Demand Estimation

An attempt is made to quantify the relationship between the

demand for a product and the determinant variables, such
as price, price of related goods, national income,
advertising etc.


Widespread application:
A computer dealer would like to know the implications of
reduction in excise duties, lower prices and rising GNP
on the demand for PCs.

An electronics manufacturer might be interested in estimating
changing proportion of demand for domestic and imported
electronic items when the import policy of the government is
liberalized.

Methods of Demand
Estimation
1.Regression analysis-Most useful and used method .

2.Marketing Research Approach
a)Consumer Survey and Observational Research-Former
useful but could be biased and expensive.Latter could raise
questions about privacy.(Scanners and People meters)
b)Consumer Clinics-Useful but sample maybe too small and
situation too artificial.
c)Market Experiments-Either same market over different time
periods or different markets with similar socioeconomic
features.Can be conducted on a larger scale and more
realistic.However, maybe over a short period or on a limited
scale due to cost considerations.Further bias may get in
due to extraneous conditions,danger from competitors and
permanent loss of customers due to price rise
experimentation.
Meaning:It refers to the anticipation or expectation about
the future course of the market demand for a product.

Nevertheless,it is not a speculative exercise into the
unknown.It is based on on the statistical data about past
behavior and empirical relationships.

The aim is to reduce the risk or uncertainty that the
firm faces in its short-term operational decision-making and
in planning for its long-term growth.

This begins with a macro-forecast of the general
level of economic activity for the economy as a whole or
gross national product.These macro-forecasts are used as
Inputs for their micro-forecasts of the industrys and firms
demand and sales.
Demand Forecasting
It is very essential for all aspects of decision-making.
Production Planning,Sales Forecasting,Control of
Business,Inventory Control, Growth and Long-term
Investment Programmes,Stability .

Short-term forecasting-Relates to a period not exceeding a
year.Important for evolving a sales policy,a price policy, a
purchase policy fixation of sales targets and for short-term
financial-planning.

Long-term forecasting-Vital for strategy formulation,
manpower planning and long-term financial planning.
Significance of Demand
Forecasting
I)QUALITATIVE FORECASTS:
Often used to make short-term forecasts when quantitative
data is not available or for supplementing it. Also useful
during product introduction.
1.Survey Techniques
Have proved very useful in conjunction with other tools but
a growing number of consumers are refusing to participate
in market-research surveys because of the time involved,
the loss of privacy, and the pressure from salespeople
operating under the guise of market research. This leads to
increasing difficulties in obtaining representative samples
and to a trend towards the greater use of observational
research. This may include the complete enumeration
method, the sample survey method and the end use
method.

Different Techniques of
Demand Forecasting
2.Opinion Polls:
While the results of published surveys of expenditure plans
of businesses, consumers and governments are useful,
the firm usually needs specific forecasts of its own sales
by polling experts within and outside the firm.
There are several such polling techniques:
a)Executive polling: The firm can poll its top management
from its sales, production, finance and personnel
departments on their views on the sales outlook for the
firm during the next quarter or year. While these personal
insights are to a large extent subjective, by averaging the
opinions of the experts who are most knowledgeable
about the firm and its products, the firm hopes to arrive at
a better forecast than would be provided by these experts
individually. Outside market experts could also be polled.
Different Techniques of
Demand Forecasting
To avoid a bandwagon effect the Delphi method can be used.
Here, experts are polled separately, and then feedback is
provided without identifying the expert responsible for a
particular opinion. The hope is that through this feedback
procedure the experts can arrive at some consensus
forecast.
b)Sales force polling: This is a forecast of the firms sales in
each region and for each product line; it is based on the
opinion of the firms sales force in the field. These are the
people closest to the market, and their opinion of future
sales can provide valuable information to the firms top
management.
c)Consumer intentions polling
3.Soliciting a Foreign Perspective: Here councils are formed of
distinguished foreign dignitaries and business people. This
input becomes a valuable tool to get a global perspective
and plan longer-term domestic and foreign strategies.
Different Techniques of
Demand Forecasting
2). TIME SERIES ANALYSIS:this attempts to forecast future
vales of the time series by examining past observations of
the data.The assumption is that the time series will continue
to move as in the past. For this reason, this analysis is often
called nave forecasting.

Reasons for fluctuations in Time-Series data:
1. Secular trend refers to a long-run increase or decrease in
the data series.(Example sales may show a rising trend over
years because of population etc).
2.Cyclical fluctuations are the major expansions and
contractions in most economic time series that seem to
recur every several years.
3.Seasonal variation refers to the regularly recurring
fluctuation in economic activity during each year because of
weather and social customs.
4.Irregular or random influences may result from wars,strikes
etc
Different Techniques of
Demand Forecasting
The simplest form of time-series analysis is projecting the
past trend by fitting a straight line to the data either visually
or, more precisely, by regression analysis.
Time-series cannot forecast turning points until they have
occurred and it does not examine the underlying forces.
Hence it is most useful in conjunction with other forecasting
methods.

3) SMOOTHING TECHNIQUES :These predict values of a time
series on the basis of some average of its past values only.
These are useful when the time series exhibit little trend or
seasonal variations but a great deal of random variation
which are then smoothed.
Two specific smoothing techniques are given under:
Moving Averages and Exponential Smoothing :Here the
forecasted value is equal to the average value of the time-
series in a number of previous periods. The latter is used
more frequently as it includes a weighted average.
Different Techniques of
Demand Forecasting
4)BAROMETRIC METHODS: One way to forecast or anticipate
short-term changes in economic activity or turning points
in business cycles is to use the index of economic
indicators.
The three basic indicators used here are classified as given:
1)Leading indicators: These move up or down ahead of
some other series. For example, an increase in building
permits can be used to forecast an increase in housing
construction.
2)Coincidental indicators: These move up or down with
simultaneously with the level of economic activity. For
example, the rate of unemployment.
3)Lagging indicators: These follow a change after some
time-lag. Example, outstanding loans.

Different Techniques of
Demand Forecasting
Different Techniques of
Demand Forecasting
In order to smooth out random variations and provide more
reliable forecasts with fewer wrong signals than individual
indicators we may use what is termed as the composite
index.This is a weighted average of the individual
indicators in each group, with the indicators that do a better
job of forecasting given bigger weights.
Another way of solving this problem would be through the
diffusion index.This gives the percentage of rising
indicators.
Though the above is a reasonably good tool to predict
turning points, however at times a leading variable may not
be available.The variability in lead time may also be
considerable.Also this provides only a qualitative
forecast.Thus it must be used in conjunction with other
methods.

Different Techniques of
Demand Forecasting
5)ECONOMETRIC MODELS:These combine statistical tools
with economic theories to forecast economic events.They
seek to identify and measure the relative importance of the
various determinants of demand or other economic
variables to be forecasted.

An econometric model may be a single-equation regression
model or it may consist of a system of simultaneous
equations.



Finally the applicability and usefulness of a method
depends on the purpose of forecasting and availability of
reliable and relevant data.Ultimately the analysts own
judgment also holds great importance.