DEMAND

FORECASTING
MEANING AND METHODS
DEMAND FORECASTING -
MEANING
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.
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.
I. Survey Methods
1. Survey of Buyer’s Choice/Consumer
survey
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:
Complete Enumeration Method: Under this method, nearly all the potential buyers are asked
about their future purchase plans.
Sample Survey Method: Under this method, a sample of potential buyers are chosen
scientifically and only those chosen are interviewed.
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.
2. Survey of Expert Opinions
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.
Firms not having this facility gather similar information about the demand for their products
through the professional market experts or consultants.
3. Market Studies and Experiments
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 such as prices, advertisement expenditure
etc. are changed and the experiments are done keeping other factors constant. However, this
method is very expensive and time-consuming.
Controlled laboratory experiment or consumer clinics is another method of market survey.
Under this method consumers are given some money and to buy goods in a stipulated store
with varying prices, packages and displays, etc.
II. Statistical Methods
1. 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.
 2. Barometric Method
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.

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.
3. 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.