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Techniques & Methods of Demand Forecasting
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3. Techniques & Methods of Demand Forecasting

Techniques & Methods of Demand

Forecasting
 Post last modified:23 January 2021
 Reading time:9 mins read

What is Demand forecasting?

Demand forecasting is a process of predicting the demand for an
organisation’s products or services in a specified time period in the future.
 Table of Contents [Hide]
 1 What is Demand forecasting?
 2 Techniques & Methods of Demand Forecasting
o 2.1 Qualitative Techniques
 2.1.1 Survey Methods
o 2.2 Quantitative Techniques
 2.2.1 Time Series Analysis
 2.2.2 Smoothing Techniques
 2.2.3 Barometric Methods
 2.2.4 Econometric Methods
 3 Business Economics Tutorial

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Demand Forecasting: Steps, Features, Techniques, Method
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2. Marketing Essentials>
3. Demand Forecasting: Steps, Features, Techniques, Method

Demand Forecasting: Steps,

Features, Techniques, Method
 Post last modified:2 January 2021
 Reading time:10 mins read

What is Demand Forecasting?

Demand forecasting is an attempt to estimate the future level of demand
on the basis of past as well as present knowledge and experience, to avoid
both under production and overproduction.
It may be based on estimates of demand potential of the entire industry.
The demand forecasting serves as the reference point for all marketing
control efforts. It is indispensable in modern business.

Table of Contents [Hide]

 1 What is Demand Forecasting?
 2 What is Forecasting?
 3 Demand Forecasting Definition
 4 Steps in Demand Forecasting
o 4.1 Identification of Objective
o 4.2 Nature of Product and Market
o 4.3 Determinants of Demand
o 4.4 Analysis of Factors
o 4.5 Choice of Method
o 4.6 Testing Accuracy
 5 Features of Demand Forecasting
o 5.1 Time Horizon
o 5.2 Level of Detail
o 5.3 Stability
o 5.4 Pattern of Data
o 5.5 Type of Model
o 5.6 Cost
o 5.7 Accuracy
o 5.8 Ease of Application
 6 Methods & Techniques of Demand Forecasting
o 6.1 Survey Methods
  6.1.1 Consumer Survey Method
 6.1.2 Collective Opinion Method
 6.1.3 Delphi Method
 6.1.4 Market Experiment Method
o 6.2 Statistical Methods
 6.2.1 Time Series Analysis
 6.2.2 Regression Analysis
 7 Importance of Demand Forecasting
o 7.1 Distribution of resources
o 7.2 Helps in avoiding wastages of resources
o 7.3 Serves as a direction to production
o 7.4 Pricing
o 7.5 Sales policy
o 7.6 Decrease of business risk
o 7.7 Inventory management
 8 Factors Affecting Demand Forecasting

What is Forecasting?
Forecasting is an attempt to predict the future by examining the past.
Business firms can estimate and minimise future risk and uncertainty
through forecasting and forward planning. Without forecasting, forward
planning will be directionless and meaningless.

Demand Forecasting Definition

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.

– Cundiff and Still

Demand forecasting may be defined as the process of finding values for

demand in future time periods
Evan J. Douglas

Steps in Demand Forecasting

Demand forecasting is a scientific exercise. It has to go through a number
of steps. At each step, critical considerations are required to be made.
Steps in demand forecasting are:
1. Identification of Objective
2. Nature of Product and Market
3. Determinants of Demand
4. Analysis of Factors
5. Choice of Method
6. Testing Accuracy
Forecasting

Identification of Objective
Economist first should be clear about the uses of forecast data and how it
is related to forward planning by the firm. Depending upon the scenario, the
economist has to choose the type of forecast: short-run, active or passive,
conditional or non-conditional, etc.

Nature of Product and Market

Nature of the product or service is an important consideration for which we
are attempting a demand forecast. Forecasting of demand must examine
carefully whether the product is a consumer good or producer good,
perishable or durable.

It should also consider the stage at which the product is i.e. introduction,
growth, maturity and saturation, or obsolescence and decline.
Finally, the nature of competition in the market (perfect or imperfect) should
not be overlooked.

Determinants of Demand
Different determinants will assume a different degree of importance in
different demand functions, depending on the nature of product and nature
of forecasts, In addition, it is important to consider socio-psychological
determinants; especially demographic, sociological and psychological
factors affecting the demand.

