Demand Forecasting: Concept, Significance,

Objectives and Factors

An organization faces several internal and external risks, such as high competition, failure of
technology, labor unrest, inflation, recession, and change in government laws.

Therefore, most of the business decisions of an organization are made under the conditions of
risk and uncertainty.

An organization can lessen the adverse effects of risks by determining the demand or sales
prospects for its products and services in future. Demand forecasting is a systematic process that
involves anticipating the demand for the product and services of an organization in future under
a set of uncontrollable and competitive forces.

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Some of the popular definitions of demand forecasting are as follows:

According to Evan J. Douglas, “Demand estimation (forecasting) may be defined as a process of

finding values for demand in future time periods.”

In the words of Cundiff and Still, “Demand forecasting is an estimate of sales during a specified
future period based on proposed marketing plan and a set of particular uncontrollable and
competitive forces.”

Demand forecasting enables an organization to take various business decisions, such as planning
the production process, purchasing raw materials, managing funds, and deciding the price of the
product. An organization can forecast demand by making own estimates called guess estimate or
taking the help of specialized consultants or market research agencies. Let us discuss the
significance of demand forecasting in the next section.

Significance of Demand Forecasting:

Demand plays a crucial role in the management of every business. It helps an organization to
reduce risks involved in business activities and make important business decisions. Apart from
this, demand forecasting provides an insight into the organization’s capital investment and
expansion decisions.

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The significance of demand forecasting is shown in the following points:

i. Fulfilling objectives:
Implies that every business unit starts with certain pre-decided objectives. Demand forecasting
helps in fulfilling these objectives. An organization estimates the current demand for its products
and services in the market and move forward to achieve the set goals.

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For example, an organization has set a target of selling 50, 000 units of its products. In such a
case, the organization would perform demand forecasting for its products. If the demand for the
organization’s products is low, the organization would take corrective actions, so that the set
objective can be achieved.

ii. Preparing the budget:

Plays a crucial role in making budget by estimating costs and expected revenues. For instance, an
organization has forecasted that the demand for its product, which is priced at Rs. 10, would be
10, 00, 00 units. In such a case, the total expected revenue would be 10* 100000 = Rs. 10, 00,
000. In this way, demand forecasting enables organizations to prepare their budget.

iii. Stabilizing employment and production:

Helps an organization to control its production and recruitment activities. Producing according to
the forecasted demand of products helps in avoiding the wastage of the resources of an
organization. This further helps an organization to hire human resource according to
requirement. For example, if an organization expects a rise in the demand for its products, it may
opt for extra labor to fulfill the increased demand.

iv. Expanding organizations:

Implies that demand forecasting helps in deciding about the expansion of the business of the
organization. If the expected demand for products is higher, then the organization may plan to
expand further. On the other hand, if the demand for products is expected to fall, the organization
may cut down the investment in the business.

v. Taking Management Decisions:

Helps in making critical decisions, such as deciding the plant capacity, determining the
requirement of raw material, and ensuring the availability of labor and capital.

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vi. Evaluating Performance:

Helps in making corrections. For example, if the demand for an organization’s products is less, it
may take corrective actions and improve the level of demand by enhancing the quality of its
products or spending more on advertisements.
vii. Helping Government:

Enables the government to coordinate import and export activities and plan international trade.

Objectives of Demand Forecasting:

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Demand forecasting constitutes an important part in making crucial business decisions.

The objectives of demand forecasting are divided into short and long-term objectives,
which are shown in Figure-1:

The objectives of demand forecasting (as shown in Figure-1) are discussed as follows:

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i. Short-term Objectives:

Include the following:

a. Formulating production policy:

Helps in covering the gap between the demand and supply of the product. The demand
forecasting helps in estimating the requirement of raw material in future, so that the regular
supply of raw material can be maintained. It further helps in maximum utilization of resources as
operations are planned according to forecasts. Similarly, human resource requirements are easily
met with the help of demand forecasting.

