Measuring and Forecasting Demand
What is forecasting?
Forecasting is a tool used for predicting
future demand based on past demand
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Why is forecasting important?
Demand for products and services is usually uncertain.
Forecasting can be used for…
• Strategic planning (long range planning)
• Finance and accounting (budgets and cost controls)
• Marketing (future sales, new products)
• Production and operations
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What is forecasting all about?
Demand for Mercedes E Class
Mar Apr Ma
Jun Jul Aug
Actual demand (past sales)
We try to predict the
future by looking back
at the past
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From the March 10, 2006 WSJ:
Ahead of the Oscars, an economics professor, at the request of
Weekend Journal, processed data about this year's films
nominated for best picture through his statistical model and
predicted with 97.4% certainty that "Brokeback Mountain"
would win. Oops. Last year, the professor tuned his model until
it correctly predicted 18 of the previous 20 best-picture awards;
then it predicted that "The Aviator" would win; "Million Dollar
Baby" won instead.
Sometimes models tuned to prior results don't have great
What’s Forecasting All About?
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The Measures of Market Demand
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Potential Market: PM is the set of consumers who
profess a sufficient level of interest in a market offer
Available Market: AM is a set of consumers who
have interest, income, and access to a particular offers
Target Market: TM is The part of the qualified
available market the company decides to pursue.
Penetrated Market: PM is the set of consumers who
are buying the company’s product2/13/2014 Babasabpatilfreepptmba.com 7
Ninety Types of
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Vocabulary for Demand Measurement
Market demand- Marketing opportunities is to estimate
total market demand in defined geographical area, time,
environment and marketing program.
Market potential- Expected market demand
Company sales forecast
Company sales potential
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Measuring Current Market Demand
Marketers will want to estimate three different
aspects of current market demand
o Total market demand
o Area market demand
o Actual sales and market shares
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Estimating Total market demand
Q = n x q x p
Q = total market demand
n = number of buyers in the market
q = quantity purchased by an average buyer per year
p = price of an average unit
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Estimating Area Market Demand
Companies face the problem of selecting
the best sales territories and allocating
their marketing budget optimally among
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Two major methods are available
o Market buildup method –Calls for identifying
all the potential buyers in each market and
estimating their potential purchases. used
primarily by business goods firms
o Market-factor index method – used primarily
by consumer goods firms.
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Market-Factor Index Method
Identifies market factors that correlate with market potential
and combines them into weighted index.
A manufacturer of men’s dress shirts wishes to evaluate its
sales performance relative to market potential in several major
Total national potential $2 billion per year.
The company current nationwide sales are $140 million, about
7% of the total potential market.
Its sales in New York are $1,100,000.
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The buying power index (BPI) for a specific area is given by
BPI = .2 x percentage of national population in the area
.5 x percentage of effective buying income in the area
.3 x percentage of national retail sales in the area
New York should account for .5935 percent of the nation’s total
potential demand for dress shirts.
Total potential equals $2 billion x .005935 = $11,870,000.
Company’s sales (NY) $1,100,000/$11,870,000 = 9.3 percent.
Which is quite high than company national share i.e. 7 percent.
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Actual sales and market shares
Actual industry sales taking place in the
Identifying competitors and estimating
Then company can evaluate its
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Estimating Future Demand
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Common Sales Forecasting
Based On: Methods
What people say Surveys of buyers’ intentions
Composite sales force opinions
What people do Test markets
What people have
Statistical demand analysis
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Survey of Buyers’ Intentions
One way to forecast what buyers will do is to ask them directly.
Surveys are especially valuable if the buyers have clearly
formed intentions, will carry them out, and can describe them to
Purchase probability scale
Do you intend to buy an automobile within the next six months?
0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1.0
No Slight Fair Good Strong For certain
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Composite of Sales-force Opinions
The company typically asks its salespeople to
estimate sales by product for their individual
It then adds up the individual estimates to arrive at an
overall sales forecast.
Salespeople are biased observers. They may
understate demand so that the company will set a low
After participating in the forecasting process, the
salespeople may have greater confidence in their
quotas and more incentive to achieve them.2/13/2014 Babasabpatilfreepptmba.com 21
Experts include dealers, distributors, suppliers,
marketing consultants, and trade associations.
Dealer estimates are subject to the same
strengths and weaknesses as salesforce
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Experts may be asked to supply their
estimates individually, with the company
analyst combining them into single estimate.
Finally, they may supply individual estimates
and assumptions that are reviewed by a
company analyst, revised, and followed by
further rounds of estimation
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Where buyers do not plan their purchases carefully
or where experts are not available or reliable, the
company may want to conduct a direct test market.
A direct test market is especially useful in
forecasting new-product sales or established
product sales in a new distribution channel or
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Breaking down past sales into its trend, cycle, season,
and erratic/unpredictable components, then
combining these components to produce a sales
Trend is the long-term, underlying pattern of growth
or decline in sales resulting from basic changes in
population, capital formation, and technology.
Cycle captures the medium-term, wavelike movement
of sales resulting from changes in general economic
and competitive activity.
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Season refers to a consistent pattern of sales
movements within the year.
Erratic events include fads, strikes, snow
storms, earthquakes, fires, and other
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Statistical Demand Analysis
A set of statistical procedures used to discover the most
important real factors affecting sales and their relative
The most commonly analyzed factors are prices, income,
population, and promotion.
Q = f(X1, X2, … ,Xn), where sales Q is dependent
Using multiple regression technique, various equation forms
can be statistically fitted to the data in the search for the best
predicting factors and equation.
Soft-drink company: Q = -145.5+6.46X1–2.37X2
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