DEMAND ANALYSISBREAK EVEN POINT

Dr. Rahul Pratap Singh Kaurav

© Entrepreneurship Development Camp, PIM, Gwalior

DEMAND

The process to satisfy human wants/ needs/desires. Want: having a strong desire for something Need: lack of means of subsistence Desire: an aspiration to acquire something

Demand: effective desire Demand is that desire which backed by willingness and

ability to buy a particular commodity. Things necessary for demand:

Time Price of the commodity Amount (or quantity) of the commodity consumers are willing to

purchase at the price 2

TY

PE

S O

F D

EM

AN

D

3

Goods

Consumer Direct

Capital

Consumable

Durable Replacement

Derived

Recurring

DE

TE

RM

INA

NT

S O

F D

EM

AN

D

Price of the product Single most important determinant Negative effect on demand

Income of the consumer Normal goods: demand increases with increase in

consumer’s income Inferior goods: demand falls as income rises

Price of related goods Substitutes

If the price of a commodity increases, demand for its substitute rises. Complements

If the price of a commodity increases, quantity demanded of its complement falls.

4

DE

TE

RM

INA

NT

S O

F D

EM

AN

D

Tastes and preferences Very significant in case of consumer goods

Expectation of future price changes Gives rise to tendency of hoarding of durable

goodsPopulation

Size, composition and distribution of population will influence demand

Advertising Very important in case of competitive markets

Contd…

5

DE

MA

ND

FU

NC

TIO

N

Interdependence between demand for a product and its determinants can be shown in a mathematical functional form

Dx = f(Px, Y, Py, T, A, N) …….. [Multivariate fx]

Independent variables: Px, Y, Py, T, A, N Dependent variable: Dx

Px: Price of x Y: Income of consumer Py: Price of other commodity T: Taste and preference of consumer A: Advertisement N: Macro variable like inflation, population growth,

economic growth6

EX

CE

PT

ION

S T

O T

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LA

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F D

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DLaw of demand may not operate due to the

following reasons: Giffen Goods: Sir Robert Giffen, Ireland Snob Appeal: Veblen Goods, Thorstein Veblen Demonstration Effect: Fashion Future Expectation of Prices (Panic buying) Addiction Neutral goods

Life saving drugs Salt

Goods with no substitute Amount of income spent

Match box7

TECHNIQUES OF DEMAND FORECASTING

•Subjective (Qualitative) methods: rely on human judgment and opinion.• Buyers’ Opinion• Sales Force Composite• Market Simulation• Test Marketing• Experts’ Opinion• Group Discussion• Delphi Method

Quantitative methods: use mathematical or simulation models based on historical demand or relationships between variables.Trend ProjectionSmoothing TechniquesBarometric techniquesEconometric

techniques

SUBJECTIVE METHODS OF DEMAND FORECASTING

Consumers’ Opinion Survey • Buyers are asked about future buying intentions of products, brand preferences and quantities of purchase, response to an increase in the price, or an implied comparison with competitor’s products. • Census Method: Involves contacting each and every

buyer• Sample Method: Involves only representative sample of

buyers•Merits

• Simple to administer and comprehend.• Suitable when no past data available.• Suitable for short term decisions regarding product and promotion.

•Demerits• Expensive both in terms of resources and time.• Buyers may give incorrect responses.

Sales Force Composite

• Salespersons are in direct contact with the customers. Salespersons are asked about estimated sales targets in their respective sales territories in a given period of time.

• Merits

• Cost effective as no additional cost is incurred on collection of data.

• Estimated figures are more reliable, as they are based on the notions of salespersons in direct contact with their customers.

• Demerits

• Results may be conditioned by the bias of optimism (or pessimism) of salespersons.

• Salespersons may be unaware of the economic environment of the business and may make wrong estimates.

• This method is ideal for short term and not for long term forecasting

Experts’ Opinion Methodi) Group Discussion: (developed by Osborn in 1953) Decisions may

be taken with the help of brainstorming sessions or by structured discussions.

ii) Delphi Technique: developed by the Rand Corporation at the

beginning of the Cold War, to forecast impact of technology on warfare. • Merits

• Decisions are enriched with the experience of competent experts.• Firm need not spend time, resources in collection of data by survey.• Very useful when product is absolutely new to all the markets.

• Demerits• Experts’ may involve some amount of bias.• With external experts, risk of loss of confidential information to rival firms.

Market Simulation • Firms create “artificial market”, consumers are instructed to shop with some

money. “Laboratory experiment” ascertains consumers’ reactions to changes in price, packaging, and even location of the product in the shop.

• Grabor-Granger test (1960s)

Merits• Market experiments provide information on consumer behaviour regarding a

change in any of the determinants of demand.

• Experiments are very useful in case of an absolutely new product.

• Demerits• People behave differently when they are being observed.

QUANTITATIVE METHODS OF DEMAND FORECASTING

Trend Projection

Statistical tool to predict future values of a variable on the basis of time series data.

• Time series data are composed of:• Secular trend (T): change occurring consistently over a long time

and is relatively smooth in its path.

• Seasonal trend (S): seasonal variations of the data within a year

• Cyclical trend (C): cyclical movement in the demand for a product that may have a tendency to recur in a few years

• Random events (R): have no trend of occurrence hence they create random variation in the series.

• Graphical method• Past values of the variable on vertical axis and time on

horizontal axis and line is plotted. • Movement of the series is assessed and future values of the

variable are forecasted• simple but provides a general indication and fails to predict

future value of demand

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200

2001 2002 2003 2004 2005

Year

Dem

and

for

mob

iles

(in la

khs)

LIMITATIONS OF DEMAND FORECASTING

• Change in Fashion

• Consumers’ Psychology

• Lack of Experienced Experts

• Lack of Past Data• Accurate

• Reliable

BREAK EVEN ANALYSIS

•Breakeven point is the point where total cost just equals the total revenue, in other words it is the no profit no loss point.

BREAK EVEN OUTPUT

•Fixed Cost/Contribution

•200000 / 40 = 5000 units

BREAK EVEN SALES

•BE Units X Sales price per unit

•5000 X 100 = 5,00,000

MARGIN OF SAFETY

•Total output – BE output

•8000 – 5000 = 3000

PROFIT

•MOS X Contribution

•3000 X 40 = INR. 1,20,000