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b. Formulating price policy:

Refers to one of the most important objectives of demand forecasting. An organization sets
prices of its products according to their demand. For example, if an economy enters into
depression or recession phase, the demand for products falls. In such a case, the organization sets
low prices of its products.

c. Controlling sales:

Helps in setting sales targets, which act as a basis for evaluating sales performance. An
organization make demand forecasts for different regions and fix sales targets for each region
accordingly.

d. Arranging finance:

Implies that the financial requirements of the enterprise are estimated with the help of demand
forecasting. This helps in ensuring proper liquidity within the organization.

ii. Long-term Objectives:

Include the following:

a. Deciding the production capacity:

Implies that with the help of demand forecasting, an organization can determine the size of the
plant required for production. The size of the plant should conform to the sales requirement of
the organization.

b. Planning long-term activities:

Implies that demand forecasting helps in planning for long term. For example, if the forecasted
demand for the organization’s products is high, then it may plan to invest in various expansion
and development projects in the long term.

Factors Influencing Demand Forecasting:

Demand forecasting is a proactive process that helps in determining what products are needed
where, when, and in what quantities. There are a number of factors that affect demand
forecasting.

Some of the factors that influence demand forecasting are shown in Figure-2:
The various factors that influence demand forecasting (“as shown in Figure-2) are
explained as follows:

i. Types of Goods:

Affect the demand forecasting process to a larger extent. Goods can be producer’s goods,
consumer goods, or services. Apart from this, goods can be established and new goods.
Established goods are those goods which already exist in the market, whereas new goods are
those which are yet to be introduced in the market.

Information regarding the demand, substitutes and level of competition of goods is known only
in case of established goods. On the other hand, it is difficult to forecast demand for the new
goods. Therefore, forecasting is different for different types of goods.

ii. Competition Level:

Influence the process of demand forecasting. In a highly competitive market, demand for
products also depend on the number of competitors existing in the market. Moreover, in a highly
competitive market, there is always a risk of new entrants. In such a case, demand forecasting
becomes difficult and challenging.

iii. Price of Goods:

Acts as a major factor that influences the demand forecasting process. The demand forecasts of
organizations are highly affected by change in their pricing policies. In such a scenario, it is
difficult to estimate the exact demand of products.

iv. Level of Technology:

Constitutes an important factor in obtaining reliable demand forecasts. If there is a rapid change
in technology, the existing technology or products may become obsolete. For example, there is a
high decline in the demand of floppy disks with the introduction of compact disks (CDs) and pen
drives for saving data in computer. In such a case, it is difficult to forecast demand for existing
products in future.

v. Economic Viewpoint:

Play a crucial role in obtaining demand forecasts. For example, if there is a positive development
in an economy, such as globalization and high level of investment, the demand forecasts of
organizations would also be positive.

Apart from aforementioned factors, following are some of the other important factors that
influence demand forecasting:

a. Time Period of Forecasts:

Act as a crucial factor that affect demand forecasting. The accuracy of demand forecasting
depends on its time period.

Forecasts can be of three types, which are explained as follows:

1. Short Period Forecasts:

Refer to the forecasts that are generally for one year and based upon the judgment of the
experienced staff. Short period forecasts are important for deciding the production policy, price
policy, credit policy, and distribution policy of the organization.

2. Long Period Forecasts:

Refer to the forecasts that are for a period of 5-10 years and based on scientific analysis and
statistical methods. The forecasts help in deciding about the introduction of a new product,
expansion of the business, or requirement of extra funds.

3. Very Long Period Forecasts:

Refer to the forecasts that are for a period of more than 10 years. These forecasts are carried to
determine the growth of population, development of the economy, political situation in a
country, and changes in international trade in future.

Among the aforementioned forecasts, short period forecast deals with deviation in long period
forecast. Therefore, short period forecasts are more accurate than long period forecasts.

4. Level of Forecasts:

Influences demand forecasting to a larger extent. A demand forecast can be carried at three
levels, namely, macro level, industry level, and firm level. At macro level, forecasts are
undertaken for general economic conditions, such as industrial production and allocation of
national income. At the industry level, forecasts are prepared by trade associations and based on
the statistical data.

Moreover, at the industry level, forecasts deal with products whose sales are dependent on the
specific policy of a particular industry. On the other hand, at the firm level, forecasts are done to
estimate the demand of those products whose sales depends on the specific policy of a particular
firm. A firm considers various factors, such as changes in income, consumer’s tastes and
preferences, technology, and competitive strategies, while forecasting demand for its products.

5. Nature of Forecasts:

Constitutes an important factor that affects demand forecasting. A forecast can be specific or
general. A general forecast provides a global picture of business environment, while a specific
forecast provides an insight into the business environment in which an organization operates.
Generally, organizations opt for both the forecasts together because over-generalization restricts
accurate estimation of demand and too specific information provides an inadequate basis for
planning and execution.

