103 EADB

Chapter-2

Dr. Rakesh Bhati

Forecasting:
Introduction, Meaning and Forecasting, Level of
Demand Forecasting,
Criteria for Good Demand Forecasting, Methods
of Demand Forecasting, Survey Methods,
Statistical Methods, Qualitative Methods,
Demand Forecasting for a New Products.
(Demand Forecasting methods - Conceptual
treatment only numericals not expected)
Demand Forecasting is the process in which historical sales data is
used to develop an estimate of an expected forecast of customer
demand.
To businesses, Demand Forecasting provides an estimate of the
amount of goods and services that its customers will purchase
in the foreseeable future.
Critical business assumptions like turnover, profit margins, cash
flow, capital expenditure, risk assessment and mitigation plans,
capacity planning, etc. are dependent on Demand
Forecasting.
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.”
 Utility of Forecasting
Forecasting reduces the risk associated with business fluctuations
which generally produce harm­ful effects in business, create
unemployment, induce speculation, discourage capital formation
and reduce the profit margin.
Forecasting is indispensable and it plays a very important part in the
determination of various policies.
In modem times forecasting has been put on scientific footing so
that the risks associated with it have been considerably minimised
and the chances of precision increased.
Significance of Demand Forecasting
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.
Significance of Demand Forecasting
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.
Significance of Demand Forecasting
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.
Significance of Demand Forecasting
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.
Significance of Demand Forecasting
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
Objectives of Demand Forecasting:
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.
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.
i. Types of Goods:
Goods can be producer’s goods, consumer goods, or services.
Apart from this, goods can be established and new goods.
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.
Is the process of making predictions of the future based on past
and present data and analysis of trends for a product or service
Types of Forecasts
-Economic forecasts
O Predict a variety of economic indicators, like money supply, inflation
rates, interest rates, etc.
-Technological forecasts
o Predict rates of technological progress and innovation.
-Demand forecasts
O Predict the future demand for a company’s products or services.
Types of Forecasting:
(i) Passive Forecast : Under passive forecast prediction
about future is based on the assumption that the firm
does not change the course of its action.
(ii) Active Forecast. : Under active forecast, prediction
is done under the condition of likely future changes in
the actions by the firms.
(i) Short term demand forecasting : In a short run forecast, seasonal
patterns are of much importance. It may cover a period of three
months, six months or one year. It is one which provides information
for tactical decisions.

(ii) Long term demand forecasting: It is helpful in suitable capital

planning. It is one which provides information for major strategic
decisions. It helps in saving the wastages in material, man hours,
machine time and capacity. Planning of a new unit must start with an
analysis of the long term demand potential of the products of the firm.
(i) External or national group of forecast: External forecast deals with
trends in general business. It is usually prepared by a company’s
research wing or by outside consultants.

(ii) Internal or company group forecast: Internal forecast includes all

those that are related to the operation of a particular enterprise such as
sales group, production group, and financial group. The structure of
internal forecast includes forecast of annual sales, forecast of products
cost, forecast of operating profit, forecast of taxable income, forecast
of cash resources, forecast of the number of employees, etc.
(i) Macro-level forecasting: Macro-level forecasting is concerned with
business conditions over the whole economy. It is measured by an
appropriate index of industrial production, national income or expenditure.
(ii) Industry- level forecasting: Industry-level forecasting is prepared by
different trade associations. This is based on survey of consumers’ intention
and analysis of statistical trends.
(iii) Firm- level forecasting : Firm-level forecasting is related to an
individual firm. It is most important from managerial view point.
(iv) Product-line forecasting: Product-line forecasting helps the firm to
decide which of the product or products should have priority in the
allocation of firm’s limited resources.
 Criteria of a Good Forecasting Method
Decision support systems consist of three elements: decision, prediction
and control.
It is, of course, with prediction that marketing forecasting is concerned.
The forecasting of sales can be re­garded as a system, having inputs
apprises and an output.
In spite of all these no one can predict future economic activity with
certainty. Forecasts are estimates about which no one can be sure.
There are certain economic criteria of broader applicability. They are: (i)
Accuracy, (ii) Plausibility, (iii) Durability, (iv) Flexibility, (v) Availability, (vi)
Economy, (vii) Simplicity and (viii) Consistency.
 Criteria of a Good Forecasting Method
(i) Accuracy:
The forecast obtained must be accurate. How is an accurate
forecast possible?
To obtain an accurate forecast, it is essential to check the
accuracy of past forecasts against present performance and of
present forecasts against future performance.
