Definition

• In the words of Cundiff and Still,

“Demand forecasting is an estimate of sales during a
specified future period which is tied to a proposed
marketing plan and which assumes a particular set of
uncontrollable and competitive forces”. Therefore,
demand forecasting is a projection of firm’s expected
level of sales based on a chosen marketing plan and
environment.
 TYPES OF FORECASTING

Passive Forecast Active Forecast

Under passive forecast Under active forecast,
prediction about future is prediction is done under
based on the the condition of likely
assumption that the future changes in the
firm does not change actions by the firms.
the course of its action.
From the view point of ‘time span’, forecasting may be
classified into two, viz.,:

• It may cover a period of three months, six

Short term months or one year.
demand • It is one which provides information for tactical
decisions.
forecasting
• Planning of a new unit must start with an
analysis of the long term demand potential of
the products of the firm.
• It is one which provides information for major
Long term strategic decisions.
demand • It helps in saving the wastages in material, man
hours, machine time and capacity.
forecasting
 At different levels forecasting may be
classified into

Macro- Industry- Product-

Firm- level
level level line
forecasting
forecasting forecasting forecasting
Objectives of Demand Forecasting
Determinants of demand forecasting
Steps involved in demand forecasting

Setting the objective

Determining time period

Selecting method for demand forecasting

Collecting data

Estimating results
 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.

Experts Opinion
Method
Consumer’s Survey Method
or Survey of Buyer’s
Intentions

Sales Force Opinion Method

 Experts Opinion Method
• This method requires a panel of experts, who are interrogated
through a sequence of questionnaires .
• This method is used for long term forecasting to estimate
potential sales for new products.

The panelists
must be rich in Secondly, its
their expertise,
conductors
possess wide
range of are objective
Conditions in their job
knowledge and
experience
 Sales Force Opinion Method
• In this method, instead of consumers, the
opinion of the salesmen is sought.
Disadvantages
•Sales force may give
biased views as
Advantages projected demand
Simplest of all methods affects their future job
Less costly prospects.
Easy to collect data •Sales force gives
It involves collective opinion on the basis of
wisdom of salesmen. past trends but
prefrences keeps
changing.
 Consumer’s Survey Method or Survey of
Buyer’s Intentions
• In this method, the consumers are directly approached to disclose
their future purchase plans by interviewing all consumers or a
selected group of consumers out of the relevant population.
• Here the burden of forecasting is shifted to the buyer.

Sample Survey End Use Method

representative households are
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
Under this method some
selected on random basis as
samples and their opinion is
taken as the generalised
opinion
TEST MARKETING
It is often used to determine
whether there is a sufficient
demand for a new product to
be viable.
•This method is quite useful
for industries which are
mainly producer’s goods.
•In this method, the sale of
the product is projected as
the basis of demand survey
of the industries using this
product as an intermediate
product.
Complete Enumeration Survey
DISADVANTAGES
•Costly
•Time consuming
Advantages •consumers may not
•first hand information reveal their purchase
plans due to some
•unbiased information privacy or
•Quite accurate commercial secrets
•Simple to use •Difficult and
impossible to survey
all consumers.
 Sample Survey and Test
Marketing

Advantages
• If the sample is the true representative,
there is likely to be no significant
difference in the results obtained by the
survey.
• It is less costly
• This method works quickly.
• It is an important tool for short term
projections.
Disadvantages
• Conclusions are based on the view
of only few consumers and not all
of them.
• Sample may not be the true
representative of entire population.
End Use Method or Input-Output Method

ADVANTAGES DISADVANTAGE
1. Yields accurate 1. A
lot of efforts are
predictions required in its collection
2. Provides sector and presentation of data.
wise demand 2. Time consuming.
forecast of different
industries. 3. Costlier
3.Specially useful for 4.Requires diverse
producer goods. calculations.
 Statistical Methods
• Statistical methods have proved to be immensely useful
in demand forecasting. The important statistical
methods are :
• Trend Projection Method ( Past sales)
• A firm existing for a long time will have its
own data have its own data regarding
sales for past years.

• Such data when arranged chronologically yield what is

referred to as ‘time series’.
• Such data can be given in a tabular or graphic form for
further analysis
 The trend can be estimated by using any one of
the following methods

• 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.

Year Sales of Firm

(Rs. Crore)
•1995 40
•1996 50
•1997 44
•1998 60
•1999 54
•2000 62
 LEAST SQUARE METHOD
• When the trend in sales over time is given by straight line, the
equation of this line is of the form: y = a + bx.

• 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.

• In order to solve the equation v = a + bx, we have to make

use of the following normal equations:
Σ y = na + b ΣX
Σ xy =a Σ x+b Σ x2
Trend Projection Method ( Past sales)

ADVANTAGES
1. Simple and inexpensive.
2.Provides reasonably
DISADVANTAGES
accurate forecasts. 1.Can be used only if past data
is available.
2.It is not necessary that past
trend may continue to hold
good in future as well.
Barometric Technique (Market factor
analysis)
• 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.”

Coincident or
The Leading The Lagging
Concurrent
Series Series
Series
Barometric Technique (Market factor
analysis)
ADVANTAGES
•Simple method
•Predicts directional change
quite accurately.

DISADVANTAGES
•Does not predict the magnitude of
changes very well.
•The method can be used for short
term forecasts only.
 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.
• This method starts from the assumption that a basic
relationship exists between two variables

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
 Econometric Models
• Econometric models are an extension of the regression technique whereby a
system of independent regression equation is solved.

• The appropriate procedure in forecasting by econometric methods is model

building.

• Econometrics attempts to express economic theories in mathematical terms in

such a way to measure the impact of one economic variable upon another so as
to be able to predict future events
 Evolutionary
approach

Demand Sales
Opinion poll
approach forecasting of experience
approach
new product

Growth curve
approach
 Criteria of a Good Forecasting
Method
Accuracy

Plausibility

Flexibility

Availability

Economy

Simplicity
Significance of demand forecasting

Preparing
budgets

Taking
Fulfilling managerial
objectives decisions

Stabilizing
employment &
production