Steps of Demand Forecasting:

The Demand forecasting process of an organization can be effective only when it is conducted
systematically and scientifically.

It involves a number of steps, which are shown in Figure-3:

The steps involved in demand forecasting (as shown in Figure-3) are explained as follows:

1. Setting the Objective:

Refers to first and foremost step of the demand forecasting process. An organization needs to
clearly state the purpose of demand forecasting before initiating it.

Setting objective of demand forecasting involves the following:

a. Deciding the time period of forecasting whether an organization should opt for short-term
forecasting or long-term forecasting

b. Deciding whether to forecast the overall demand for a product in the market or only- for the
organizations own products

c. Deciding whether to forecast the demand for the whole market or for the segment of the
market

d. Deciding whether to forecast the market share of the organization

2. Determining Time Period:

Involves deciding the time perspective for demand forecasting. Demand can be forecasted for a
long period or short period. In the short run, determinants of demand may not change
significantly or may remain constant, whereas in the long run, there is a significant change in the
determinants of demand. Therefore, an organization determines the time period on the basis of its
set objectives.

3. Selecting a Method for Demand Forecasting:

Constitutes one of the most important steps of the demand forecasting process Demand can be
forecasted by using various methods. The method of demand forecasting differs from
organization to organization depending on the purpose of forecasting, time frame, and data
requirement and its availability. Selecting the suitable method is necessary for saving time and
cost and ensuring the reliability of the data.

4. Collecting Data:

Requires gathering primary or secondary data. Primary’ data refers to the data that is collected by
researchers through observation, interviews, and questionnaires for a particular research. On the
other hand, secondary data refers to the data that is collected in the past; but can be utilized in the
present scenario/research work.

5. Estimating Results:

Involves making an estimate of the forecasted demand for predetermined years. The results
should be easily interpreted and presented in a usable form. The results should be easy to
understand by the readers or management of the organization.

Demand Forecasting: Meaning and

Importance
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After reading this article we will learn about:- 1. Meaning of Demand Forecasting 2. Importance
of Demand Forecasting 3. Demand (Sales) Forecasting Periods 4. Factors Affecting5. Methods
of Estimating Future Demand 6. Demand Forecasting of New Products 7. Criteria 8. Procedure.

Contents:

1. Meaning of Demand Forecasting

2. Importance of Demand Forecasting
3. Demand (Sales) Forecasting Periods
4. Factors Affecting Demand (Sales) Forecasting
5. Methods of Estimating Future Demand
6. Demand Forecasting of New Products
7. Criteria of Good Forecasting Method
8. Demand/Sales Forecasting Procedure
1. Meaning of Demand Forecasting:

Accurate demand forecasting is essential for a firm to enable it to produce the required quantities
at the right time and arrange well in advance for the various factors of production e.g., raw
materials, equipment, machine accessories etc. Forecasting helps a firm to access the probable
demand for its products and plan its production accordingly. Forecasting is an important aid in
effective and efficient planning.

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It reduces the uncertainty and making the organization more confident of coping with the
external environment. The increasing availability of economic data, the continuous improvement
of technique and the expanded computational ability provided by the computer made it possible
for firms to forecast their demand/sales with considerable accuracy.

Accurate demand forecasting is essential for a firm to enable it to produce the required quantities
at the right time and arrange well in advance for the various factors of production.

According to Henry Fayol, “the act of forecasting is of great benefit to all who take part in
the process and is the best means of ensuring adaptability to changing circumstances. The
collaboration of all concerned lead to a unified front, an understanding of the reasons for
decisions and a broadened outlook”.

2. Importance of Demand Forecasting:

The importance of demand/sales forecasting can be understood by the following lines:

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1. Helpful in deciding the number of salesmen required to achieve the sales objective.

2. Determination of sales territories.

3. To determine how much production capacity to be built up.

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4. Determining the pricing strategy.

5. Helpful in deciding the channels of distribution and physical distribution decision.

6. To decide to enter a new market or not.

7. To prepare standard against which to measure performance.

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8. To assess the effect of a proposed marketing programme.

