How to Forecast Market Demand

Making a successful market demand forecast will help you stock enough for the upcoming sale. Demand forecasting is the use of past sales data to determine future consumer demand. With accurate demand forecasting, business operations will be more efficient, customer service will be better, and production times will be reduced. Thanks to it, businesses can avoid high operating costs, lousy customer service and stock shortages. ^{[1] X Research Source}

Table of Contents

Collect information

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Identify specific products. Instead of focusing on an entire product line, identify specific products that you want to track. This makes it easier to organize past data and forecast future demand. For example, if you currently have a winter clothing line, focus on gloves first instead of covering the entire product line. ^{[2] X Research Source}

Focus on the product that generates the most revenue. For example, many businesses uphold the 80/20 rule, which means that in general, 20% of the product or service a business provides generates 80% of the business’s revenue. ^{[3] X Research Resources} Identify and track their needs.
You may have to forecast demand for every existing product. However, each time forecasting a group of several similar products such as gloves, boots and winter hats will be easier and more accurate.
Consider creating a Sales and Operations Planning team, which includes representatives from each department and is tasked with preparing product demand forecasts.

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Review the marketing plan. Any marketing or promotion can help increase the demand for your product. Look at past data and figure out where you’ve been successful. See if a special sale or holiday promotion has stimulated product demand. You should consider the whole thing when forecasting demand, especially if you intend to repeat an already used sales strategy. ^{[4] X Research Sources}

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Review key metrics. Identify the cause of the uncertainty in the customer’s product demand. The main indicator includes demographic and environmental factors. Demographics include age, gender, geographic location, and any other set of identifiable characteristics. Identifying the needs of key demographic groups helps narrow the area of data used for forecasting. Environmental factors also affect demand. For example, an extremely harsh winter could be the cause of a drop in sales. ^{[5] X Research Sources}

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Look at the market. Analyze every word and action of your competitors, customers, banks and any other players in your market. Consider whether a competitor is running a major promotion or sales campaign. ^{[6] X Research Sources}

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Review the previous months. Look at previous months and year-to-year sales variances, such as holidays. This will help you identify annual and seasonal fluctuations. When looking at the past months, analyze the mechanism behind the demand. Don’t miss any price adjustments or marketing campaigns that have increased new customers. There is always a reason behind a business boom and a smart businessman will find it. For example, maybe you’re running a “buy one get one free” promotion in August for products that “start the new school year”. If you decide to use this strategy again, consider them in your forecast. ^{[7] X Research Sources}

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Determine the delivery time. Delivery time is the time from the time the order is placed until the delivery of the product is completed. This information will assist you in forecasting demand. Thanks to it, you can determine the speed of product completion and market demand. ^{[8] X Research Sources}

If buying from another company, delivery time starts from the time you place the order and ends at the time the item is delivered to your place.
You can also determine the delivery time by calculating the materials and components of the product. Knowing the lead time required will help you forecast demand more accurately. Focusing on a specific item will help you estimate the amount of materials needed and the product’s lead time.
Once you have a forecasted output, consider the demand for each product. For example, if manufacturing pencils, you will need to know the amount of wood, rubber and other necessary information based on your estimate. ^{[9] X Research Source}

Decide on a market approach

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Determine the method used. In general, there are four main methods of demand forecasting. These include judgment, experimentation, causality/relationship, and timeline. Based on the product history, choose the most suitable method. For example, the empirical method is often used for new products with no historical data on the market. These methods represent how you will collect most of the data you need. ^{[10] X Research Source}

You can combine multiple methods for more accurate demand forecasting.

