Answer to Question #198072 in Economics for tanya

Question

Demand forecasting is not a speculative exercise into the unknown. It is essentially a reasonable judgment of future probabilities of the market events based on scientific background. Explain the statement by elaborating different qualitative and quantitative methods of demand forecasting

Answer 1

Demand forecasting is carried out using qualitative and quantitative methods (including the normative-target method).

For short-term and medium-term forecasts, qualitative methods are used (expert assessment; consumer survey, etc.) and quantitative methods (use of the coefficient of elasticity of demand; method of geometric progression; trend model; multivariate correlation and regression models, including multiple linear regression ). For long-term forecasts, a regulatory target method is used.

   Qualitative methods for forecasting demand are subjective assessments in the absence of calculations of economic potential, are used when there is a lack of initial information, or the complexity of its application, and are based on the opinion of experts.

   Qualitative forecasting methods include the following:

evaluations of marketers who work with consumers and know their reactions and behavior in the market;

an assessment of consumer expectations based on the results of a survey of the company's customers in relation to their future needs;

method of expert assessments (method "Delphi"), representing the analysis of opinions of experts from different, but related areas of activity. After filling out the questionnaires and familiarizing themselves with the opinion of other experts, specialists make new assessments. The procedure can be repeated several times to obtain a consensus on the issue under consideration.

Sales staff estimates. Typically, sales personnel have a very accurate understanding of the sales potential that their customers provide, and, in addition, are able to assess the potential of the market as a whole, at least in the area that it serves. The easiest way is to ask salespeople to give ratings for each product, but not abstractly, but based on specific hypotheses about marketing efforts in terms of prices, advertising support, etc. After that, sales managers formulate final ratings, summing up the ratings of all employees.

   The fundamental drawback of this method is the danger of systematic underestimation on the part of salespeople who are interested in having an easily achievable sales plan, and at the end of the planning, period to achieve a significant excess of planned indicators. Options for correcting such estimates that reduce the risk of bias.

- Ask sales workers to independently determine the degree of error in their estimates. This data can then be used to refine the forecast.

- Adjust the estimates of salespeople with the help of a regional sales manager who may have a broader view.

- Introduce a correction factor based on accounting for errors in the past forecasts of each salesperson.

   Including salespeople in the forecasting process is useful primarily in order to motivate them and to promote acceptance of the sales quotas assigned to them. In addition, they are indispensable when building sales forecasts in very small segments, at the level of a separate territory or an individual client.

   Assessment of consumer expectations. It consists in directly asking buyers about their purchase plans for a certain period. Buying intentions can be considered at two levels: at the general level and at the level of a specific product category.

   At a general level, shoppers' mood or confidence, their perceptions of well-being, and their intentions to purchase durable goods are assessed.

   Intention to purchase research for a specific product or brand is often less reliable than general research. Great care is needed in the use of the results of such studies. The best results are obtained when it comes to goods or services that buyers have to plan ahead for, which is true for expensive purchases such as a car, home, or travel.

   These methods have obvious limitations, but they can be a useful starting point in demand analysis and their usefulness should not be underestimated. In any case, they should be used in conjunction with more objective methods.

   The method of expert assessments. The value of this method obviously depends on the experience and intuition of the person making the prognosis. The main disadvantage is undoubtedly the difficulty of communication and the impossibility of verifying the truth or falsity of the forecast. The way to reduce the risk of subjectivity in individual judgment is to reach out to a group of experts who discuss their points of view and seek to reach a consensus. The Delphi method presents a good opportunity for reaching consensus.

   According to this method, group experts formulate their individual judgments anonymously, usually using questionnaires. Then the median judgment is determined; it is communicated to the group members, who are required to reconsider their judgment in the light of the group's opinion. Typically, this method quickly leads to consensus, usually in two rounds.

Quantitative methods for forecasting demand are mathematical calculations, including models that reflect the relationship between demand and a number of factors that are independent variables.

   Quantitative forecasting methods are based on the fact that the trend in the development of events in the future is associated with the development of the situation in the past:

trend model;

multivariate correlation and regression models, including multiple linear regression;

normative target method;

geometric progression method;

using the coefficient of elasticity of demand.

 

   extrapolation method (analysis of time series, trends), in which the trends of the past are extended into the future development of the situation. This method is used to assess the demand for goods, sales volume, seasonality, etc. This method can be used only in a situation where the market situation does not change too rapidly.

   correlation analysis, looking at the relationship between various factors considered and other variables. The method is used to consider the influence of several variables on a predicted parameter. The application of this method is rather complicated and expensive, but in a simplified form, it can be used for practical business as well.

   a normative-target method based on the assessment of future consumption of a product in accordance with its rational or normative levels. Factors of changes in the size and composition of the target market are considered here. It is used for long-term forecasts.

     the use of the coefficient of elasticity of demand is of particular importance in forecasting, expresses the dependence of one factor on the state of another, for example, the dependence of the quantity of goods (services) on monetary income or the price of goods (services). Usually, the coefficient of elasticity of demand is used, which expresses the amount of change in demand (in percent) when the price (income of the population) changes by 1%.