Methods of Demand Forecasting

Demand forecasting is the art as well as the science of predicting the likely demand for a product or service
in the future. This prediction is based on past behavior patterns and the continuing trends in the present.
Hence, it is not simply guessing the future demand but is estimating the demand scientifically and
objectively. Thus, there are various methods of demand forecasting which we will discuss here.

Methods of Demand Forecasting

There is no easy or simple formula to forecast the demand. Proper judgment along with the scientific formula
is needed to correctly predict the future demand for a product or service. Some methods of
demand forecasting are discussed below:

1] Survey of Buyer’s Choice

When the demand needs to be forecasted in the short run, say a year, then the most feasible method is to
ask the customers directly that what are they intending to buy in the forthcoming time period. Thus, under
this method, potential customers are directly interviewed. This survey can be done in any of the following
ways:

a. Complete Enumeration Method: Under this method, nearly all the potential buyers are asked about
their future purchase plans.

b. Sample Survey Method: Under this method, a sample of potential buyers are chosen scientifically
and only those chosen are interviewed.

c. End-use Method: It is especially used for forecasting the demand of the inputs. Under this method,
the final users i.e. the consuming industries and other sectors are identified. The desirable norms of
consumption of the product are fixed, the targeted output levels are estimated and these norms are
applied to forecast the future demand of the inputs.

Hence, it can be said that under this method the burden of demand forecasting is on the buyer. However, the
judgments of the buyers are not completely reliable and so the seller should take decisions in the light of
his judgment also.

The customer may misjudge their demands and may also change their decisions in the future which in turn
may mislead the survey. This method is suitable when goods are supplied in bulk to industries but not in the
case of household customers.

2] Collective Opinion Method

Under this method, the salesperson of a firm predicts the estimated future sales in their region. The
individual estimates are aggregated to calculate the total estimated future sales. These estimates are
reviewed in the light of factors like future changes in the selling price, product designs, changes in
competition, advertisement campaigns, the purchasing power of the consumers, employment
opportunities, population, etc.

The principle underlying this method is that as the salesmen are closest to the consumers they are more
likely to understand the changes in their needs and demands. They can also easily find out the reasons
behind the change in their tastes.

Therefore, a firm having good sales personnel can utilize their experience to predict the demands. Hence,
this method is also known as Salesforce opinion or Grassroots approach method. However, this method
depends on the personal opinions of the sales personnel and is not purely scientific.
Know more about Law Of Demand And Elasticity Of Demand

3] Barometric Method

This method is based on the past demands of the product and tries to project the past into the future. The
economic indicators are used to predict the future trends of the business. Based on future trends, the
demand for the product is forecasted. An index of economic indicators is formed. There are three types of
economic indicators, viz. leading indicators, lagging indicators, and coincidental indicators.

The leading indicators are those that move up or down ahead of some other series. The lagging indicators
are those that follow a change after some time lag. The coincidental indicators are those that move up and
down simultaneously with the level of economic activities.

4] Market Experiment Method

Another one of the methods of demand forecasting is the market experiment method. Under this method,
the demand is forecasted by conducting market studies and experiments on consumer behavior under actual
but controlled, market conditions.

Certain determinants of demand that can be varied are changed and the experiments are done keeping
other factors constant. However, this method is very expensive and time-consuming.

5] Expert Opinion Method

Usually, market experts have explicit knowledge about the factors affecting demand. Their opinion can help
in demand forecasting. The Delphi technique, developed by Olaf Helmer is one such method.

Under this method, experts are given a series of carefully designed questionnaires and are asked to forecast
the demand. They are also required to give the suitable reasons. The opinions are shared with the experts to
arrive at a conclusion. This is a fast and cheap technique.

6] Statistical Methods
The statistical method is one of the important methods of demand forecasting. Statistical methods are
scientific, reliable and free from biases. The major statistical methods used for demand forecasting are:

a. Trend Projection Method: This method is useful where the organization has a sufficient amount of
accumulated past data of the sales. This date is arranged chronologically to obtain a time series.
Thus, the time series depicts the past trend and on the basis of it, the future market trend can be
predicted. It is assumed that the past trend will continue in the future. Thus, on the basis of the
predicted future trend, the demand for a product or service is forecasted.

b. Regression Analysis: This method establishes a relationship between the dependent variable and the
independent variables. In our case, the quantity demanded is the dependent variable and income,
the price of goods, the price of related goods, the price of substitute goods, etc. are independent
variables. The regression equation is derived assuming the relationship to be linear. Regression
Equation: Y = a + bX. Where Y is the forecasted demand for a product or service.

