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Demand Forecasting-

Marketing Research-Lecture
Handout
Marketing Research
Indian Institute of Management (IIM)
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Lecture #42
Demand Forecasting

Frequently marketing researchers are requested to estimate the current market and sales potential
for a new or existing product. This information is essential to configure sales territories, assign
sales quotas, determine number of salespersons needed and their compensation level, appropriate
advertising and sales promotion budgets, finding new prospect accounts, dropping slow products,
and making new product decisions.

Sales or demand potential for new or established products can be estimated.


Importance of Forecasting
The forecasting of sales or demand is a critical input to marketing decisions and making decisions
in other functional areas like production, finance, and human resources. Poor forecasting would
result in excessive inventory, inefficient sales expenses, heavy discounts, lost sales, inefficient
scheduling of production, and poor planning for cash flow and capital investments. We should
understand that forecasting provides the basis of almost all planning and control. If the forecasts
are unreliable, it is most difficult to make the right tactical or strategic decision.

Accuracy of Sales Forecasts


Sales forecasting comprises of numerical estimates and these are just estimates and are never
absolutely correct, that is the numerical estimates always differ from actual sales results. This can
be established only after the sales have been recorded. As such, there is no direct measure of
forecasting accuracy before the forecasting period. Therefore the tactics to be closer to accurate
forecasting are that we, as good researchers, should

Choose systematic and objective procedures and employ them adequately; and Select valid data
sources that yield information on time and in adequate detail.

Methods of Forecasting
There is a variety of approaches that can be used for forecasting. These are classified as
Qualitative and Quantitative.

Quantitative methods may further be sub divided into Time Series Extrapolation and
Causal Models.

List of Forecasting Methods

Qualitative Methods
• Jury of executive judgment
• Sales force estimates
• Survey of customer intentions
• Delphi docsity.com
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Time-Series Extrapolation
• Trend projection
• Moving average
• Seasonal and cyclical index

Causal Models
• Leading indicators
• Regression models

Qualitative Methods
These methods are based on the subjective judgments of various individuals in the situation
although these individuals may have access to quantitative information about the past to aid their
estimates. These individual may get an opportunity to revise and refine their estimates but still the
estimates are subjective.

Let us examine these methods one by one in detail.

Jury of executive judgment


This method involves combining the judgment of a group of managers on the issue of forecast. A
variety of concerned and informed managers representing such functional areas as marketing,
sales, operations, manufacturing, purchasing, accounting, and finance are invited, combined on
one place and asked to give their sales estimates for the next specified period. The estimates are
consolidated and may be averaged or range is determined. This method is widely used in
forecasting but it is mostly used to estimate the potential of consumer products and sales of service
companies.

Advantages and Disadvantages

Advantages include,
• It is fast and efficient
• It is quite timely as the forecast is generated by the executives who have most current
information.
• Forecast is based on collective knowledge and experience of the managers and as such
the judgment is very close to the real situation

The main disadvantage is the subjectivity of the executives.


Sales force Estimates
This method is based on the judgments of the sales force which is actually working in the field.
Each sales person is asked to give his estimate of sales in his territory for the next period. All
estimates are added and this gives a total of sales potential in all territories for the next period.
Then these estimates are fine-tuned by the sales supervisors and estimates are finalized.

As the forecasts from the sales force are drawn on the complete, sensitive and current knowledge
of the customer and market, these estimates are very close to the actual. Although these are
subjective judgments but based on rich experience of the sales force
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The disadvantages of this method include that individual salespeople can be naturally optimistic or
pessimistic. There is another serious bias to occur when the forecast is linked to the performance
measure of salesperson. In that the salesperson would intentionally underestimate the potential of
his territory so that fewer quotas are assigned to him and he can easily achieve it at the end of the
period and receives appreciation and/or any incentive attached.

The sales force estimate approach is mostly used in industrial organizations.

Survey of customer intentions


In this method, customers are requested to make their own forecasts about how much of this
product they intend to buy and use in the next period. The sales forecast, in turn, is worked out on
the basis of their buying intentions.
Sampling frame is usually the existing customer or client list, As the bulk of sales or demand
usually comes from existing customers, the sample of customers to survey the buying intentions is
taken from the existing customers. The right person in the customer organization must be
contacted

The survey of customer buying intentions works best when the number of customers, or at least the
major customers, is small. As such, the maximum use of this technique is made in industrial
organizations.

As compared to Jury of Executive Judgment or Sales force Estimate methods, Survey of Buying
Intention is more expensive and time consuming.

Delphi Approach
Delphi Approach is somehow an extension of jury of executive judgment method to refine the
forecasting process. In Delphi approach, group members are asked to make individual judgments
about the forecast. Then these judgments are compiled and the whole package is returned to each
member, so that he/she can compare his/her own estimate with those of the other members. In this
exercise, the names are obscured, and codes are given instead so that the personalities or positions
of some members in the group do not bias the opinion of other members.

The members are asked to revise their estimates in the light of others’ judgments, and if they differ
from others, state the reason why they believe that their estimates are correct. They return the
package to the coordinator who is conducting this session and serves as a clearing house. The
coordinator forwards the revised estimates with comments of each member to other members. It
means everybody is receiving everybody’s comments.

This process is repeated three or four times and the group usually reach to the final forecast of
sales.
Quantitative Methods
Time-Series Analysis
Time series analysis is simply the extrapolation of historical data in the next period. Statistical
formulas are used to extrapolate the data in the future.

Three factors are prerequisite for time-series extrapolation and must be understood clearly.
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• Data must exist in time series
• Environmental change influencing the time series can make the extrapolation err, little
ability to forecast “turning points”
• Detection of patterns or trends in the past data must be possible.

Causal Models
Causal Models involve statistical techniques that relate historical sales data to the economic factors
or forces that become the cause to increase or decrease the sales. These methods are indeed the
most sophisticated sales forecasting tools. They prove to be very correct when relevant historical
data on major forces causing changes in sales are available. Two methods are mostly used in the
Causal Models: Leading Indicators and Regression
Leading Indicators
This approach involves the identification of leading indicators which become the cause of the
variation in sales of a good or service. These factors can move the sales of a particular good or
service up or down. For example
• Urbanization may lead to new housing
• New housing lead major appliances sales
• Number of births leads the sale of infant-related goods and services

Regression Models
We have already studied simple Regression model in which independent variable/s are identified
and their values are input into the model to forecast the sale for a particular period or year. You
may recall simple regression model which is
Sales Forecast = Y = a + bX
Multiple Regression Model is
Sales Forecast=Y = a + b1X1 + b2X2 + b3X3

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