Analysis of Factors
In an analysis of statistical demand function, it is customary to classify the
explanatory factors into

 Trend factors
 Cyclical factors
 Seasonal factors
 Random factors
An analysis of factors is especially important depending upon whether it is
the aggregate demand in the economy or the industry’s demand or the
company’s demand or the consumer’s demand which is being predicted.
Choice of Method
The economist has to choose a particular technique from among various
techniques of demand forecasting, depending upon the nature of the
product.

Testing Accuracy
There are various methods for testing statistical accuracy in a given
forecast. Some of them are simple and inexpensive; others are quite
complex and difficult.

This testing is needed to avoid/reduce the margin of forecasting error and

thereby to improve the decision-making.

Read: Consumer Behaviour – Classification, Importance, Stages

Features of Demand Forecasting

Eight major features of demand forecasting method can be identified
with forecasting methods (techniques) to identify key characteristics of a
good demand forecasting method.

Features of Demand Forecasting

Time Horizon
The length of time over which a decision is being made has a bearing on
the appropriate technique to use. The probability of forecasting error
generally decreases with an increase in the length of the time horizon.

Level of Detail
The level of detail needed should match the focus of the decision-making
unit in the forecast.

For example, production planning must make its decision at the individual
product level, whereas the corporate planning department is likely to be
happy with aggregate demand forecasts by product categories.
Stability
Forecasting in situations that are relatively stable over time requires less
attention than those that are in constant flux. In stable situations, the
existing pattern is assumed to continue in the future and past patterns can
be easily extrapolated in future.
Pattern of Data
Data required to use the underlying-relationships should be available on a
timely basis. Each forecasting method is based on an underlying
assumption about the data.

As different forecasting methods vary in their ability to identify different

patterns, it is useful to make the pattern in the data fit with the method that
suits it the most.

Type of Model
Other assumptions are also made in each forecasting technique that must
fit the situation under consideration. The technique used should be easily
comprehended by the management to give quick meaningful results.

Cost
Several costs are associated with adopting a forecasting procedure. The
variation in costs affects the selection of the forecasting method. There is a
need for an economic consideration of balancing the benefits against the
extra cost of providing the improved forecasting.

Accuracy
It is measured by the degree of deviations between past forecasts and
current actual performance or present forecasts and future performance. If
the likely state comes close to the actual state, it means that the forecast is
dependable.

Ease of Application
Models must be chosen within the abilities of the users to understand them
and within the time allowed for using them. This will enable management to
properly interpret the results. The simplicity of handling the method matters
in the selection of the method.

Read: 4Ps of Marketing Mix

Methods & Techniques of Demand

Forecasting
The choice of choosing techniques of demand forecasting is
complicated because each situation might require a different method.
Management should be aware of the factors favouring one method over
another in a given demand-forecasting situation.
Some of the methods of demand forecasting are discussed below:

Methods & Techniques of Demand Forecasting

Survey Methods
Under this approach, surveys are conducted about the intentions of
consumers (individuals, firms or industries), opinion of experts or of
markets.

When taking sample surveys, a selected subset is surveyed and through

study, inferences are drawn. These methods are usually suitable for short-
term forecasts due to the nature of consumers’ intentions.

A few important survey methods:

Consumer Survey Method
A firm can ask consumers, what and how much they are planning to buy at
various prices of the product for the forthcoming time period, usually a year.

Collective Opinion Method

Also called sales-force polling), salesmen or experts are required to
estimate expected future demand of the product in their respective
territories and sections.

Delphi Method
It is also known as Reasoned Opinion. A variant of opinion poll and survey
method is a Delphi method, developed by Rand Corporation of USA in the
late 1940s for predicting technical changes.

Market Experiment Method

Under this method, the main determinants of the demand of a product like
price, advertising, product design, packaging, quality, etc., are identified.

These factors are then varied separately over different markets or over
different time periods, holding other factors constant. The effect of the
experiment on consumer behaviour is studied under actual or controlled
market conditions, which is used for overall forecasting purpose.

Statistical Methods
These methods make use of historical data (time series or cross-section)
as a basis for extrapolating quantitative relationships to arrive at the future
demand patterns and trends. The data may also be analysed through
econometric models.

These are useful for long-term forecasting, for old products and for larger
levels of aggregation. They are based on scientific ways of estimation,
which are logical, unbiased and proved to be useful. However, the biggest
disadvantage is that it is difficult to apply these methods.

Time Series Analysis

It is an arrangement of statistical data in chronological order, i.e., in
accordance with its time of occurrence. It reflects the dynamic pace of
steady movements of a phenomenon, over a period of time.