The Scope of Demand Forecasting

The scope of demand forecasting depends upon the operated area of the firm, present as well as what is
proposed in the future. Forecasting can be at an international level if the area of operation is international. If
the firm supplies its products and services in the local market then forecasting will be at local level.
The scope should be decided considering the time and cost involved in relation to the benefit of the
information acquired through the study of demand. Cost of forecasting and benefit flows from such
forecasting should be in a balanced manner.

Types of Forecasting or approaches

There are two types of forecasting:

 Based on Economy

 Based on the time period

1. Based on Economy

There are three types of forecasting based on the economy:

i. Macro-level forecasting: It deals with the general economic environment relating to the economy as
measured by the Index of Industrial Production(IIP), national income and general level of
employment, etc.

ii. Industry level forecasting: Industry level forecasting deals with the demand for the industry’s
products as a whole. For example demand for cement in India, demand for clothes in India, etc.

iii. Firm-level forecasting: It means forecasting the demand for a particular firm’s product. For example,
demand for Birla cement, demand for Raymond clothes, etc.

2. Based on the Time Period

Forecasting based on time may be short-term forecasting and long-term forecasting

i. Short-term forecasting: It covers a short period of time, depending upon the nature of the industry.
It is done generally for six months or less than one year. Short-term forecasting is generally useful in
tactical decisions.

ii. Long-term forecasting casting: Long-term forecasts are for a longer period of time say, two to five
years or more. It gives information for major strategic decisions of the firm. For example, expansion
of plant capacity, opening a new unit of business, etc.

What are the different demand forecasting techniques?

Introduction

Demand forecasting is the process of predicting future sales by using historical data to make informed
business decisions about everything from inventory planning, and warehousing needs to running promotions
and meeting customer expectations. Demand forecasting helps the business estimate the total sales and
revenue for a future period of time. The predictions depend upon the past sales pattern and the continuing
trend and user behavior in the present. Subsequently, it is not just simply estimating the future demands but
combining several techniques for estimating the demand scientifically and objectively. Before we continue to
various techniques to forecast demand, it is necessary to know about the types of forecasts an organization
performs.
Types of forecasting

There are several demand forecasting techniques, based on techniques, your forecast may differ. Demand
Forecasting can majorly classified based on the level of detailing, the time period considered and the scope
of the market considered. Most organizations do multiple demand forecasts to get a better picture out of it.

 Active Demand Forecasting:An Active demand forecasting model takes into consideration market
campaigns, market analysis, and research and market expansion plans. This type of forecasting is
done for scaling and diversifying business with aggressive growth plans such as startups. As startups
have less historical data so they have to make estimations based on external data.

 Passive Demand Forecasting: Passive demand forecasting is the simplest way to make predictions
using historical data. This type of forecasting is mainly used by well-established organizations with an
ample amount of historical data and market experience.

 Short Term Demand Forecasting: Short-term demand forecasting will make predictions for the next
three to twelve months of time period. It is used to act quickly to changes in customer demand and
market behavior. In this type of forecasting, real-time sales data is used to manage just in time
inventory.

 Long Term Demand Forecasting: Data security is non-negotiable in today’s world. Snowflake takes
this seriously, offering robust security features to protect your precious data. From encryption to
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 External Macro Forecasting: External macro forecasting helps to overlook trends in the broader
economy. This projection looks at how those trends will affect your goals. An external macro demand
forecast also can offer you direction for a way to satisfy those goals.

 Internal Business Forecasting:Internal Business Forecasting deals with internal business operations
such as business financing, supply-chain management, cash on hand, and personnel. It basically
points towards the areas where the organizations need to increase the capacity in order to meet the
expansion goals.

Based on the type of forecasting, required by an organization, various forecasting techniques can be used,
which we will discuss in the next segment of the blog.

Demand Forecasting Techniques

There are two methods in which demand forecasting can be done i.e
(A) Survey Methods and

(B) Statistical Methods.

 Advanced Analytics:

 Passive Demand Forecasting: Passive demand forecasting is the simplest way to make predictions
using historical data. This type of forecasting is mainly used by well-established organizations with an
ample amount of historical data and market experience.

 Short Term Demand Forecasting 2: Short-term demand forecasting will make predictions for the next
three to twelve months of time period. It is used to act quickly to changes in customer demand and
market behavior. In this type of forecasting, real-time sales data is used to manage just in time
inventory.

