The Complete Guide on Customer Demand Forecasting in Retail

Demand is the key indicator for every business to consider before taking the first step or expanding in the chosen market segment. It drives economic growth while central banks and governments boost demand to end down-sliding. Demand Prediction, which is part of Predictive Analytics, implies an evaluation of the number of goods and services that consumers will probably buy in the future. The most critical business factors such as turnover, profit margins, cash flow, capital expenditure, risk assessment, mitigation plans, capacity planning, etc. are directly dependent on demand.
What are the 5 Determinants of Demand?


The 5 Determinants of Demand are the following:

Product price.
Customers’ income.
Prices of complementary goods or services.
Customers’ tastes.
Customers’ expectations.

How Each Determinant of Demand Affects It


A better way to understand how each determinant affects demand is to assume that all other determinants, except for this one, do not change. So, all other indicators being equal, let’s take a look at each of them separately:



Product price
When prices rise, demand falls – that’s what the Law of Demand tells us. Subsequently, when prices drop, demand rises. Purchasing decisions are usually guided by price if all other factors are equal.



Customers’ income
When income rises, demand rises as well. But it’s not always that you would like to buy twice as much of a certain good or service. For example, earning more does not mean you need two, three, or four different shoe horns, because one is enough for everyday usage.



Prices of complementary goods or services
The price of related goods and services will also raise the cost of using the product you need, so you will want less. The example might be a price for gas that rose $4 a gallon in 2008. Consequently, the demand for Hummers dropped for one reason — gas is a related product to Hummers.



Demand rises also when the consumers’ tastes, preferences, and desires change, and they suddenly begin to like the product. And vice versa, if consumers’ tastes change to not favor a product, demand drops. Advertising a brand can influence consumers’ desires for a product. Expectations, along with actual desires, also affect the level of demand. That is when people expect that a product will have more value, they increase the demand for it.



Types of Demand Forecasting


The types of Demand Forecasting vary and can be influenced by multiple factors such as time span, the scope of the market, or the level of detailing. They are split into two groups: time period based and economy based. Let’s take a look at what subtypes correspond to each of these two types.



Economy based


Macro-level prediction.

This forecasting type considers the overall economic environment, dealing with the economy measured by the Index of Industrial Production, the country’s level of employment, national income, etc.



Industry-level prediction.

Industry-level prediction, obviously, deals with the demand that a particular industry’s products will have. For example, the demand for cars in the USA, the demand for electric scooters in the USA, etc.



Brand-level forecasting.

Brand-level forecasting means predicting the demand for the products of a particular brand or firm, such as Adidas, Nike, etc.



Time period based



Long-term forecasting.

Long-term forecasting implies making forecasts for a long period of time, such as two to five years or more. This forecasting type can give valuable strategic information to a business (e.g., moving to another market segment, extending a plant’s capacity, etc.).

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