Using the method of judgment

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Form a moderator’s rating. Gather a small group of senior management in the company and ask them to make a demand forecast. Each team member can provide valuable insights and insights from experience with the market. They can also assist in selecting marketing campaigns and suppliers of quality supplies. This method is not as expensive and time consuming as other judgment methods. The weakness is that it is based on expert opinion, who can be biased and tend to promote their own agendas of action. ^{[14] X Research Source}

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Summary of seller comments. Ask each salesperson to predict their sales. Sales is the team that is closest to the market and understands the needs of customers. Combine these forecasts at each sales level by city, province, and region. The advantages of this method are low cost and ease of data collection. The downside is that it’s based on customer opinions and they’re easy to change. At the same time, salespeople can inflate the numbers to secure their place in the job. ^{[15] X Research Source}

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Hire a personal market expert. Market experts observe industry trends and consult your sales force to forecast demand. These could be business magazine writers, economists, bankers, and professional consultants. However, the amount of information an individual can collect is finite. Therefore, you should assemble a team of market experts to be able to collect as much data. ^{[16] X Research Source}

Compared to the sales team, these individuals can provide a more in-depth and quality understanding of the market. However, as an outsider, they will not understand the needs for your particular product as well as the company’s employees. You should use these people to forecast market demand and then use insider judgment to estimate the company’s likelihood of success in that market.

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Use the Delphi Method. First, create an expert group. It could be a group of managers, selected employees or industry experts. Ask each person to give their demand forecast. Have them answer the questionnaire for two or more rounds. After each round, present the results of the previous round anonymously. Encourage experts to adjust responses taking into account the results obtained from the previous round. The goal is that by the end, the whole group will begin to agree on the resulting forecast. ^{[17] X Research Source}

Pre-determine a breakpoint, such as a specific number of rounds, consensus score, or consistency in results.

Use the experimental method

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Customer investigation. You can collect information from them in many ways: phone or e-mail, check order history statistics, market trends. Ask about purchasing plans and subjective buying behavior. Use a large sample to generalize the results. Ask about your ability to buy the product and add up the results. ^{[18] X Research Sources}

Customers are the ones who best understand the demand for a certain product. The danger of these investigations is that they often exaggerate real demand. While a person may be interested in a product, actually buying it is another matter.
Remember that conducting an investigation can be expensive, difficult, and time consuming. Surveys rarely provide a foundation for successful demand forecasting.

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Use test marketing. Use it in the early stages of product development. Find the small, secluded, and demographic area you’re targeting. Go through every step of your marketing plan, including advertising, promotions, and distribution plans. Measure product awareness, penetration, market share and total sales. Adjust the strategy based on the information gathered to minimize the problems encountered when launching products on a national scale. ^{[19] X Research Source}

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Invite customer groups. Gather a small group of potential customers in the room and let them use your product, then discuss it. Customers are usually paid a small amount or gift for joining. Like the survey method, the data obtained is more useful in product analysis than in forming the basis of demand prediction. ^{[20] X Research Sources}

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Use scan table data. Find a large group of customers who agree to participate in ongoing research on their buying habits, such as at the grocery store. Convince these customers to provide information such as household size, age, household income, and any other information that is important to your product. Every time they buy groceries, their purchase information is recorded and analyzed. This data may be collected when they use the purchase card. They provide a rich database for statistical modeling and show relationships in the data. ^{[21] X Research Source}

As with other types of experiments, it can be difficult to forecast demand from these results.

Use the contact/cause-and-effect method

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Check monthly sales or seasonal trends of previous years. Review past years’ sales figures to determine the time of year that resulted in a higher percentage of sales. Are they stable? Sales are higher in winter or summer? Measure the increase or decrease in sales during those times. Is the change higher or lower in a given number of years? Next, consider the possible reasons behind them. Take what you’ve learned and apply the predictions to the current year.

For example, if you sell boots, your sales may have been especially high during the cold winters. If this year is forecast to have such a cold winter, you should increase your demand forecast accordingly.

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Find customer reactions. It is a situation where a change in a product or market results in higher or lower sales. Create a chart of sales over time and mark important dates, such as when a price hike or a competitive product hit the market. It can also be broader, such as in response to economic shifts or changes in private consumption. Read relevant business magazines and relevant articles to gather this information. Being well-informed can give you a clearer idea of what factors are likely to impact future product demand.