9. To decide the promotional mix.

10. Helpful in the product mix decisions relating to width and length of product line.

3. Demand (Sales) Forecasting Periods:

Demand forecasting is done for a definite period. The period can be one month, three month, one
year, two years, five years, ten years etc. Generally, organisations are involved in forecasting the
demand for one year and taking that demand forecast as a base, the demand for 6 months, 3
months and one month is derived.

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So demand forecasting is of two types on the basis of periods:

1. Short run demand forecast.

2. Long run demand forecast.

1. Short Run Demand Forecast:

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Its period ranges from one week to six months.

Following important decisions are taken under short run demand forecasting:

(a) Evolving suitable production policy so as to avoid the problem of over production and under
production.

(b) Determining appropriate price policy so as to avoid an increase when the market conditions
are expected to be weak and a reduction when the market is going to be quite strong.

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(c) Forecasting short term financial requirements. Cash requirements depend on sales level and
production operations. Sales forecasts enable arrangement of sufficient funds on reasonable
terms well in advance.
(d) Setting sales targets and establishing controls and incentives. If targets are set too high, they
will be discouraging sales man who fail to achieve them; if set too low, the targets will be
achieved easily and hence incentives will prove meaningless.

(e) Helping the firm in reducing cost of purchasing raw materials and controlling inventory.

2. Long Run Demand Forecast:

The period of this type of forecasting ranges from one year to five years. This type of forecasting
is generally done for a product line rather than for an individual product.

The purpose of long run demand forecasting includes:

(a) New unit planning or expansion of an existing unit. A long term demand forecasting helps to
plan for the new units or at the same time existing units to expand their activities. A multi-
product firm must determine total demand situation and the demand for different items.

(b) Planning for long term financial requirements. If the demand is more and it takes long term,
then for such long term financial requirements could be planned and made available.

(c) Planning for manpower requirements under the long term demand, manpower is mostly
required. For this purpose, persons have to be trained.

4. Factors Affecting Demand (Sales) Forecasting:

The following factors are to be considered for while going demand forecasting:

1. Purchasing power of customers

2. Demography

3. Price

4. Replacement demand

5. Credit conditions

6. Conditions within the industry

7. Socio economic conditions.

1. Purchasing Power of Customers:

This is determined by disposable personal income (personal income minus direct taxes and other
deduction). Some people suggest the use of discretionary income in place of disposable income.

Discretionary income can be estimated by subtracting three items for disposable income, viz.,
inputted income, and income in kind, major fixed out lay payments such as mortgage debt
payments, insurance premium payments, and rent and essential expenditures such as food and
clothing and transport expenses based upon consumption in a normal year.

Discretionary income can be quite an important determinant in case of consumer non-durables

which are luxuries.

2. Demography:

This involves the characteristics of the population, human as well as non-human, using the
product concerned. For example, it may pertain to the number and characteristics of children in a
study of the demand for toys or the number and characteristics of automobiles in a study of the
demand for tyres.

In fact, it involves distinguishing between the total market demand and market segments. Such
segments may be derived in terms of income, social status, sex, age, male-female ratios, urban
rural ratios, educational level, geographic location etc. The segment when quantified can be used
as an independent variable affecting the demand for the product in question.

3. Price:

The price factor is another important variable to be included in demand analysis. Here, one has to
consider the prices of the product and also its substitutes and complements. One may also
consider the price differences between the product concerned and its substitutes and
complements.

Price as a determinant of the volume of sales of consumer non-durables is sometimes more

important through cross elasticity (involving substitute products) than it is directly in terms of
price elasticity. Direct price elasticity can be expected to be more important with respect to those
consumer non-durables which are capable of shortage and are free from risks of change in styles.

4. Replacement Demand:

The total demand consists of:

(i) New owner demand, and

(ii) A replacement demand.

The replacement demand tends to grow with the growth in the total stock with the consumers.
Once a person gets used to a thing, he is unlikely to give it up at some future date. This makes
replacement demand regular and predictable. For certain established products, life expectancy
tables are been prepared in developed countries in order to estimate the average replacement
rates.

When purchasing power increases, the scrap-page rate is lower. But as production catches up, the
scrap-page tends to increase. The total demand is symbolically stated as D = N + R where N is
new owner demand and R is the replacement demand. Each of these independent variables may
be for casted separately.

The purchasing power, the number of families and some other factors depending on the product
concerned, set an upper limit to the maximum or the optimum ownership level. It is the level
towards which the actual volume of consumer stock tends to gravitate. The difference between
optimum and the actual stock shows the growth potential of the demand for durable goods.

