Everything You Need to Know About Qualitative Forecasting Methods
Business forecasting is the practice of predicting the future financial state of a company regarding sales and profits while anticipating the amount of potential growth over time. These projections allow business owners to make more informed decisions based on expected trends and entry points for developing the company.
Generally speaking, there are two common methods of forecasting quantitative and qualitative.
Quantitative forecasting uses numerical data and statistical methods to anticipate important changes in the future of a business as well as trends in demand.
On the other hand, qualitative techniques use judgments and theories developed by experts in the field who have seen the workings of the business and are aware of the economic changes that occur on a yearly basis.
Advantages of Qualitative Forecasting
Qualitative methods are most beneficial for newer or smaller companies who lack enough historical data to produce accurate quantitative results. However, even for established businesses, the information from qualitative forecasts can give additional insight and valuable information from industry experts that objective data cannot produce.
Here are two main advantages that can be derived from a qualitative approach to forecasting-
Qualitative forecasting techniques offer more flexibility in comparison to fully quantitative forecasts and statistical methods. While data sets contain highly valuable information, they cannot completely account for the changing conditions within the industry, especially when these changes occur outside of historical sales averages.
Qualitative forecasts can also take into account more external variables, helping the owners and executives responsible for this prediction to think open-mindedly without any numerical limitations.
For start-up companies or new locations of franchises with little to no historical data, the qualitative methods become useful as they can rely on the intuition and judgment of experienced specialists, consultants, and industry experts.
Companies could even conduct focus groups or consumer surveys to gauge their target demographics' reactions towards certain products or services.
Commonly Used Methods
Here are two common ways in which qualitative business forecasting is carried out-
Market research is the process of testing the popularity of a service or individual item by gauging the reactions of prospective customers. This allows businesses to determine their target markets and seek ideas and responses from consumers to fine-tune their products.
Businesses can either perform market research internally or hire an agency that specializes in collecting this information. The study can be conducted via consumer surveys, product testing, or focus groups, in which participants are typically compensated with product samples or a small stipend for their time.
They can also design polls for prospective consumers in order to help the business gain better insight into where they stand and whether they hold a future in the chosen market in the presence of strong competitors.
This method includes multiple questionnaires filled out by a panel of industry experts and gathering their opinions regarding the business or product.
The goal of the Delphi Method is to reach a group consensus of executive opinions at the end of these multiple sessions of questionnaires and base a forecast on the results.
As this method involves aggregating opinions from a diverse set of specialists, it can be carried out without bringing everyone together for a physical meeting. Additionally, as the responses of the contributors can be collected anonymously, the participants on the advisory board won't have to worry about the consequences of sharing their honest views.
Choosing the Right Qualitative Method
When choosing a qualitative method to use, business leaders should also analyze the following aspects before reaching a decision.
First, businesses need to understand their purpose of forecasting. If, for instance, they are trying to gauge future prospects of a business idea or product, it would be more beneficial to carry out market research.
However, for companies wanting to forecast budgets based on predicted future sales, they will need to use the Delphi technique and seek out the insights of professionals on a panel.
Dynamics and Components
All of the elements in distribution, sales, and production systems must be taken into consideration to decide which of the qualitative forecasting methods would be most suitable. It is crucial to study the positive or negative impacts of these elements in relation to the business to be confident about which method to opt for.
Determine the Importance of the Past
Those in charge of forecasting for the company must evaluate how important it is to include or omit the past activities or patterns of the business. When there have been significant changes to the industry as a result of automation or the introduction of new products, past data may be less important for future forecasts.
The outcomes of qualitative forecasting methods are more opinion-based as opposed to being driven by past data and statistical techniques.
As it does not involve data analysis, qualitative methods should be carried out more than once to make sure results and opinions are consistent throughout each focus group or advisory board.
The Importance of Automation
Forecasting provides valuable information for business leaders. However, it requires lots of planning, designing, and hard work. While qualitative forecasting models can be beneficial on their own, the best way to increase accuracy in sales, labor, or inventory forecasting is to combine this technique with a quantitative method to produce the most accurate forecast possible.
Therefore, to avoid business owners from having to spend hours on manual data collection or calculations, companies should look towards investing in forecasting software to reduce the amount of effort and time.