Pros & Cons of Qualitative vs. Quantitative Demand Forecasting Methods

For business owners, forecasting is an essential component of growing the success of their companies. Through effective demand forecasting, they are able to predict future sales and labor demand to budget accordingly.

Whether businesses choose to implement qualitative or quantitative methods, knowing the benefits and shortcomings of each approach allows management to make better-informed decisions that will meet their unique goals.

Generally speaking, demand forecasting can be split up into two categories- qualitative and quantitative.

Qualitative Demand Forecasting

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This method of forecasting focuses on the opinions, judgment, and experiences of industry experts.

Businesses can gather a panel of experts in their industry to collect opinions on recommended budgets, product/service popularity, labor needs and more.

Alternatively, they can also seek out the attitudes toward certain products or services by conducting market or consumer surveys, as well as questionnaires with their target demographic.

Advantages of Qualitative Forecasting

Flexibility By utilizing qualitative methods, business owners have the flexibility they need to explore the expert opinion, judgment, and intuition of their industry's leaders without being held back by rigid numerical data.

Intuition When sales data is lacking, qualitative demand forecasting methods are often much more accurate and desirable among business owners. For example, if the firm is launching a new product that is unlike any other item currently available, they won't have the past data on hand to forecast for its demand. Qualitative forecasting can, therefore, fill these gaps of knowledge to complete an accurate forecast.

Disadvantages of Qualitative Forecasting

Errors in Judgment Although a hunch about what to expect within the business can be accurate, there are many times when experts in the field are dealing with the unknown. As a result, the qualitative approach can be susceptible to human errors as it is so heavily dependent on executive opinion.

Unexpected Changes Qualitative forecasting doesn't always take into account unexpected occurrences. Sudden environmental changes such as harsh weather, as well as governmental and economic activity shifts, can also derail the accuracy of qualitative techniques.

Bias Although the experts and consumers involved in market research aim to remain objective, their responses can be heavily affected by personal biases. Individuals who are too optimistic or pessimistic can greatly skew the qualitative data.

Quantitative Demand Forecasting

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Quantitative demand forecasting techniques on the other hand, utilize concrete information regarding sales, inventory and labor based on the company's historical data.

As these projections are based on clear numerical information and statistical techniques, this method eliminates the risk of bias while producing clearer results.

Advantages of Quantitative Forecasting

Addresses Historic Data When conducting quantitative methods, businesses are able to objectively address the company's history. From revenue and sales to expenses, businesses have the unbiased past data they need to make informed decisions about the company's future.

Exposes Patterns Numerical data can clearly expose patterns of spending, sales, and scheduling within the business. This type of forecasting clearly shows trends over a specific time period and whether these patterns are consistent from year to year. As a result, owners can make changes to the workforce or inventory control processes to meet expected annual averages.

Attracts Stakeholders When businesses have concrete data to back up their need for investors or loans, the quantitative technique works in their favor. Stakeholders want to see the company's bottom line and cash flows before making any commitments. Therefore, showcasing historical trends gives businesses the fuel they need to appeal for more funding.

Disadvantages of Quantitative Forecasting

Lacks Detail While quantitative forecasting methods produce clear numbers needed to make important decisions, it can lack intuition and experience. This type of forecasting does not allow businesses to account for external factors only years of experience within the industry can reveal.

Cost In many cases, qualitative demand forecasting methods are less expensive to employ. Compiling, analyzing, and organizing quantitative data requires more staff and analysts to uncover trends and patterns. However, this concern can be easily addressed by using affordable business forecasting tools and software to automate the process.

Finding the Best Solution With Forecasting Software

While either approach has its own benefits as well as shortcomings, the most effective way to combat inaccuracies is to use both methods and compare these results to ensure projections are consistent throughout.

In order to produce the most reliable results, business owners can simplify the process by utilizing software technology. This would allow companies to utilize both quantitative and statistical methods with minimal effort, while still producing the necessary details regarding industry trends and the effects of external factors.

Forecasting software will free up precious time and eliminate the risk of human error during data collection and calculation, while providing businesses with the valuable data and research they need to make informed decisions with confidence.