Accuracy cannot be tested by precise measure­ment but buy
judgment.
 Criteria of a Good Forecasting Method
(ii) Plausibility:
The executive should have good understanding of the technique
chosen and they should have confidence in the techniques
used.
Understanding is also needed for a proper interpretation of results.
Plausibility requirements can often improve the accuracy of
results.
 Criteria of a Good Forecasting Method
(iii) Durability:
Unfortunately, a demand function fitted to past experience may
back cost very greatly and still fall apart in a short time as a
forecaster.
The durability of the forecasting power of a demand function
depends partly on the reasonableness and simplicity of
functions fitted, but primarily on the stability of the
understanding relationships measured in the past. Of course,
the importance of durability determines the allowable cost
of the forecast.
 Criteria of a Good Forecasting Method
(iv) Flexibility:
Flexibility can be viewed as an alternative to generality.
A long lasting function could be set up in terms of basic natural
forces and human motives.
Even though fundamental, it would nevertheless be hard to measure
and thus not very useful.
A set of variables whose co-efficient could be adjusted from time to
time to meet changing conditions in more practical way to
maintain intact the routine procedure of forecasting.
 Criteria of a Good Forecasting Method
(v) Availability:
Immediate availability of data is a vital requirement and the search
for reasonable approximations to relevance in late data is a
constant strain on the forecasters patience.
The techniques employed should be able to produce meaningful
results quickly.
Delay in result will adversely affect the managerial decisions.
 Criteria of a Good Forecasting Method
(vi) Economy:
Cost is a primary consideration which should be weighted against
the importance of the forecasts to the business operations.
A question may arise: How much money and managerial effort
should be allocated to obtain a high level of forecasting accuracy?
The criterion here is the economic consideration.
 Criteria of a Good Forecasting Method
(vii) Simplicity:
Statistical and econometric models are certainly useful but they are
intolerably complex.
To those executives who have a fear of mathematics, these methods
would appear to be Latin or Greek.
The procedure should, therefore, be simple and easy so that the
management may appreciate and understand why it has been
adopted by the forecaster.
 Criteria of a Good Forecasting Method
(viii) Consistency:
The forecaster has to deal with various components which
are independent. If he does not make an adjustment in
one component to bring it in line with a forecast of
another, he would achieve a whole which would appear
consistent.
The ideal forecasting method is one that yields returns over cost with
accuracy, seems reasonable, can be formalised for reasonably long
periods, can meet new circumstances adeptly and can give up-to-date
results. The method of forecasting is not the same for all products.
There is no unique method for forecasting the sale of any commodity.

The forecaster may try one or the other method depending upon his
objective, data availability, the urgency with which forecasts are needed,
resources he intends to devote to this work and type of commodity
whose demand he wants to forecast.
1. Opinion Polling Method: In this method, the opinion of the buyers,
sales force and experts could be gathered to determine the emerging
trend in the market.
The opinion polling methods of demand forecasting are of three kinds:
(a) Consumer’s Survey Method or Survey of Buyer’s Intentions: In
this method, the consumers are directly approached to disclose their
future purchase plans. I his is done by interviewing all consumers or a
selected group of consumers out of the relevant popu­lation. This is the
direct method of estimating demand in the short run. Here the burden of
forecasting is shifted to the buyer.
(a) Consumer’s Survey Method or Survey of Buyer’s Intentions:
(i) Complete Enumeration Survey: Under the Complete Enumeration Survey, the
firm has to go for a door to door survey for the forecast period by contacting all
the households in the area.
(ii) Sample Survey and Test Marketing: Under this method some representative
households are selected on random basis as samples and their opinion is taken
as the generalised opinion.
(iii) End Use Method or Input-Output Method: This method is quite useful for
industries which are mainly producer’s goods. It helps us to understand inter-
industry’ relations. In input-output accounting two matrices used are the
transaction matrix and the input co-efficient matrix. The major efforts required
by this type are not in its operation but in the collection and presentation of
data.
(b) Sales Force Opinion Method:
This is also known as collective opinion method. In this method,
instead of consumers, the opinion of the salesmen is sought.
It is sometimes referred as the “grass roots 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 main merit of this method lies in the collective wisdom of
salesmen. This method is more useful in forecasting sales of
new products.
(c) Experts Opinion Method:
This method is also known as “Delphi Technique” of investigation.
The Delphi method requires a panel of experts, who are interrogated
through a sequence of questionnaires in which the responses to one
questionnaire are used to produce the next questionnaire.