Regression Analysis
Regression analysis is perhaps the most popular method of forecasting
among economists. It is a mathematical analysis of the average relation
between two or more variables, in terms of the original units of the data.

Read: What is Marketing Environment?

Importance of Demand Forecasting

Importance of demand forecasting are given below:
1. Distribution of resources
2. Helps in avoiding wastages of resources
3. Serves as a direction to production
4. Pricing
5. Sales policy
6. Decrease of business risk
7. Inventory management
 Demand
Forecasting Importance

Distribution of resources
We know that inputs are processed to result into output. These inputs
include resources like materials, machinery and of course human
resources.

The business firm also has to make decisions regarding capital

arrangement, manpower planning and so on. In short, the estimation of
demand enables the firm to undertake critical business decisions.

Helps in avoiding wastages of resources

Demand forecasting is not an option but compulsion in today’s competitive
environment. In order to avoid wastages, it is always beneficial to have a
sense of future demand for products and services.
Serves as a direction to production
If there is a proper prediction of the demand, then it serves as a handy tool
for the businesses to undertake future production activities. According to
the demand in the market, the company can control their production.

Pricing
The decision regarding the pricing of goods and services is perhaps one of
the most critical business decisions. If there are sincere predictions about
the future sales of the firm’s product then it could serve as a good aid to
devise pricing strategies.

Sales policy
Production is followed by sales. The business firms can plan their sales
policy effectively on the backdrop of demand forecasting.

This also implies that the distribution of goods and services can be done
appropriately depending upon the predictions of the demand for the
product.

Decrease of business risk

Where there is a business there is a risk. Demand forecasting though does
not completely remove the business uncertainties, helps in reducing the
risks and uncertainties to a certain extent.
Inventory management
Inventories is one of those aspects which is closely associated with
demand. This is because inventories are kept by the producers to meet the
demand in the coming times.

Factors Affecting Demand Forecasting

1. Prevailing economic conditions
2. Existing conditions of the industry
3. Existing condition of an organisation
4. Prevailing market conditions
5. Sociological conditions
6. Psychological conditions
7. Competitive conditions
8. Import-export policies
 Factors Influencing
Demand Forecasting

Techniques & Methods of Demand

Forecasting
Different organisations rely on different techniques to forecast demand for
their products or services for a future time period depending on their
requirements and budget.

Methods of demand forecasting are broadly categorised into two types. Let
us discuss these techniques & methods of demand forecasting in detail:

1. Qualitative Techniques
o Survey Methods

2. Quantitative Techniques
o Time Series Analysis
o Smoothing Techniques
o Barometric Methods
 o Econometric Methods

Methods of Demand Forecasting

Qualitative Techniques
Qualitative techniques rely on collecting data on the buying behaviour of
consumers from experts or through conducting surveys in order to forecast
demand.These techniques are generally used to make shortterm forecasts
of demand.
Qualitative techniques are especially useful in situations when historical
data is not available; for example, introduction of a new product or service.
These techniques are based on experience, judgment, intuition, conjecture,
etc.

Survey Methods
Survey methods are the most commonly used methods of forecasting
demand in the short run. This method relies on the future purchase plans of
consumers and their intentions to anticipate demand.
Thus, 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. The two types of survey methods
are explained as follows:
 Complete enumeration survey: This method is also referred to as
the census method of demand forecasting. In this method, almost all
potential users of the product are contacted and surveyed about their
purchasing plans.

Based on these surveys, demand forecasts are made. The aggregate

demand forecasts are attained by totalling the probable demands of all
individual consumers in the market.

 Sample survey: In this method, only a few potential consumers (called

sample) are selected from the market and surveyed. In this method, the
average demand is calculated based on the information gathered from
the sample.
Opinion poll
Opinion poll methods involve taking the opinion of those who possess
knowledge of market trends, such as sales representatives, marketing
experts, and consultants.

The most commonly used opinion polls methods are explained as follows:

 Expert opinion method: In this method, sales representatives of

different organisations get in touch with consumers in specific areas.
They gather information related to consumers’ buying behaviour, their
reactions and responses to market changes, their opinion about new
products, etc.

 Delphi method: In this method, market experts are provided with the
estimates and assumptions of forecasts made by other experts in the
industry. Experts may reconsider and revise their own estimates and
assumptions based on the information provided by other experts.

