The following factors are to be considered while going for demand forecasting:
Purchasing power of customers
Conditions within the industry
1. Purchasing power of customers: This is determined by disposable personal income (personal income minus direct taxes and other deductions). Some people suggest the use of discretionary income in place of disposable income. Discretionary income can be estimated by subtracting three items from disposable income, viz., inputted income and income in kind, major fixed outlay payments such as mortgage debt payment, insurance premium payments and rent, and essential expenditures such as food and clothing and transport expenses based upon consumption in a normal year. Discretionary income can be quite an important determinant in case of consumer non-durables.
2. Demography: This involves the characteristics of the population, human as well as non-human, using the product concerned. For example, it may pertain to the number and characteristics of children in a study of the demand for toys or the number and characteristics of automobiles in a study of the demand for tyres. In fact, it involves distinction between the total market demand and market segments. Such segments may be derived in terms of income, social status, sex, age, male-female ratio, urban rural ratio, educational level, geographic location etc. The segment, when quantified, can be used as an independent variable affecting the demand for the product in question.
3. Price: The price factor is another important variable to be included in demand analysis. Here, one has to consider the prices of the product and also its substitutes and complements. One may also consider the price difference between the product concerned and its substitutes and complements. Price as a determinant of the volume of sales of consumer non-durables is sometimes more important through cross-elasticity (involving substitute products) than it is directly in terms of price elasticity. Direct price elasticity can be expected to be more important with respect to that consumer nondurables, which are capable of storage and are free from risk of changes in style.
4. Replacement demand: The total demand consists of:
New owner demand, and
A replacement demand.
The replacement demand tends to grow with the growth in the total stock with the consumers. Once a person gets used to a thing, he is unlikely to give it up at some, future day. This makes replacement demand regular and predictable. For certain established products, life expectancy tables are being prepared in developed countries in order to estimate the average replacement rate. When purchasing power increases, the scrap page rate is lower; but as production catches up, the scrap page tends to increase. The total demand is symbolically stated as D = N + R, where N is new owner demand and R is the replacement demand.
Each of these independent variables may be forecast-ed separately. The purchasing power, the number of families and some other factors depending on the product concerned, set an upper limit to the maximum or the optimum ownership level. It is the level towards which the actual volume of consumer stock tends to gravitate. The difference between optimum and the actual stock shows the growth potential of the demand for durable goods.
5. Credit conditions: The availability of credit and hire purchase facilities tends to push up the demand for consumer durables. In India, for consumer durables like refrigerators, televisions, cars, scooters etc, hire purchase facility is available. In western countries, the extension of credit is used as sales promotion measure. Among the manufacturers, the Indian Sewing Machine Company, the manufacturer of Singer, claims to have pioneered hire purchase in India. Hawkins pressure cookers are also available on hire purchase basis. The intensified competition between car and two wheeler manufactures has led to many firms extending credit for their purchase.
6. Conditions within the industry: The sale of a company is the part of the total sales of industry. If the conditions of the industry change then the sale of each of the firms in the industry is affected. All the time the new marketers enter the market and some eclipse. It is also to be decided about the position of a firm in the industry whether it has the leadership status or follower status or challenger status. Changes in other factors by one firm also affect the status of another. For example, if the price of the product by a firm is reduced than there is an impact on other firms. Same is the case with promotion and distribution. All these factors affect the demand forecasting of the product.
7. Socio-economic conditions: Socio-economic condition of the country also affects the sales forecasting. They may include total national income, per capita income, standard of living of the masses, education, inflation, deflation etc. For instance, if the prices are rising sharply and the production is not increasing to cope the demand, then it will be difficult for the public to satisfy all their wants. It will lead to the reduction in demand and thereby the sales forecast will be affected on the contrary. If there is a rapid increase in the per capita income along with increase in production, the demand will increase and thereby the sales forecast will be affected.
Learn more about the different kinds of factors that affect demand (sales) forecasting only at the University Canada West.
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