Market Forecasting Methods: Short & Long Term Techniques

Forecasting Market Methods: Long and Short Term

A company’s production schedules, planned manning levels, and financial budgeting are all related to the sales forecast. A too optimistic forecast can lead to excess stocks being accumulated, over-production and high manning levels, and over-borrowing or inefficient deployment of financial resources. A pessimistic forecast can lead to large opportunity costs and frustration among potential buyers because of late or no delivery. Firms adopt various approaches to sales forecasting, but the basic approach is to (according to T. Proctor):

Stage 1.

Make an environmental forecast regarding inflation, employment, interest rates, consumer spending and saving, and business investment.

Stage 2.

Make a forecast of sales and profits to be earned by the industry using the data in stage 1, together with other information that links industry figures to environmental trends.

Stage 3

Make a company sales forecast using the data in stage 2 and assuming a given market share.

Often, however, firms may not know the industry sales level. In such cases, sales forecasts are made at the company level at stage 2, and stage 3 is not used. There are two basic approaches to forecasting sales for established products, both of which have several variants. On the one hand, there are methods that rely on asking people questions, and on the other hand, there are those that involve the statistical or mathematical analysis of historical data.

One of the most used methods to forecast future market trends is the optimization of M.C.O. For predicting market trends, one of the most important things to consider internally in the company is ‘how the market is working today.’ For this understanding, most companies receive a lot of information about the variables that make up the market trend.

They might be classified easily as:

Monitoring Market Variables

The company needs recurrent and continuous information to measure short-term market trends, normally bought from specialized agencies (e.g., Nielsen AC corp.). This information provides a continuous assessment of the main micro-environment variables about the market and sector where the company is operating. Some requirements of monitoring sources of information are:

• Periodically updated (monthly, annual, etc.)
• Constant time intervals
• Comparable and comprehensible
• Useful and structured

‘Ad-hoc’ Market Analysis

Sometimes, information provided by external and continuous sources is not enough to describe market trends (hidden variables that affect directly, not measured). This ad-hoc information is useful to get a deeper understanding and acknowledgment of the variables that will explain the reasons for market changes and obtain conclusions for developing strategic and tactical actions. This ad-hoc information may be useful for:

• Detecting concrete market opportunities
• Explaining the subjacent behaviors of monitoring variables (e.g., the market might be increasing revenues but needs to be understood if loyalty levels are changing, the number of households that consume the brand, intensity of purchase, etc.)
• Evaluating and assessing by punctual, variables not normally analyzed.
• Developing and launching new products on the market.
• Evaluating new alternatives and new acknowledgments of the market (new vision and depth of understanding).

In conclusion, the market is a group of external factors that directly affect company business and way of working (it is part of the micro-environment), not controllable by the enterprise but being influenced by the actions and strategies developed (and by competitors’ strategies). It is vital that the company has a deep and continuous understanding of the market situation (especially the market share variable, as a result of tactics and plans implemented by investment). It allows the company to inquire about its perceived positioning, the trends, and new opportunities to develop strategic business decisions.

Main Forecasting Methods:

• Classical time series analysis
• Moving Average (TAM)
• Statistical Demand Analysis
• Equilibrium price-quantity market analysis