Faculty of Management

Managerial Economics

Topic 3: Demand Forecasting

Subject In-charge: Ms.Poonam

Designation: Assistant Professor

CAMPUS: JHANJERI, MOHALI

 Meaning & Definition of
Demand Forecasting
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.

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 various inputs.
 Meaning & Definition of
Demand Forecasting
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.
 Why Is Demand Forecasting
for New Products Important?
• Money is an important asset whose even slight
improper spending can hamper a company’s cost sheet.
And when it comes to supply chain verticals, these
expenses need more accountability. Demand forecasting
becomes an indispensable aspect from an organization's
planning point of view for a production process to be
efficient & intelligible.
• Preparing the budget- A new product forecasting process needs its budget
sorted out as it helps reduce risk during a good's life cycle. It benefits
efficient financial decision-making that drives cash flow, allocation of
resources, profit margins, expansion opportunities, inventory accounting,
operational costs & overall expenses.
• Better Inventory Control- The critical aspect that new product demand
forecasting models drive is it lets your business know which product your
customer base is looking out for and when they are looking to acquire it.
• Tapping into Market Potential- Dynamic Pricing is a well-known concept in
today’s ecommerce driven business. To create a sudden splurge in demands,
companies employ flash sales with reduced prices to attract higher
conversion rates.
• Better Profit Margins- Every business thrives on good profits at the end of
each quarter. With demand forecasting providing you with accurate
marketing insight which later translates into intelligent sales decision
bringing in attractive numbers – a business model more often than not will
end up returning profit on its investments.
METHODS OF DEMAND
FORECASTING
 A) Qualitative Techniques/
Opinion Polling Method
- In this method, the opinion of the buyers, sales force and expert
could be gathered to determine the emerging trend in the market.
- Suited for short term demand forecasting.
-Demand forecasting for new product can be made by qualitative
techniques.

The opinion polling methods of demand forecasting are of following

kinds:
1) Consumer Survey Method
2) Sales Force Opinion Method
3) Expert Opinion/Delphi Method
1) Consumer Survey Method
Survey method is one of the most common and direct
methods of forecasting demand in the short term. This method
encompasses the future purchase plans of consumers and
their intentions. In this method, an organization conducts surveys
with consumers to determine the demand for their existing
products and services and anticipate the future demand
accordingly.

Survey method include:

a)Complete Enumeration Survey
b)Sample Survey and Test Marketing
c)End Use
 1) Consumer Survey Method
a) Complete Enumeration Survey:
In this method records the data & aggregates of
consumers. If the data is wrongly recorded than Demand
Forecasting going wrong, than this method will be totally useless.
b) Sample Survey & Test Marketing:
Only few customers selected and their views collected.
Based on the assumption that the sample truly
represents the population.
This method is simple and does not cost much
The main disadvantage is that the sample may not be a true
representation of the entire population.
 1) Consumer Survey Method
c) End Use Method:
This method Focuses on Forecasting the demand for
Inputs i.e intermediary Goods.
Under this method, the final users i.e the consuming industries
and other sectors are identified.
The sales of a Product are projected through a survey of its end
users.

Example:
Milk is a commodity which can be used as an intermediary
good for the production of ice cream, and other dairy
products.
 2) Sales Force Opinion
Method
-In this method , instead of consumers, the opinion of salesman is sought.
-It is also referred as the “grass root approach” as it is a bottom- up method
that requires each sales person in the company to make an individual
forecast for his or her particular sales territory.
- The composite of all forecasts then constitutes the sales forecast for the
organisation.

-The main advantage is that the collecting data from its own employees is
easier for a firm than to do it from external parties.
-The main disadvantage is that the sales force may give biased views as the
projected demand affects their future job prospects.
 3) Delphi Technique
This method is also known as expert opinion method.
In this method seeks the opinion of groups of Expert through mail about
the expected level of Demand.
The identity of expert is kept secret.
These opinion exchanged among the various experts and their reactions
are sought and analyzed.
The process goes on until some sort of unanimity is arrived at among all the
experts.

The advantage is that the forecast is reliable as it is based on the opinion

of people who know the product very well.
The disadvantage is that the method is subjective and not based on scientific
analysis.
B) Quantitative Techniques/
Statistical or Analytical
Methods
These are forecasting techniques that make use of
historical quantitative data.
A statistical concept is applied to the existing data in order to
generate the predicted demand in the forecast period.
The statistical methods, which are frequently used, for
making demand projection are:
1) Trend Projection Method
2) Barometric Method
3) Regression Method
4) Econometric Method
 1) Trend Projection Method
-An old firm can use its own data of past years regarding sales in past years.
-These data are known as time series of sales.
-Assumes that past trend will continue in future.
-Past trend is extrapolated (generalised).
 2) Barometric Method
In barometric method, demand is predicted on the basis of past events or key
variables occurring in the present.
This method is also used to predict various economic indicators, such as
saving, investment, and income.
This method was introduced by Harvard Economic Service in 1920 and further
revised by National Bureau of Economic Research (NBER) in 1930s.
This technique helps in determining the general trend of business activities.
For example, suppose government allots land to the XYZ society for
constructing buildings. This indicates that there would be high demand for
cement, bricks, and steel.
The main advantage of this method is that it is applicable even in the absence
of past data.
 3) Regression Method
This method is undertake to measure the relationship between
two variables where correlation appears to exist.

E.g. The age of the air condition machine and the annual repair expenses.

This method is purely based on the statistical data.

4) Econometric Method
It is assumed that demand is determined by one or more variables. E.g.
income, population, etc.

Demand is forecast on the basis of systematic analysis of economic

relations by combining economic theory with mathematical and statistical
tools.
 Importance of Demand
Forecasting
1) Production Planning:
Expansion of output of the firm should be based on the estimates of
likely demand, otherwise there may be overproduction and consequent
losses may have to be faced.

2) Sales Forecasting:
Sales forecasting is based on the demand forecasting.
Promotional efforts of the firm should be based on the sales forcasting
 Importance of Demand
Forecasting
3) Control of Business:
For controlling the business, it is essential to have a well conceived
budgeting of costs and profits that is based on the forecast of annual
demand.

4) Inventory Control:
A satisfactory control of business inventories, raw materials,
intermediate goods, finished product, etc. requires satisfactory
estimates of the future requirements which can be traced through
demand forecasting.
 Importance of Demand
Forecasting
5) Economic Planning and Policy Making:
The government can determine its import and export policies in view of
the long-term demand forecasting for various goods in the country.

6) Growth and Long- term Investment Programs:

Demand forecasting is necessary for determining the growth rate of the
firm and its long-term investment programs and planning.
 References & Sources
• https://www.academia.edu/34707649/Managerial_Economics_Textbook - E-book by

Samuelson & Marks, Managerial Economics, 7th edition, Wiley Publications.

• https://books.google.co.in/ - Google E-book by Geetika, Managerial Economics, Tata

McGraw publication.

• T. R. Jain, Managerial Economics, Vikas Publications

Thank You.