Slide 1

DEMAND FORECASTING

1
Slide 2

FORECASTING & DEMAND MEASUREMENT

SPACE LEVEL

TIME LEVEL

2
Slide 3

• Product levels (6)

– Product item, product form, product line,
company, industry and total sales

• Space levels (5)

– Customer, territory, regional, national and
international

• Time levels (3)

– Short-run, medium-run and long run sales

3
Slide 4

WHICH MARKET TO MEASURE

(1)
Market
(2)
(3) Potential
Available Market
Market
(6)
Penetrated
Market
(5)
Target (4)
Market Qualified
Available
Market
4
Slide 5

WHICH MARKET TO
MEASURE

• Market – the set of all actual and potential

buyers of a product

5
Slide 6

• Potential Market – the set of all consumers

who profess a sufficient level of interest for

a particular market offer

6
Slide 7

• Available market – the set of all consumers

who have interest, income and access to a

particular market offer

7
Slide 8

• Qualified Available market – the set of all

consumers who have interest, income,

access and qualifications for a particular

market offer

8
Slide 9

• Target market – the part of the qualified

available market the company decides to

pursue

9
Slide 10

• Penetrated market – the set of consumers

who have already bought the company’s

product

10
Slide 11

MARKET DEMAND

• The total volume that would be bought by a

defined customer group in a defined
geographical area in a defined time period
in a defined market environment under a
defined marketing programme.

11
Slide 12

MARKET DEMAND FUNCTIONS

A particular market
environment is
assumed

MP

MF

MM
Planned
expenditure

12
Industry Marketing Expenditure
Slide 13

Prosperity
MP

MP
Recession

13
Industry Marketing Expenditure
Slide 14

• Expansible and non-expansible market

• Market demand
• Market sensitivity of demand
• Market forecast
• Market potential
• Company demand
• Company sales forecast
• Sales quota
• Sales budget
• Company sales potential
14
Slide 15

• Chain Ratio Method

• Area Market Potential

– Market Build-up Method
– Multiple Factor Index Method

15
Slide 16

CHAIN RATIO METHOD

E.g. Demand for leather slippers

= population X
per capita income X
average % of income spent on clothes & accessories X
average % of amount spent on clothes & accessories
that is spent on footwear X
average % of amount spent on footwear that is spent
on slippers X
expected % of amount spent on slippers that will be
spent on leather slippers
16
Slide 17

MARKET BUILD-UP METHOD

Q = q1 + q2 + q3 + ….. qn

17
Slide 18

MULTIPLE FACTOR INDEX

METHOD

Qi = 0.5yi + 0.3ri + 0.2pi

18
Slide 19

ESTIMATING FUTURE
DEMAND
• Macroeconomic forecast

• Industry forecast

• Company sales forecast

19
Slide 20

FORECASTING METHODS
• Methods based on judgment
– Unaided judgment
• (when experts are unbiased, large changes are unlikely, experts know
the market, they possess privileged information)
– Delphi technique
• (experts asked indep opinion, given feedback, again asked – 2 or 3
rounds till consensus is reached)
– Structured analogies
• (e.g. similar product has been introduced in another market)
– Game theory
– Judgmental Decomposition
• (dividing the forecast into parts. E.g. prob – to forecast sales for a
brand; break it down into forecast for indus sales, m’t share, selling
price etc.)
20
Slide 21

• Methods based on judgment (contd.)

– Judgmental bootstrapping
• (experts give opinion; based on that, regression models
are dev’d; more accurate than unaided judgment; weight
given to diff factors; useful for new products with little
past data)
– Simulated interaction
• (role playing; particularly for conflict situations; e.g.
involving a supplier; decisions taken by role players are
used for forecasting)
– Intention & expectation survey of consumers
• (asked intention & expect’n; these may differ since
intention is based on an ideal situation but expect’n is
based on probability of that situ’n happening)
– Conjoint analysis
• (E.g. ask consumer preferences for alternative product
designs) 21
Slide 22

• Methods based on quantitative data

– Extrapolation
• (based on historical data; e.g. exponential smoothing –
smoothens out fluctuations & gives more weightage to
recent data)
– Quantitative analogies
• (e.g. what will be sales for a drug after patent is removed
– look at historical sales figures for a similar drug)
– Rule-based forecasting
• Experts’ knowledge & time-series data are integrated; e.g.
trends are extrapolated only when they agree with
manager’s prior expectations)

22
Slide 23

• Methods based on quantitative data (contd.)

– Neural network
• Computer intensive methods that use decision making
processes similar to human brain. Recognize patterns in
the data. Large amount of data required.
– Data mining
– Causal models
• Key is to identify the important variables
– Segmentation
• Break down prob into components; make forecast for
each component; combine. E.g. make forecasts for
woolen garments in different climatic zones and then
combine them.
23
Slide 24

BASIS OF FORECASTS
• What people say
– (survey of buyers’ opinion, sales force opinion,
expert opinion etc.)

• What people do
– (test marketing etc.)

• What people have done

– (records of past buying behaviour, time series
analysis, statistical data analysis etc.)
24
Slide 25

STUDYING THE
ENVIRONMENT

• FAD

• TREND

• MEGATREND

25
Slide 26

• Fad – unpredictable, short-lived and without social,

economic and political significance

• Trend – a direction or sequence of events that have some

momentum and durability
– Longer than a fad; reveals the shape of the future; has longevity, is
observable across several market areas and consumer activities and
is consistent with other significant indicators occurring or
emerging at at the same time. E.g. vigilante consumer, health
consciousness

• Megatrend – large social, economic, political and

technological changes that are slow to form, and once in
place, they influence us for some time
– (7 to 10 years or longer) e.g. global economy, global lifestyles,
women in leadership

26
Slide 27

ENVIRONMENT
• Demographic environment
– World population growth
– Population age mix
– Ethnic markets
– Educational groups
– Household patterns
– Geographical shifts in population

27
Slide 28

• Economic environment
– Subsistence economy
– Raw material exporting economy
– Industrializing economy
– Industrial economy

• Natural environment
– Shortage of raw material
– Increased energy costs
– Increased pollution levels
– Govt’s role in environment protection
28
Slide 29

• Technological environment
– Pace of technological change
– Opportunities for innovation
– Varying R&D budgets
– Increased regulation

• Political & Legal environment

– Legislation regulating business
– Special interest groups

• Social & Cultural environment

– Core cultural values
– Subcultures
– Secondary values
29