 Long Term Demand Forecasting: Data security is non-negotiable in today’s world. Snowflake takes
this seriously, offering robust security features to protect your precious data. From encryption to
access controls, your data is in safe hands.

 External Macro Forecasting: External macro forecasting helps to overlook trends in the broader
economy. This projection looks at how those trends will affect your goals. An external macro demand
forecast also can offer you direction for a way to satisfy those goals.

 Internal Business Forecasting: Internal Business Forecasting deals with internal business operations
such as business financing, supply-chain management, cash on hand, and personnel. It basically
points towards the areas where the organizations need to increase the capacity in order to meet the
expansion goals.

 Advanced Analytics:

 Market Research
In the market research technique, consumer-specific survey forms are sent out in tabular format to
get insights that an organization can’t get from internal sales. It gives better information about the
type of customers and demographic data which will help to target future markets. Market Research
helps young companies to know their customer base better.

 Sale Force Opinion

SalesForce Opinion method use data from sales groups to forecast demand. Salespeople of an
organization are closest to their customer base, hence can generate valuable information on
customer needs, behavior, and feedback and can even give information about the competition in the
markets.

 Delphi Method
In Delphi Method, an organization hires a group of external experts. Each Expert generates a forecast
based on their market knowledge. After this process forecasts are shared among the experts
anonymously, hence experts get influenced by each other’s forecasts. Now the experts are asked
again to generate a forecast and this process is repeated until all experts reach a near consensus
scenario. The process is intended to permit the experts to expand on one another’s information and
assessments.

 Statistical Methods:
  Trend Projection This is the simplest and most common demand forecasting technique
which is used by organizations. Trend Projection uses past sales data to project future sales.
This technique can be used by organizations with a sufficient amount of past sales
data(typically more than 18 to 24 months). The data is arranged in chronological order to
form a time series, time series depicts the past trends based on which future market trends
can be predicted.
 Barometric Forecasting Technique
In Barometric Technique, demand is forecasted based on the basis of past events or the events
occurring in the present. It is done by analyzing statistical and economic indicators such as saving,
investment, and income. This method can be implemented even in the absence of past data. For
example, suppose the government plans for a large housing project, this indicates that there would
be high demand for construction materials in the future.
 Econometric Forecasting Technique
This technique combines past sales data with the factors that influence the demand to create a
mathematical formula to predict future demand. It finds the relation between the dependent
variable and the independent variables. If only one factor affects the demand it is known as a single
variable demand function or simple regression. Whereas if there are multiple factors affecting the
demand, it is known as multiple variable demand function or multiple regression.
 Regression Equation : Y = a + bX , Y is the forecasted demand.
Demand forecasting helps organizations to make smart business decisions. Based on the business
requirements, sales data, market research, and economic factors different demand forecasting
techniques can be used. It is often an iterative, highly detailed, and expertise-driven process.

 Demand Forecasting For A New Product

Demand forecasting for new products is quite different from that for established products. Here
the firms will not have any past experience or past data for this purpose. An intensive study of
the economic and competitive characteristics of the product should be made to make efficient
forecasts.
Professor Joel Dean, however, has suggested a few guidelines to make forecasting of demand
for new products.

a. Evolutionary approach
The demand for the new product may be considered as an outgrowth of an existing product. For
e.g., Demand for new Tata Indica, which is a modified version of Old Indica can most effectively
be projected based on the sales of the old Indica, the demand for new Pulsor can be forecasted
based on the sales of the old Pulsor. Thus when a new product is evolved from the old product,
the demand conditions of the old product can be taken as a basis for forecasting the demand for
the new product.
b. Substitute approach
If the new product developed serves as substitute for the existing product, the demand for the
new product may be worked out on the basis of a „market share‟. The growths of demand for all
the products have to be worked out on the basis of intelligent forecasts for independent variables
that influence the demand for the substitutes. After that, a portion of the market can be sliced out
for the new product. For e.g., A moped as a substitute for a scooter, a cell phone as a substitute
for a land line. In some cases price plays an important role in shaping future demand for the
product.

c. Opinion Poll approach

Under this approach the potential buyers are directly contacted, or through the use of samples of
the new product and their responses are found out. These are finally blown up to forecast the
demand for the new product.

d. Sales experience approach

Offer the new product for sale in a sample market; say supermarkets or big bazaars in big cities,
which are also big marketing centers. The product may be offered for sale through one super
market and the estimate of sales obtained may be „blown up‟ to arrive at estimated demand for
the product.

