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Demand Estimate and Demand Forecasting – Objectives, Methods and Experiments

Demand forecasting is a reliable prediction, estimate, or forecast of the behavior or course of market demand for a particular product.

Demand Forecasting may be made at the following levels

  1. Firm-Level Demand Forecasting – At the micro-level, an individual firm may forecast market demand for a product in the industry as a whole.
  2. Industry-Level Demand Forecasting – At the industry level, an industrial association may forecast the market demand for a product in the industry as a whole.
  3. National-Level Demand Forecasting – At the macro level, a country or nation may forecast aggregate demand for some important commodities or products at the national level.

Significance of Demand Forecasting

  1. Price Fixation
  2. Production Planning
  3. Inventory Control
  4. Sales Forecasting
  5. Short-term Financial Requirements
  6. Growth and Long-term Investment Plans
  7. Replacement
  8. Budgeting
  9. Stability
  10. Demand Forecasting at Macrolevel

Short- & Long-Term Forecasting

Short-Term Forecasting

  • It refers to determining demand estimates, i.e., demand volume for a firm’s product in the short run, usually between a month to a year, depending upon a firm’s nature and scale.
  • This forecast is performed on an annual basis and is subdivided month-wise.
  • The plant size remains fixed, i.e. fixed factors like machines remain constant; only variable factors like raw materials vary in amount.

Long-Term Forecasting

  • It refers to demand forecasts for a firm’s product in the long run for periods exceeding one year.
  • The plant size can be fully increased or decreased by increasing or reducing the firm’s production capacity.
  • A firm’s decision regarding the expansion or contraction of its production capacity is based on long-term demand forecasting.

Objectives of Short-Term & Long-Term Demand Forecasting

Objectives of Short-Term Demand Forecasting

  1. Fixing Sales Target
  2. Determining a Sales Policy
  3. Determining a Purchase Policy
  4. Adoption of a Pricing Policy
  5. Formulation of Short-Term Financial Policy

Objectives of Long-Term Demand Forecasting

  1. Long-Term Production Planning
  2. Long-Run Financial Planning
  3. Manpower Planning

Methods for Demand Forecasting

Methods for Demand Forecasting

Survey Methods

1. Expert Opinion’s Survey

Survey Method is the Expert Opinion’s Survey.

These surveys are based on opinion of experts who deal in the same or similar products and can predict a product’s likely sales.

Advantages of this method are

This Method is simple and requires minimum stastical work

Time available for forecasting may be very short

Disadvantages are

  • Likely to be biased and is often purely subjective
  • Experts may not know of broader economic changes that impact future demand

2. Delphi Method.

In the Delphi method An attempt is made to arrive at a consensus in an uncertain area by questioning a group of experts repeatedly until their responses appear to converge.

The Advantages of this method

  • Generates a non structural opinion instead of an unstructured one
  • Enables respondents to be forthright in their views

Disadvantages

  • Tedious and costly
  • Success depends on expertise, knowledge, experience and aptitude of the coordinator.

3. Consumer Survey Method

Complete Enumeration Method

Demand forecasts are prepared by surveying consumer’s intentions by questioning them about their future consumption plans.

<click>The first method under consumer survey method is Complete Enumeration Method

A forecaster performs a complete survey of all consumers whose demands are to be forecasted.

Advantages

  • The forecaster does not introduce any personal bias or value judgment
  • Likely to be more accurate than other methods

Disadvantages

  • Tedious and cumbersome process that may be unsuitable if the number of consumers is very large
  • Time-consuming and costly

Sample Survey Method.

The second type is Sample Survey Method

In this method, The forecaster selects a sample of consuming units from the relevant population and then collects data on their probable demands for the product in the forecast period.

Advantages

  • Less tedious and less costly and subject to less data error
  • Useful in detecting changes in consumers’ tastes and preferences and in determining consumers’ expectations about future prices

Disadvantages

  • Sampling errors may exist
  • Success depends on cooperation of selected consumers

End-Use Method

End-Use Method

Product demand is forecasted through a survey of its users. This method is used when a product is used for more than one purpose.

Advantages of this method

Provides use-wise or sector-wise demand forecasts

Helps government in framing policies

Disadvantage

Every firm must have an accurate production plan for the future

4. Market Experiments

Market experiments are conducted to generate demand forecasts. There are two approaches :

1. Actual Market Experiment

The first method under market experiment is Actual Market Experiment

These are conducted in the actual marketplace in several ways.

Advantages

  • Market experiments are very useful for introducing a product for which no other data exists

Disadvantages

  • Inferences drawn may not be realistic as the experiment may be conducted on a limited scale and over a short period of time.
  • Competitors may try to sabotage the experiment by changing the determinants of their products.

2. Simulated Market Experiment (Consumer Clinics)

A set of consumers may be provided with a sum of money and asked to shop in a simulated store.

During the experiment, the prices of products, packaging, advertising, etc. will be varied to observe how consumers react to these changes.

The Shortcomings of this method are:

Consumers are unlikely to act normally as they would in a real market situation. The sample of participants is likely to be very small because of the high cost of conducting the experiment.

Statistical Methods: Trend Method

Trend Method

Time series data of the variable under forecast are used to fit a trend line, either graphically or through the statistical least-squares method.

Advantage

Provides a dependable forecast

Does not require formal knowledge of economic theory and the market

Disadvantage

Trend method Assumes that the past is repeated in the future

2. Regression Method

It is the most commonly used forecasting method that uses economic theory and appropriate statistical estimation methods to forecast demand.

It Requires historical data on the variable under forecast as well as on the determinants of this variable.

The following steps are required to obtain forecasts through this method:

  1. Identification of variables
  2. Collection of historical data
  3. Choice of demand function
  4. Estimation of function
  5. Derivation of forecasts

Advantage

This method is prescriptive and descriptive, that is, it generates a demand forecast and explains why the demand is what it is.

Disadvantages

If some explanatory variables are not chosen correctly, they tend to be misleading

This method forecasts demand based on past relationships; if the future relationship deviates from the past relationship, the forecast will be wrong.