series. The averaging process smoothens out fluctuations as well as the ups &downs in the given data. The moving average is characterized by a constant known as the period of extent of the moving average.

Least Square Method

The method of least squares is used to approximately solve over determined systems, i.e. systems of equations in which there are more equations than unknowns. Least squares is often applied in statistical contexts, particularly regression analysis. Least squares can be interpreted as a method of fitting data. The best fit, between modeled and observed data, in the least-squares sense is that instance of the model for which the sum of squared residuals has its least value, a residual being the difference between an observed value and the value given by the model. Least squares corresponds to the maximum likelihood criterion if the experimental errors have a normal distribution and can also be derived as a method of moments estimator. Regression analysis is available in most statistical software packages.