e. Growth Curve approach

According to this, the rate of growth and the ultimate level of demand for the new product are
estimated on the basis of the pattern of growth of established products. For e.g., An Automobile
Co., while introducing a new version of a car will study the level of demand for the existing car.

f. Vicarious approach
A firm will survey consumers‟ reactions to a new product indirectly through getting in touch
with some specialized and informed dealers who have good knowledge about the market, about
the different varieties of the product already available in the market, the consumers‟ preferences
etc. This helps in making a more efficient estimation of future demand.
These methods are not mutually exclusive. The management can use a combination of several of
them supplement and cross check each other.

What Is the Law of Supply?

The law of supply is a basic economic concept. It states that an increase in the price of goods or
services results in an increase in their supply. Supply is defined as the quantity of goods or services
that suppliers are willing and able to provide to customers. The law works like this: Rising prices
mean that products become more profitable, assuming other factors such as production costs
remain constant. The prospect of higher profits therefore motivates businesses to supply more of
these products. Existing suppliers may increase the supply of more profitable products at the
expense of less profitable ones. In addition, new suppliers may enter the market, further increasing
the overall supply.
Key Takeaways
 The law of supply states that an increase in the price of goods or services results in an
increase in the quantity that suppliers make available to the market.
 Existing suppliers increase production of higher-priced goods to maximize profits, while new
suppliers may also enter the market.
 The law of supply assumes that all other factors remain constant. In practice, many other
factors can play into supply decisions, including rising production costs and market
competition.
Law of Supply Explained
Consider the example of a pizzeria that sells pasta dishes as well as pizzas. If the price of pizza rises,
and with it the profit per pie, the business may focus its resources on increasing the production of
pizza` — while decreasing the production of pasta offerings. As the price keeps rising, the pizzeria
continues to increase the pizza supply because it can increase its profits by doing so. This
relationship can be represented graphically as a supply curve, which shows the number of pizzas
produced at different prices.