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Build a product lifecycle model. A lifecycle represents the “life” of your product, from first introduction to present time. Look at sales at each stage. Consider customer characteristics who purchased the product during these stages. For example, you will have a fast-adapting customer group (who loves the latest technology), a mainstream buyer group (who waits for a product to be tested and evaluated), a backward group (who just buys it). when the product has been on the market for a long time) and other customer groups. They will help you identify lifecycle trends and demand patterns for your product. ^{[22] X Research Source}

This model is most commonly used in some industries such as high technology, fashion and short life products. What makes it special is that the source of demand is directly related to the product life cycle.

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Use simulation models. Model the flow room of components entering the manufacturing plant based on the required material plan and finished product delivery flow. For example, calculate the time to receive each component, including the shipping time (regardless of where the item was sourced from). This will give you a sense of how quickly you can get the product to satisfy the buyer’s need. ^{[23] X Research Sources}

These models are known for being difficult and slow to build and maintain.

Using the timeline method

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Use the moving average method. This is a mathematical technique used when there is little or no trend present in the data. It will provide an overview of the data over time. Determine the needs of the previous three months. Once you have the totals, divide them by four (to calculate the next month). The formula would be F4 = (D1 + D2 + D3) ÷ 4. In this equation, ‘F’ represents the forecast and ‘D’ refers to the month. The above equation works for stable demand.

For example, forecast = (4,000 (January) + 6,000 (February) + 8,000 (March)) /4 = 4,500.

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Use a weighted moving average (WMA). If demand is volatile, this formula can be used to account for variance in sales. The formula WMA 4 = (W * D1) + (W * D2) +(W * D3). The ‘D’ represents the bridge and the number that goes with it represents the month. ‘W’ is a density constant, usually between 1 and 10, determined from sales history. ^{[24] X Research Source}

For example, WMA = (4 * 100) + (4 * 250) + (4 * 300) = 2,600.
Use a larger density constant for new data and smaller for older data. That’s because new data has a stronger influence on forecast results.

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Use the exponential leveling method. This technique is an averaging method that uses changes in demand for new products that take place by applying a flattening constant to the latest data. It is useful if recent volatility is the result of real change, such as seasonal trends (holiday time) rather than random changes. ^{[25] X Research Sources}

Find forecasts for previous periods. In the formula, it is denoted by (Ft). Next, find the actual demand in that period, denoted by (At-1).
Decide on the weights to be used. It is (W) in the formula, with a value between 1 and 10. Use a smaller number for older data.
Substitute data into the formula: Ft = Ft-1 + W * (At-1 – Ft-1) or for example: Ft = 500 + 4(W) * (590 – 500) = 504 * 90 = 45,360.

Demand forecast

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Summary of results. Once the data has been collected, create a graph or table that shows the demand forecast. Do so by running the demand for the product for the following months. For example, if creating a line chart, put the month on the horizontal axis and the quantity demanded on the vertical axis. If it is forecasted that 600 units will be needed in October and 800 units in November, plot those points on the graph. Draw the line between the points. You can also plot historical data to compare research and historical data. ^{[26] X Research Source}

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Analyze your results. You now have your results sorted or presented in an easy-to-read format. But what do they say? Look for trends, such as increases or decreases in demand, and cyclicality, such as busy months and seasons. Compare your data with previous years’ data and assess differences in volume and trend. Look in the data for evidence that the marketing plan is working or has worked in the past.

Also, go back and determine exactly how you believe the prediction will be. Are you overly optimistic with your own forecasts? How big is your expected margin of error?

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Present and discuss your forecast. Present the forecast to the right people in the company and discuss it with them. Gather input from marketing and sales, finance, production, and any other management. Next, adjust the forecast. Once everyone agrees with the forecast, everyone can better strategize. ^{[27] X Research Source}

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Monitor and adjust forecasts. As new data is collected, adjust the forecast to reflect that. You will want to use all the information you have available. If you don’t constantly monitor and update your forecast, you can make costly mistakes and affect your financial stability. ^{[28] X Research Sources}

Steps