5. Credit Conditions:

The availability of credit and hire purchase facility tends to push up the demand for consumer
durables. In India, for consumer durables like, refrigerators television, scooters etc., hire
purchase facility is available. In western countries, the extension of credit is used as sales
promotion measure.

Among the manufacturers, the Indian sewing machine company the manufacturers of singer,
claim to have pioneered hire purchase in India (Business India). Hawkins pressure cookers are
also available on hire purchase basis. The intensified competition between car and two wheeler
manufactures has led to many firms extending credit for their purchase.

6. Conditions within the Industry:

The sales of a company is the part of the total sales of industry. If the conditions of the industry
changes then the sales of each of the firm in the industry is affected. All the times the new
marketers enter the market and some eclipse.

It is also to be decided about the position of our firm in the industry whether it has the leadership
status or followers status or another. For example, if the prices of the product by a firm is
reduced than there is an impact on other firms. Same is the case with promotion and distribution.
All these factors affect the demand forecasting of the product.

7. Socio Economic Conditions:

Socio economic conditions of the country also affects the sales forecasting. They may include
total national income, per capita income, standard of living of the masses, education, inflation,
deflation etc. For instance, if the prices are rising sharply and the production is not increasing to
cope the demand then it will be difficult for the public to satisfy their wants.
It will lead to the reduction in demand and thereby the demand forecast will be affected on the
contrary. If there is a rapid increase in the per capita income along with increase in production,
the demand will increase and thereby by the demand forecast will be affected.

5. Methods of Estimating Future Demand:

These are variety of methods and techniques for forecasting demand/sales. Which one or ones to
use depends on factors such as the cost involved, the forecast’s time period, the market’s stability
or volatility and the availability of personnel with forecasting skills. Some techniques are
qualitative while others are highly quantitative.

The demand/sales forecasting methods include:

1. Survey of buyer’s intentions/opinion survey method.

2. Sales force composite method/collective opinion method.

3. Executive judgment/jury of executive opinion method.

4. Delphi method.

5. Time series analysis.

6. Market test method.

7. Correlation method.

1. Survey of Buyer Intention:

Customers may be asked to communicate their buying intentions in a coming period. This
requires identifying potential buyers and asking them if they intend to buy a certain product
during a specific future time period and if so, how many units and from whom will they buy.
Survey of this type is used especially for industrial products’ demand forecasting.

Merits:

1. Method is suitable for industrial product demand forecasting.

2. Surveys are sometimes used for forecasting demand of a new product. People may have need
for a product are asked if they would buy it. These surveys often are conducted before the
product is produced in large quantities to determine if the marketer really has a marketable
product.

Demerits:
1. It is very expensive and time consuming.

2. A number of biases may creep into the surveys. If shortages are expected, customers may tend
to exaggerate their requirements.

3. This method is not very useful in the case of house hold customer goods because of the
irregularity in customer’s buying intentions, their inability to foresee their choice when faced
with the multiple alternatives and the possibility that the buyers’ plans may not be real but only
wish full thinking.

2. Sales Force Composite Method/Collective Opinion Method:

In this method, the sales men are required to estimate expected sales in their respective territories
in a given period. Then the individual sales force forecasts are combined to produce the total
company forecast. This method is used based on the assumption that sales persons are closest to
the customers and have direct contact with the customers.

Merits:

1. The forecasts are based on first-hand knowledge of salesmen.

2. This method may prove quite useful in forecasting sales of new products especially in the
industrial market.

3. This method is simple.

Demerits:

1. It is a completely subjective method.

2. The sales person may give the lower estimates if the estimates alone are used to set their sales
quotas.

3. Sales persons may be unaware of the broaderer economic changes likely to have an impact on
the future demand.

4. The sales people are more concerned with making sales than with forecasting sales, which, to
them may seem like needless paper work.

3. Executive Judgement/ Jury of Executive Opinion Method:

It involves combining and averaging the sales projections of executives in different departments
to come up with a forecast. It they are experienced and knowledgeable about the factors that
influence the sales, and if they are current on market developments, the approach can work.

Merits:
1. Forecast may be made quickly and economically.

2. Much more factual than made from consumer opinion and sales force method.

Demerits:

1. It is very subjective and hence forecast lacks scientific reality.

2. The executives may rate recent experiences more heavily than more distant once which may
result in too much optimism or pessimism regarding future sales.