Thus any information available to some experts and not to others is
passed on, enabling all the experts to have access to all the
information for forecasting.
The method is used for long term forecasting to estimate potential
sales for new products
2. Statistical Method:
Statistical methods have proved to be immensely useful in demand
forecasting. In order to main­tain objectivity, that is, by
consideration of all implications and viewing the problem from
an external point of view, the statistical methods are used.
(i) Trend Projection Method:
A firm existing for a long time will have its own data regarding sales for
past years. Such data when arranged chronologically yield what is
referred to as ‘time series’.
Time series shows the past sales with effective demand for a particular
product under normal conditions. Such data can be given in a tabular or
graphic form for further analysis.
This is the most popular method among business firms, partly because it is
simple and inexpensive and partly because time series data often
exhibit a persistent growth trend.
Time series has got four types of components namely, Secular Trend (T),
Secular Variation (S), Cyclical Element (C), and an Irregular or
Random Variation (I). These elements are expressed by the equation
O = TSCI.
Secular trend refers to the long run changes that occur as a result of
general tendency.
Seasonal variations refer to changes in the short run weather pattern or
social habits.
Cyclical variations refer to the changes that occur in industry during
depression and boom.
Random variation refers to the factors which are generally able such as
wars, strikes, flood, famine and so on.
Trend projection fits a trend line to a mathematical equation.
The trend can be estimated by using any one of the following methods:
(a) The Graphical Method; All values of output or sale for different
years are plotted on a graph and a smooth free hand curve is
drawn passing through as many points as possible. The
direction of this free hand curve—upward or downward—
shows the trend.
(b) The Least Square Method.: A trend line can be fitted to the time
series data with the help of statistical techniques such as least
square regression.
When the trend in sales over time is given by straight line, the
equation of this line is of the form: y = a + bx. Where ‘a’ is the
intercept and ‘b’ shows the impact of the independent variable.
We have two variables—the independent variable x and the dependent
variable y. The line of best fit establishes a kind of mathematical
relationship between the two variables x and y. This is expressed by
the regression у on x.
(ii) Barometric Technique:
A barometer is an instrument of measuring change. This method is
based on the notion that “the future can be predicted from
certain happenings in the present.”
In other words, barometric techniques are based on the idea that
certain events of the present can be used to predict the directions
of change in the future.
This is accomplished by the use of economic and statistical
indicators which serve as barometers of economic change.
Generally forecasters correlate a firm’s sales with three series:
Leading Series, Coincident or Concurrent Series and Lagging
Series
 (ii) Barometric Technique
(a) The Leading Series:
The leading series comprise those factors which move up or down
before the recession or recovery starts. They tend to reflect future
market changes.
For example, baby powder sales can be forecasted by examining the birth
rate pattern five years earlier, because there is a correlation between the
baby powder sales and children of five years of age and since baby
powder sales today are correlated with birth rate five years earlier, it is
called lagged correlation. Thus we can say that births lead to baby soaps
sales.
 (ii) Barometric Technique
(b) Coincident or Concurrent Series:
The coincident or concurrent series are those which move up or down
simultaneously with the level of the economy.
They are used in confirming or refuting the validity of the leading
indicator used a few months afterwards.
Common examples of coinciding indicators are G.N.P itself,
industrial production, trading and the retail sector.
 (ii) Barometric Technique
(c) The Lagging Series:
The lagging series are those which take place after some
time lag with respect to the business cycle.
Examples of lagging series are, labour cost per unit of the
manufacturing output, loans outstanding, leading rate of
short term loans, etc.
(iii) Regression Analysis:
It attempts to assess the relationship between at least two variables
(one or more independent and one dependent), the purpose being
to predict the value of the dependent variable from the specific
value of the independent variable.
The basis of this prediction generally is historical data. This method
starts from the assumption that a basic relationship exists between
two variables.
An interactive statistical analysis computer package is used to
formulate the mathematical relationship which exists.
For example, one may build up the sales model as:
Quantum of Sales = a. price + b. advertising + c. price of the rival products +
d. personal disposable income +u
Where a, b, c, d are the constants which show the effect of corresponding
variables as sales.
The constant u represents the effect of all the variables which have been left
out in the equation but having effect on sales.
In the above equation, quantum of sales is the dependent variable and the
variables on the right hand side of the equation are independent
variables.
If the expected values of the independent variables are substituted in the
equation, the quantum of sales will then be forecasted.