As prices and output continue to increase, the supplier eventually reaches the maximum quantity
that it can provide with its existing equipment — it can't make any more pizzas because its ovens
are already full at all times. The pizzeria may then decide to invest in an additional pizza oven to
increase its supply. Meanwhile, other entrepreneurs establish new pizzerias because the higher
prices justify the startup costs. This further increases the market supply.
How Does the Law of Supply Work?
The law of supply applies to services and labor as well as goods — a higher price can increase the
supply. For example, employees may be more likely to work overtime if they're paid at a higher
hourly rate. Professions that offer relatively high salaries, such as software engineering, may attract
more people to educational programs that ultimately increase the supply of qualified job applicants.
In practice, prices are often determined by the relationship between supply and demand. A related
economic theory, the law of supply and demand, describes how this works. Rising demand for
products and services tends to drive up prices. This provides an incentive for providers to increase
the supply. However, as the price of those products and services continues to rise, fewer customers
will buy them. The law of supply and demand predicts that as a result, free markets move toward an
equilibrium point where the price and quantity of the supply exactly matches customer demand.
Factors That Affect Supply
The law of supply predicts that rising prices result in increases in the supply of goods or services —
but that's assuming all other factors remain constant. In reality, many other factors can affect
supply, and those factors can change frequently. Here are 10 of the most common.
 Price and demand forecasts.
Many businesses base their production plans on forecasts of future demand and pricing, not just on
what customers are currently buying. Enterprise resource planning software can help businesses
improve demand forecasts by considering factors such as economic growth and seasonality.
Furthermore, if a product's price is expected to increase, businesses may hold back stock so they
can make a larger profit in the future.
 Production costs.
The law of supply assumes that companies can increase profits by selling more goods or services
when prices rise, which provides them with an incentive to increase the supply. But if the price rises
reflect increased production costs, that may not be true. If a pizzeria raises the price of a slice by 50
cents because the cost of the tomatoes used in the sauce went up by 50 cents, its profit is
unchanged — so the price increase doesn't represent an incentive to make more pizzas. On the
other hand, if production costs fall and prices remain stable, profits increase and so does the
incentive to supply more pizzas.
 Competition.
New suppliers may enter the market even if prices are not increasing and demand is stable. Often,
these new suppliers aim to offer products at lower prices than existing providers.
 Technology.
Technology can enable companies to make and sell more products at a lower cost, thus increasing
the available supply.
 Transportation.
Transportation delays or rising shipping costs can affect a company's ability to increase its supply of
goods. If goods can't move from warehouses to retail shelves, they can't be purchased by customers
and don't count toward the market supply.
 Availability of raw materials and labor.
A business may want to increase the supply of a product but unable to do so because it can't
purchase the raw materials or hire the people required to produce it.
  Government regulations and subsidies influence supply in some industries.
Companies must meet strict regulatory requirements when introducing certain healthcare products,
for example, which can limit the supply of these products regardless of the demand. On the other
hand, government subsidies support the supply of some local transportation services.
 Weather and natural disasters.
For many agricultural goods, the weather has a major impact on supply. A dry season or flooding
can greatly reduce crop yields.
 Comparable goods.
A change in the supply of one good can affect the supply of other goods. For example, if the market
price of corn increases, farmers may dedicate more land to growing corn. As a result, they use less
land for growing squash, so the supply of squash decreases.
 Business objectives.
Companies may adjust the supply of products to achieve specific objectives. For example, some
businesses introduce limited-edition collectibles in small quantities to increase their desirability and
value. At the other extreme, companies sometimes supply products in large quantities to build
market presence and brand awareness, even if increasing the supply doesn't generate higher
profits.
Types of Law of Supply
There are five types of supply — market supply, joint supply, composite supply, short-run supply and
long-run supply. Here's how to distinguish them.
 Market supply.
The market supply is the total supply from all producers. If a town has three pizzerias that produce
30, 40, and 25 pies a day, respectively, at $20 apiece, the market supply at the $20 price level is 95
pies a day.
 Joint supply.
Joint supply occurs when multiple goods are produced from a single source. For example, cows can
be used to produce milk as well as leather.
 Composite supply.
Composite supply occurs when goods are intrinsically linked and sold only as a bundle. For example,
a car manufacturer typically offers air conditioning and audio systems only as part of a bundled
package with the purchase of a new vehicle.
 Short-run supply.
Short-run supply is the total supply that companies can provide without additional investment in
business expansion. It's also known as short-term supply.
 Long-run supply.
Long-run supply, also known as long-term supply, includes factors such as suppliers' investment in
new production capacity. It also considers that new suppliers may enter the market while older
firms exit.
Exceptions to Law of Supply
Not every business scenario is determined by the law of supply. There are many exceptions —
situations where the supply of goods and services isn't determined by the pricing. Here are some of
the most common.
 Economies of scale.
When a producer becomes large enough, it may be able to apply economies of scale to reduce the
cost of producing goods and services. As a result, it may be able to increase its supply while keeping
prices stable or even reducing them.
 Shift in business plan.
If a business is shifting its market focus and plans to cease production of some products, it may
temporarily increase the supply of those products at a low price to eliminate any remaining stock
and raw materials. A business may also use this approach as an emergency measure if it needs cash
in a hurry.
 Monopoly.
When there's only a single supplier of a good or service, the company may be able to increase or
decrease its supply or pricing irrespective of external factors.
 Competitive pricing.
In a highly competitive market, businesses may increase the supply of their products while reducing
the price to capture market share.
 Expiring or dated goods.
If perishable goods near their expiration date, a business may increase their supply early to try to
recoup some of the production costs before the goods become unsellable.
 One-of-a-kind goods.
Handmade art or other rare goods cannot be easily reproduced, so the supply cannot expand even
if the price rises.
 Inelastic supply.
For many goods, including agricultural products, it is difficult to quickly adjust the supply even if the
price rises. It can take months or even years for crops to reach maturity and become available to
customers. For example, an apple farmer who adds trees to their orchard won't be able to harvest
the fruit for several years.
Law of Supply Examples
The law of supply operates across almost every industry. Here are some common examples.
 The owner of a coffee shop notices that sandwich prices are rising. To boost profits, the
owner starts making more sandwiches for sale.
 A movie studio sees that major theaters are charging higher prices for blockbuster films, so it
begins greenlighting more projects to develop star-studded action movies.
 Noticing that the price of organic vegetables is increasing faster than the price of
conventionally produced crops, a farmer starts the process of gaining organic certification.
Conclusion
The law of supply describes a simple relationship between pricing and supply — the higher the price
of an item, the more suppliers will make. In practice, many other factors can affect both supply and
pricing, including production costs, the availability of raw materials and the competitive
environment. So while it's useful to consider the law of supply when making business decisions, it's
equally important to take into account other factors that may apply to your situation.