4. Delphi Method:

It consists of an attempt to arrive at a consensus in an uncertain area by questioning a group of

experts repeatedly until the responses appear to converge along a single line (consensus). The
participants are supplied the responses to previous questions from others in the group by the
coordinator.

The coordinator provides each expert with the responses of the others including their reasons,
each expert is given the opportunity to react to the information or considerations advanced by
others. Delphi Method was originally developed at Rand Corporation in the late 1940s by Olaf
Helmer, Dalkey and Gorden and has been successfully used in the area of technological
forecasting i.e., predicting technical change.

5. Time Series Analysis:

Time series analysis is based on extrapolation, which is the process of projecting a past trend or
relationship into the future in the belief that history will repeat itself. Unfortunately, this is not
always the case, especially in the longer term.

Hence, the importance of making assumptions about future events which may disturb previous
patterns. Hence also the relevance of qualitative forecasting as described below, which attempts
to predict the future without relying on statistical analysis of past events.

Components of Time Series Analysis:

The components of time series analysis are:

1. Cycle, which comprises the wave like movement of sales which react to periodic events or
swings in economic activity.

2. Trend, which is found by fitting a straight or curved line through past sales.This process is
known as trend fitting.

3. Erratic events, which include strikes or any major disaster that is unpredictable and needs to be
removed from past data.
4. Season, which is the consistent pattern of sales movement during the year, for example,
Christmas for the retail trade.

All these components are taken into account in time-series analysis using the techniques of trend
fitting, smoothing and decomposition.

(A) Trend Fitting:

A projection is best made from a reasonably long series of data as shown in Fig. 5.2. There are
three basic shapes of trend lines (Fig. 5.2, 5.3, 5.4, 5.5):

1. Linear trends which are straight lines as in Fig. 5.2 increasing by about the same amount each
period.

2. Exponential trends which increase by the same percentage each year. Unless plotted on semi
log paper they form a curve as shown in Fig. 5.3
3. S-shaped curves where typically, as illustrated in Fig. 5.4 Sales build up slowly after a product
launch, accelerate as the product takes on and then ease off as maturity is achieved.

This pattern corresponds broadly with the initial stages of the product life cycle. The S-shaped
curve can take other forms, for example a heavily promoted product may start very rapidly
before easing off and finally declining, as illustrated in Fig. 5.5.
(B) Smoothing:

If sales fluctuate considerably during the year it may be desirable too smooth out the peaks and
hollows to produce a recognizable trend as a basis for a projection.

The two most commonly used smoothing techniques are:

1. Moving Averages:

Which are calculated by taking a period say, three months. The sales are totaled for the period
and divided by 3 to produce the average per month. When the next monthly sales figures are
available, they are added to the previous total, but the sales for the first of the original three
months are deducted.

The residual figure is divided by 3 to produce the moving average. Moving averages can be
plotted on to a chart in the same way as raw sales figures, and trends are then extrapolated.

2. Exponential Smoothing:

This technique takes into account the greater significance in forecasting of recent trends by
progressively weighting them more heavily. This produces an exponential curve.

(C) Decomposition Analysis:

By definition, smoothing a trend removes seasonal variations which are therefore not reproduced
in the projection. But a company has to take account of such variations in its trading pattern
when making sales plans and it is, therefore, useful to restore them by the technique of
decomposition analysis.

This is described in detail by Bolt, but essentially involves:

1. Taking the seasonal element out of past trends.

2. Projecting the seasonal variations for the same period

3. Adjusting the de-seasonalised projection to take account of forecast seasonal movements.

4. Projecting the de-seasonalised trends for the period of the forecast. Time series extrapolation
by short cut formula

A simple formula for predicting next year’s sales uses the per cent of sales increase or decrease
of this year compared to last year:

Next year’s sale = This year’s sales x (This year’s sales/Last year’s sales)

Thus, if sales this year is 80, 00,000 and last year were 60, 00,000 the prediction of sales for the
next year would be.

Next year sales = 8 x (816) = 10.67 = 1, 06, 70,000 units.

Merits:

a. Simple trend analysis is for products with a history of stable demand than for products with
erratic sales patterns.

Demerits:

a. The method cannot be used to forecast sales of a new product because past sales data are
absent.