The regression equation can also be written in a multiplicative form
as given below:
Quantum of Sales = (Price)a + (Advertising)b+ (Price of the rival products)
c
+ (Personal dispos­able income Y + u
In the above case, the exponent of each variable indicates the elasticities
of the corresponding variable. Stating the independent variables in
terms of notation, the equation form is QS = P°8. Ao42 . R°.83. Y2°.68. 40
Then we can say that 1 per cent increase in price leads to 0.8 per cent
change in quantum of sales and so on.
If we take logarithmic form of the multiple equation, we can
write the equation in an additive form as follows:
log QS = a log P + b log A + с log R + d log Yd + log u
In the above equation, the coefficients a, b, c, and d represent the
elasticities of variables P, A, R and Yd respectively.
The co-efficient in the logarithmic regression equation are very
useful in policy decision making by the management.
(iv) Econometric Models:
Econometric models are an extension of the regression technique whereby
a system of independ­ent regression equation is solved. The requirement
for satisfactory use of the econometric model in forecasting is under
three heads: variables, equations and data.
The appropriate procedure in forecast­ing by econometric methods is
model building. Econometrics attempts to express economic theories in
mathematical terms in such a way that they can be verified by
statistical methods and to measure the impact of one economic variable
upon another so as to be able to predict future events.
How is demand forecasting done?
There is a seemingly endless number of ways to predict future demand
of a product or service, both qualitative and quantitative. 
One of the simplest methods used in industry is to say something like
“well my sales at this time last year were X, so I think this year they
will be about X”.
This can quickly spiral out of control, however, into things such as “but
my competitor introduced a similar product this year, so that could
reduce X to X-Y, but we also saw the economy and population of the
service region expand, so that could increase sales to X-Y+Z,…”.
How is demand forecasting done?
Using simplistic techniques can sometimes yield the best results, often in
situations where sales are very erratic, but many times they gloss over
important information which could help improve prediction accuracy.
You may have picked up on some of the important factors to consider in
a good demand forecast in the example above, such as geography,
competition, and economic indicators, but other things can come into
play as well, such the stock market, seasonal trends, overall trends,
causal relationships to various other products, and even weather.
Demand forecasting for new
products is a challenge ripe
with many pitfalls.
Steps for forecasting new product revenue
Step 1: Make it a collaborative effort
Identify a handful of key people from marketing, sales,
operations, and relevant technical departments and form a
working group. This core team will be responsible for
developing and managing the reforecasting process
through the launch period until demand planning becomes
more predictable.
Steps for forecasting new product revenue
Step 2: Identify and agree upon the assumptions
Collectively review all the available qualitative and quantitative data from
market research, market testing, and buyer surveys. Use the data to
identify a set of assumptions that can form the basis of a forecasting
model. Ideally this will include assumptions about:
– Number of consumers in the target market
– Proportion expected to buy the product
– Anticipated timing of their purchase
– Patterns of repeat purchasing and replacement purchasing
Be prepared to commission additional research or consult external
industry experts to fill any important data gaps. And always let the
working group use their collective judgement to identify a realistic range
of values for each assumption.
Steps for forecasting new product revenue
Step 3: Build granular models
Not all consumers will purchase a new product at the same
rate. Some may be prepared to queue all night around the
block to get their hands on it, but others will want to wait for
subsequent versions when any unforeseen bugs are fixed
and prices are typically lower. So it is important to build a
forecasting model that is sufficiently granular to reflect how
and when different market segments in different
geographies might purchase the product and at what price.
Steps for forecasting new product revenue
Step 4: Use flexible time periods
Sales over the first few days and weeks in the life of any new
product need to be carefully monitored as they will quickly
show how demand is likely to grow in the future. So
although the sales and finance function may only be
interested in monthly data, it pays to develop detailed daily
forecasts for the first quarter against which to track actual
sales.
Steps for forecasting new product revenue
• Step 5: Generate a range of forecasts
• Run through a number of iterations, changing various
assumptions and probabilities in the model to generate a
range of forecasts. This is easily done if a modelling
solution that can be recalculated in real-time is deployed as
internal experts and business leaders can generate and test
alternative scenarios on the fly.
Steps for forecasting new product revenue
Step 6: Deliver the outputs that users need quickly
In new product launch planning, agreements may have been reached with
a number of suppliers to deliver rapid replenishment designed to
prevent stock outs in the most uncertain period immediately after the
launch. However if reforecasting the exact replenishment needs of
every distribution point in the supply chain involves multiple steps,
much of that precious time will evaporate.
Building a fully integrated forecasting model that compares existing stock
level and automatically generates a detailed replenishment report for
every location as soon as any high level assumptions change
precludes such delays and shortens the replenishment cycle.
