The most important entrepreneurial forecasting is demand forecasting. If an entrepreneur knows what will be demand for their products and services it will be easier to forecast sales and costs for their business purpose.
In the previous post, I write about some open questions about entrepreneurial forecasting. This is the second part from the series of entrepreneurial forecasting.
Difference Between Demand and Sales
Sales simply present how much is actually sold from the business.
Demand shows the need for the products and services from the market. Demand answers the question: How much is a need in the period of time from specific products and services that was offered on the market?
This is important because we can have two extreme situations:
1. Demand can’t be satisfied.
This means that our business capacity and business capacity of our competitor cannot satisfy current demand on the market for certain products and services.
2. Sales will be less than demand.
If the sale is less than demand then it’s the clear signal that competitors satisfy the market demand. Another thing is that our capacity is bigger than real market needs.
Demand Characteristics
I will obtain some of the most important characteristics of demand that must be included in the forecasting. In the graphic below are showing some of the characteristics described below.
1. Demand Has Own Pattern
You can see the pattern of demand if you plot the quantity of demand from historical data on a time scale as shown on the graphic. In that graph, you can see a pattern that in some months demand is increasing and in another months decrease. Actual demand varies from the period to period of time. These variations appear because of:
- Trend. You can see from the plot that on every fifth month, there are increasing of demand.
- Cycle. This is another characteristic show some pattern in demand over a period of time.
- Seasonality. Demand depends on fluctuations that can be resulted of the holiday season, weather, or other events that take a place on a seasonal.
If you can predict the pattern of demand it is easier to forecast demand for some future period of time.
2. Stable and Dynamic Demand
Another characteristic of demand is that it can be stable and dynamic demand.
As shown on the plot, we can have demand shape that retains same in a longer period of time, and it is called stable demand. This is the situation where there are not changes in the demand over time.
When demand patterns for some products or services are changed over time, then we have dynamic demand. This demand is when the shape is changed over time on the plot.
If the demand is stable, then forecasting is much easier for entrepreneurs. If the demand for products and services is dynamic, then there will be much more work for entrepreneurs to predict and forecast it.
3. Dependent and Independent Demand
Another important characteristic of demand that is important about entrepreneurial forecasting is that demand can be dependent and independent demand.
It was said that demand for a product or service is dependent when it is related to the demand for any other product or service or any other factor that can have direct influence on demand. Contrary, independent demand is demand that is not related to any other product and service or another direct influence factor.
It is probably that demand will be always dependent because it will be always related with other influence factors.
You can read the third part of this series at The Five Principles of Entrepreneurial Forecasting.
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