(6) Market Test Method:

In a market test the firm distributes the product in one or more markets to total potential
customer response to the marketing mix. The market test measures actual sales not intentions to
buy. If test markets are selected wisely and the test is conducted properly, the marketer can
generalize test experience to the entire market and develop a demand/sales forecast.

Merits:

1. It is very useful when surveys of buyer intentions are too costly or the data gathered is of
questionable value.

2. The method is generally used to forecast demand for new products. However, they can also be
used to forecast sales of existing products that being into the new geographical areas.

3. Market tests are also used to measure response elasticity to various levels of marketing.
Demerits:

1. Market tests are expensive and time consuming.

2. There is no guarantee. That buyer response in the test market will continue by the period of the
test, or that test results will be duplicated in other markets.

(7) Correlation Method:

The method is based on historical sales data. When there is a close relationship between sales
volume and a well-known economic indicator, correlation method can be used.

The marketer could develop a mathematical formula that describes the relationship between sales
and independent variable and by plugging needed information into the formula, could than
forecast sales on the basis of this independent variable.

6. Demand Forecasting of New Products:

Demand forecasting of new products is little bit difficult than forecasting demand for existing
product. Its reason is that the product is not available and no historical data is available. In these
conditions the forecasting is being done keeping in view the inclination arid wishes of the
customers to purchase.

For this a research is being conducted but there is a problem because it is also very difficult for
the customer to say anything without seeing and using the product before. So it is very difficult
to forecast the demand for new products.

For forecasting here we base our estimate on the conventional methods which are as
follows:

1. Evolutionary approach

2. Substitute approach

3. Market testing approach

4. The potential consumer approach.

1. Evolutionary Approach:

This method is based on assumption that the new product is the form of continuous improvement
of the old one. The demand is for-casted as the basis of the demand of the old product. This
method is only appropriate when the marketer is sure that the customers would take the new one
as the improved version of the old one.
2. Substitute Approach:

This method is based on assumption that the new product is substitute to previous product and
fulfill the same objective of the customers as by the previous product. On this basis it can be
calculated that how far the new product would take the place of old one and on this basis the
forecasting is done.

3. Market Testing Approach:

When product is quite new in the country, or good estimates are not available or buyers do not
prepare their purchase plan, this method is very often adopted. Under this method, seller
introduces his product in a part in the market segment for quite sometimes and makes the
assessment of sales for the whole segment or the market on the basis of results of test sales.

Merits:

1. It is best when a new product is introduced in the country for the first time.

2. Sales forecast is based on actual results hence forecast is more reliable.

3. During test period any defect in the product may also come in the knowledge of the sales
executive or production executive which may be removed immediately to make the product
successful in the market when it is fully commercialized.

Demerits:

1. Sales forecast data are projected on the basis of results of a part of the segment or the market.

2. It takes long time to test the market.

4. The Potential Consumer Approach:

If the new product is absolutely unique that cannot be compared with the existing products, then
the forecaster must attempt to determine who the users might be potential consumer should be
described and properly classified on the basis of appropriate segment variables e.g., income, age,
statues, occupation, sex and so on.

Accordingly the size of each target market should be estimated. Thus a forecaster may be able to
estimate obtainable sales volumes of the new product.

7. Criteria of Good Forecasting Method:

Following criteria are generally used to evaluate the effectiveness and efficiency of a
forecasting method:
1. Simplicity and Ease of Comprehension:

The technique should be simple to understand and easy to operate. Management must able to
understand and have confidence in the techniques used. Complicated mathematical and statistical
procedures may be avoided.

2. Durability:

Durability of the forecasting power of a demand and functions depends on reasonableness and
simplicity of functions fitted.

3. Accuracy:

The method should be accurate to suit to the needs of the time.

4. Availability:

Techniques should give quick results and useful information.

5. Economy:

Costs must be weighted against the importance of the forecast to the operations of the business.

8. Demand/Sales Forecasting Procedure:

It involves the following steps:

Step-1:

Determining the objective and the purpose for which the forecasts are to be used.

Step-2:

Determining the relative importance of the factor which affect sales of each product.

Step-3:

Selecting the appropriate forecasting method.

Step-4:

Collecting and analysing the data.

Step-5:

Making assumption regarding effect of factor.

Step-6:

Making specific forecasts relating to the product and territories involved.

Step-7:

Periodically reviewing and reviving the forecasts.