Steps for forecasting new product revenue
Step 7: Combine different techniques
Bottom up modelling based on purchasing intentions is not the only method
available for forecasting demand for new products. In some markets, such as
technology and consumer electronics, products can go through an entire life
cycle in a matter of months. Such narrow windows of opportunity make it vitally
important to assess demand as accurately as possible. The most damaging
situation is having a stock shortage while the product is still hot, leading
disappointed consumers to purchase a competitor’s product.
These sectors make use of sophisticated modelling techniques developed by
academics that use substitution and diffusion rates to forecast how rapidly new
technologies replace older ones. Such methodologies might not be appropriate
to many businesses, but the message is the same; combining different
forecasting techniques gives more accurate results.
Steps for forecasting new product revenue
Step 8: Reality check the forecast
Whenever reliable data exists, always check the forecast
against the sales evolution of comparable products to see if
it is realistic. Similarly you should also estimate how your
market share might evolve as new competitors came into
this emerging category and how the total market might
grow. Unless this macro overview is credible, be prepared
to rework the assumptions behind the model.
Steps for forecasting new product revenue
Step 9: Reforecast, reforecast and reforecast some more
Diligently monitor sales and qualitative feedback such as
product reviews, media mentions, and customer feedback,
and agree with the members of the working group how the
assumptions in the model might need to change. If it’s
appropriate, reforecast daily.
Steps for forecasting new product revenue
Step 10: Be prepared to cut your losses
Finally, always have a contingency plan. A high proportion of
new products fail and it is better to pull the plug on an ailing
new product that is unlikely to achieve a viable level of
profitability at the earliest opportunity. So quantify and
agree what level of sales penetration constitutes failure well
before the product launch. That way, the decision will be
swift and the existing stock can be quickly and cost-
efficiently depleted.
Steps for forecasting new product revenue
Forecasting demand for new products is not an exact science
and relies on judgement rather than statistical techniques.
Key to success are collaboration, using all the quantitative and
qualitative data that is available and having a modelling
solution that can quickly and easily be updated to generate
detailed forecasts for all users across the business.
The benefits can be impressive both in terms of reduced
inventory costs and improved customer satisfaction,
something that is vital for a new product to flourish.
Methods of Demand Forecasting for a New Product
The demand forecasting is the scientific tool to predict the likely
demand of a product in the future. It is the starting point of
fulfilling a customer order and based on the forecasted demand,
a firm commits its resources, capacities and capabilities for a
period of time to create goods and services that its customers
value and are willing to pay for. Hence, According to American
Marketing Association, “Demand forecasting is an estimate of
sales in dollars or physical units for a specified future period
under a proposed marketing plan.”
The demand of new product can be forecasted by anyone of
the following techniques:

Substitute Approach : It is based on the assumption that a new

product will be analyzed as a substitute of an existing product.
In this method, the demand of substitute product is analyzed
and on the basis of such analysis (or survey) forecasts are made
for the new product to be introduced in the market.
Evolutionary Approach
This method of sales forecasting is based on the assumption that
the new product will be considered an improvement over
existing products.
It is further assumed that the new product can follow some life-
cycles as of existing products.
The sales of existing product are analyzed and efforts are made to
forecast the sales of the new product of the enterprise on this
basis.
Buyers or consumers view
In this method, the potential buyers of the product are contacted
and efforts are made to know their opinions regarding new
product.
Efforts are also made to guess the quantity to be purchased by
these consumers. Sales forecasts of the new product are based
on these opinions and estimates.
Vicarious approach (or Experts’ opinion)
This approach of sales forecasting of new product is based on the
opinion of experts in the field of marketing, who know the
needs, desires, tastes and preferences of customers.
Experts are contacted and their opinions are collected regarding
the utilities and possible demand of the product.
Sales forecasts are prepared on the basis of opinion of these
experts.
Sales experience approach (or Market test method)
In this method, the new product is offered for sale in a sample
market for a fixed period.
The results of the sales of the product are considered to be the base
of forecasting the demand for the new product.
The results of sales of the product in these segments are collected
and deeply analyzed.
Discussion
• Why Forecasting Demand for New
Products is So Risky
• Main Difficulties of Forecasting
New Product Demand
• Are Traditional Methods of
Estimating New Product Demand
Accurate?