 Market studies and experiments: This method is also referred to as

market experiment method. In this method, organisations initially select
certain aspects of a market such as population, income levels, cultural
and social background, occupational distribution, and consumers’ tastes
and preferences.

Among all these aspects, one aspect is selected and its effect on
demand is determined while keeping all other aspects constant.
Quantitative Techniques
Quantitative techniques for demand forecasting usually make use of
statistical tools. In these techniques, demand is forecasted based on
historical data.
These methods are generally used to make long-term forecasts of demand.
Unlike survey methods, statistical methods are cost effective and reliable
as the element of subjectivity is minimum in these methods. Let us discuss
different types of quantitative methods:

Time Series Analysis

Time series analysis or trend projection method is one of the most
popular methods used by organisations for the prediction of demand in the
long run. The term time series refers to a sequential order of values of a
variable (called trend) at equal time intervals.
Using trends, an organisation can predict the demand for its products and
services for the projected time. There are four main components of time
series analysis that an organisation must take into consideration while
forecasting the demand for its products and services. These components
are:

 Trend component: The trend component in time series analysis

accounts for the gradual shift in the time series to a relatively higher or
lower value over a long period of time.
 Cyclical component: The cyclical component in time series analysis
accounts for the regular pattern of sequences of values above and below
the trend line lasting more than one year.
 Seasonal component: The seasonal component in time series analysis
accounts for regular patterns of variability within certain time periods,
such as a year.
 Irregular component: The irregular component in time series analysis
accounts for a short term, unanticipated and non-recurring factors that
affect the values of the time series.
Smoothing Techniques
In cases where the time series lacks significant trends, smoothing
techniques can be used for demand forecasting. Smoothing techniques are
used to eliminate a random variation from the historical demand.

This helps in identifying demand patterns and demand levels that can be
used to estimate future demand. The most common methods used in
smoothing techniques of demand forecasting are simple moving average
method and weighted moving average method.

The simple moving average method is used to calculate the mean of

average prices over a period of time and plot these mean prices on a graph
which acts as a scale.

For example, a five-day simple moving average is the sum of values of all
five days divided by five.
The weighted moving average method uses a predefined number of time
periods to calculate the average, all of which have the same importance.

For example, in a four-month moving average, each month represents 25%

of the moving average.
Barometric Methods
Barometric methods are used to speculate the future trends based on
current developments. This methods are also referred to as the leading
indicators approach to demand forecasting.
Many economists use barometric methods to forecast trends in business
activities. The basic approach followed in barometric methods of demand
analysis is to prepare an index of relevant economic indicators and forecast
future trends based on the movements shown in the index.

The barometric methods make use of the following indicators:

 Leading indicators: When an event that has already occurred is
considered to predict the future event, the past event would act as a
leading indicator.

For example, the data relating to working women would act as a leading
indicator for the demand of working women hostels.

 Coincident indicators: These indicators move simultaneously with the

current event.

For example, a number of employees in the non-agricultural sector, rate

of unemployment, per capita income, etc., act as indicators for the
current state of a nation’s economy.

 Lagging indicators: These indicators include events that follow a

change. Lagging indicators are critical to interpret how the economy
would shape up in the future. These indicators are useful in predicting
the future economic events.

For example, inflation, unemployment levels, etc. are the indicators of

the performance of a country’s economy.
Econometric Methods
Econometric methods make use of statistical tools combined with
economic theories to assess various economic variables (for example,
price change, income level of consumers, changes in economic policies,
and so on) for forecasting demand.
The forecasts made using econometric methods are much more reliable
than any other demand forecasting method. An econometric model for
demand forecasting could be single equation regression analysis or a
system of simultaneous equations. A detailed explanation of regression
analysis is given in the next section.

 Regression Analysis: The regression analysis method for demand

forecasting measures the relationship between two variables. Using
regression analysis a relationship is established between the dependent
(quantity demanded) and independent variable (income of the consumer,
price of related goods, advertisements, etc.).
For example, regression analysis may be used to establish a relationship
between the income of consumers and their demand for a luxury product.
In other words, regression analysis is a statistical tool to estimate the
unknown value of a variable when the value of the other variable is known.
After establishing the relationship, the regression equation is derived
assuming the relationship between variables is linear.

The formula for a simple linear regression is as follows:

Y =a + bX
Where Y is the dependent variable for which the demand needs to be
forecasted; b is the slope of the regression curve; X is the independent
variable; and a is the Y-intercept. The intercept a will be equal to Y if the
value of X is zero.