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Econometric analysis and causal modellingfor forecasting including price sensitivity |
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Causal / econometric modelsIn causal analysis the aim is to quantify the effect of factors which are suspected of causing shifts in sales volume or market share. Such factors might include the weather, relative prices, sales force availability or economic indices. Historical data is analysed using mathematical regression techniques, with the help of specialist software. Click here for more detail on weather sensitivity analysis / weather related forecasting The causal factors, or 'independent variables' may effectively be leading indicators. So the value of a causal factor a month ago, or two months ago, may affect sales or market share this month. Therefore it is often necessary to include the exploration of potential time lags when analysisng the effects of causal factors. When a causal relationship has been identified it immediately helps to explain historical sales. That can in itself be helpful, but to use the model fully for future forecasting it is necessary to forecast the causal factor before one can forecast sales or market share. The task is made easier in the short term if a causal factor is a leading indicator, because the forecast may be fully or partially dependent on values of the causal factor that are already known. If the causal factor is a well known index for which other organisations publish forecasts, this can also ease the burden of preparation before using it in the causal sales forecasting model. Price sensitivityIf historical information on prices is available it is often useful to explore the effect of price on sales volume or market share. Prices, of course, interact with competitors prices, so it can be helpful to create a causal factor that is an index of company price to market price or to key competitor prices. Well established FMCG brands can particularly benefit from this type of analysis. Economic indicesSome markets are highly dependent on the economic climate and to forecast sales without reference to key economic variables can be a mistake. The wide variety of economic data is that is published by the government can be examined together with industry leading indicators such as the purchasing managers indices. Sales force calling patternsThe effect of sales force activity can be difficult to analyse, but is still rewarding for some businesses. For example, many pharmaceutical companies operate with large numbers of sales personnel and benefit from the analysis of call frequencies and patterns. Need for expert helpSpecialist software is invaluable in carrying out price sensitivity and other causal modelling, but great care is necessary to avoid confusion of the results with natural seasonality or inherent trends in market size or share. The matter should not be left to an automatic process embedded in software. Forecast Solutions can expertly carry out the work, examining the effects of relative prices, economic indices or sales force calling and can help maximise the benefits by integration into the sales forecasting process. •
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