• How to Improve Accuracy While
Forecasting New Products
Why Forecasting Demand for New Products is So Risky
Introducing a brand new product that your stores have never sold
before is a much riskier proposition. Launching a new product
requires making significant commitments to your vendors. Your
vendors often lock your initial orders and early replenishment
orders to coincide with their own forecast windows. Any co-
marketing funds you receive require investments in store
merchandising and promotional campaigns. And in some cases,
the future of your vendor relationship will depend on the sales
performance of the new product.
Why Forecasting Demand for New Products is So
Risky
And again, without an accurate demand forecast, you risk
misallocating inventory and missing your revenue targets while
watching turns collapse. Fixing the problem through stock
rebalancing or price markdowns will be expensive. Not to
mention lost opportunity of bringing another product instead
and losing cash.
That’s why getting off on the right foot is critical.
Main Difficulties of Forecasting New Product Demand
Large retailers can’t employ enough analysts to understand everything driving
product demand. Forecasting demand for existing products is difficult
enough to do manually, because to get an accurate prediction you need to
account for: Geography, Demographics, Personalized assortment, Space
constraints, Competition
Sure, smaller retailers might be able to make some assumptions and educated
guesses for a couple of locations.
But how do you accurately forecast the demand for each store, when you have
hundreds of stores and multiple channels across dozens of regions — all
with their own demographics, space constraints, local competition, etc.?
introducing new products during promotional
campaigns will skew your forecasts.
Uplifts are difficult to calculate when
campaigns center around the new product.
Even more challenging, measuring  the
impact on new product sales when
campaigns center around adjacent
categories.
And if that wasn’t difficult enough, your
product pricing strategy will have a
massive impact on demand (making or
breaking your performance).
That’s why before you can start answering questions of inventory,
you need to make sure your pricing strategy for the new product
is well-defined.
• What should initial pricing look like?
• Is launch pricing different from everyday pricing?
• Is the pricing seasonal or does the vendor have a predictable
cadence of price drops?
• And how do you set promotional pricing to optimize sales,
inventory, and profitability?
Are Traditional Methods of Estimating New Product Demand Accurate?
As complicated as forecasting may be, the first forecast has to
come from somewhere.
Buyers and analysts try to do their best by finding data that hints at
the new product’s future performance.
Again, in some cases, you may have existing products that are
“close enough” to draw comparisons. Different-styled apparel
meant for the same customer; laptops with different specs but
similar prices; or last year’s products from the same holiday
season can all inform new product forecasts.
Are Traditional Methods of Estimating New Product Demand Accurate?
Outside market research from retail specialists can give some insight into new
product categories. Consultants can help you understand new kinds of
customers, assess a product’s mindshare on social media, or conduct local
focus groups.
A pilot project may provide actionable information when a new product’s
demand is too uncertain. If you don’t have enough stores to create a
representative sample, a limited-run pilot in all stores may be your only
choice.
Product pre-orders are another way to gauge demand for products that have
never been sold at your stores. But this requires a solid infrastructure for
promoting and taking pre-orders, and some data on the relationship between
previous pre-orders and in-season sales.
Some retailers use pricing to discover optimal demand. They introduce the new
product in low quantities and a higher price point, reducing it over time until
reaching the most profitable run rate. However, this approach runs the risk of
cutting too far and is heavily reliant on trial and error. Once you’ve set a
lower price in customers’ minds, reversing course is difficult.
These and other traditional approaches to forecasting products suffer from the
same failings.
None of them are accurate predictors of demand. None of them predict your
business’ unique situation. And to an extent, all of them simply inform gut
decision-making.
Reliable data only arrives after the fact which can make new product launches
very expensive. This is why new product sales forecasts have traditionally
been more of an art than a science.
How to Improve Accuracy While Forecasting New Products
Machine learning algorithms can analyze many more inputs and tease
out trends better than any analyst identifying the factors that impact
demand for the new product. By using Predictive Analytics, you can
produce more accurate by-store demand forecasts even when you
have no sales history.
Predictive Analytics automatically generates a forecast based on a new
product’s attributes rather than on the product as a whole. For
example, how do red shirts and short-sleeve shirts and cotton shirts
perform? The completed analysis yields intelligently-allocated
inventories for each store and distribution center.
The system automatically accounts for seasonality, assortment
depth vs diversity, store times, e-commerce fulfillment demand,
promotional uplifts, price elasticity, related product and much
more. 
Once the new product launches, AI learns more about the
product’s true store-level demand faster than traditional
analysis. The system automatically responds to the reality on
the ground and adjusts future orders, allocation, promotions,
and pricing accordingly.
Thank you for your Attention!!!
Any Questions?