A Note on Forecasting Demand for Special Offers in a Magazine Author(s): Max K.

Adler Source: The Journal of Industrial Economics, Vol. 2, No. 1 (Nov., 1953), pp. 44-50 Published by: Blackwell Publishing Stable URL: http://www.jstor.org/stable/2097390 . Accessed: 20/07/2011 04:31
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A NOTE ON FORECASTING DEMAND FOR SPECIAL OFFERS IN A MAGAZINE by MAX K.

ADLER

i. Introduction. This note is specifically concerned with the problem of forecasting the demand for commodities which are the subject of 'special offers' by a particular journal. The main part of the note will discuss the technique of forecasting which has been evolved. There are, however, two aspects of wider significance. First, that the techniques which have been developed may be applicable in the forecasting of demand for other commodities offered for sale through other channels; attempts at such more general use may enable further improvements and modifications in the forecasting methods. Second, apart from this technical interest to statisticians forecasting demand, there is the point that the methods which have been developed seem to imply certain generalizations about consumers' behaviour in particular situations, and it may be of interest to economists to consider them. The Problem. The journal Womanis a weekly magazine with a 2. certified circulation of over 2,500,000 copies per week. It costs 4id. and is read by over 6,ooo,ooo women and girls aged sixteen and over in the British Isles. The publishers claim it to be the largest women's magazine in the world. One feature of the journal is that from time to time it arranges for its readers to acquire commodities which it offers on special terms. These offers cover broadly three types of commodities: cosmetics, household goods, and articles of clothing. The offers are always made in feature articles and not in advertisements. Readers who wish to purchase the offered article or articles are asked to send in a coupon together with a postal order for the amount asked for. On the coupon readers give their name and address and indicate their particular choice, if more than one variety is offered. Whether or not the problem of maximizing profits arises, the publishers of Woman obviously do not wish to make losses on the offers. It is necessary to give firm orders to the manufacturers a considerable time before the offers appear in the journal. Many offers are taken up by readers in their hundreds of thousands; large quantities are, therefore, involved, and a wrong judgement on the size of the order to be placed with the manufacturers can involve sizeable losses. These can arise in two different ways: (i) If the demand is overestimated, a certain number of the
44 t

FORECASTING DEMAND FOR SPECIAL OFFERS

45

articles offered are left in the hands of the publisher who has to dispose of therd in the best possible way. (ii) If the demand is underestimated, a large number of readers who have sent for the offer cannot be satisfied. Since the buyer sends the money when applying, the clerical work connected with returning the individual amounts is very heavy and, together with the postage, also very expensive, quite apart from the loss of goodwill. Originally, decisions about the magnitude of orders depended on the business acumen of the personshandling the offers. The question arose how far it was possible to use market research and statistical methods to answer beforehand how many readers would be likely to send for any particular offer. 3. Methodof Forecasting Adopted. For offers which had already been made, of course, the total sales were already known. It was thought that these statistics could be used to forecast the sales of a new offer, if it were possible to establish its relative standing with consumers as compared with previous offers. For this purpose, it was decided to use a questionnaire presented in interviews to a cross-sectionof the female population.1 A 'pull' of the feature page containing the offer whose sales are to be forecast is obtained several weeks ahead of publication. The investigator shows a copy of this pull to the respondent and gives her a chance to absorb its contents. A series of questions is then asked, mainly in order to present the respondent, step by step, with a picture of the real situation when an offer is sent for. The pertinent questions are as follows: If you saw this announcement in Woman would you say that this offer interested you or not? If you saw this offer in Woman,do you think you would be preparedto cut out the coupon and send the money for the offer? If it happened that by the time you came to send for the offer somebody had cut out the coupon, would you make the effort of buying another copy in order to send for this offer? In addition to questions as to marital status and occupation, and the interviewers' assessmentof age and social class, the respondents are asked whether, during the last week prior to the interview, they read or looked through a certain number of weekly journals, one of which is Woman. In this way, the amount of interest and buying intentions is obtained, broken down not only by the usual age and class groups, but also by readers of Woman and by non-readers. Thus it becomes
1 In fact, the surveys were carried out in the Greater London area only, in order to save costs. The size of the sample was in each case Iooo, stratified by age and class. Only females aged sixteen or over were interviewed.

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MAX K. ADLER

possible to assess the relative standing of the offer, compared with previous offers, and the various differences of acceptance within the age and class groups, and by readership of the journal. However, this assessment is necessarily very broad, and does not lend itself to a numerical statement as to the number of items of the particular offer that will be bought by the readers of the journal. The introduction of 'barometer scales' helped the statistical technique to be refined. These are charts containing a picture of a barometer with readings from o to iOO. Two copies are used in each interview. The first, bearing next to the points marked iOO, 75, 50, 25, and o, words which indicate the degree of interest in descending order2 is used to ascertain the degree of initial interest in the offer. The second is used later in the interview, after the respondent has stated that she would send for the offer, to indicate the strength of her wish to obtain the article. The sums of the barometer readings are averaged by the number of respondents in each class and age group, and these averages serve as weights to be applied to the percentages of those interested, those not interested, and those who do not know. An Intensity of Interest Index is obtained by multiplying the percentage of those interested by their average interest score. When the Intensity of Interest Scores for two or more similar offers are compared it can be seen at a glance which offer has the highest acceptance. The acceptance of the various age and class groups can also be ascertained in this way, and this may yield useful pointers for the writing of future offer features. Although the introduction of the barometer undoubtedly improves the research findings, it still does not make possible numerical forecasts. For this it is necessary to take account of the sales of previous offers. It was found that sales forecasts based on an offer dissimilar to the one to be predicted did not yield accurate results; therefore all offers were classified in the three groups, cosmetics, household goods, and clothing items, as mentioned before, and forecasts of the sales of a future offer are based on the findings for a past offer of the same group. If the population would react in exactly the same way to the published offer as the sample of women does to the pull of the offer feature, it would be quite easy to make a forecast. In this case, each per cent of those saying that they would send for the offer, would represent a certain number of sales, and a simple multiplication would result in an exact sales forecast. It is well known, however, that the number of people who say that
2Thus, IOO is marked 'Very Interested', and o, 'Not Interested at All'.

FORECASTING

DEMAND

FOR SPECIAL

OFFERS

47

they would act in a certain way is always larger than the number of people who, in the event, do so act. This is illustrated by the fact that in respect of a certain offer each percentage point of those saying that they would send for it yielded 5428 actual sales, while each percentage point of those who said the same to another, similar, offer yielded only I469 actual sales. How then can these two figures be reconciled? On the basis of experience it was argued that the percentage of those saying they would send for an offer who will actually do so will depend on the price, so that the higher the price of a given offer the lower the percentage who will send. For the purpose of forecasting, it was assumed that the percentage would decrease proportionately to the rise in price; in other words that, in order to forecast the sales from a given offer, the percentage of those who say that they will send for it, both for the offer which serves as forecasting base and for the offer for which the sales are to be predicted, must be deflated by the price of each offer respectively. This deflating factor is taken into account in the following formula. XO Yp Xp
Yo
,

where

Xp=the sales of the offer to be predicted; Xo=the actual sales of the offer that serves as prediction base; Yp=the quotient of the percentage of readers who said that they would send for the offer to be predicted, over the unit price of that offer; Yo=the quotient of the percentage of readers who said that they would send for the offer that serves as prediction base, over the unit price of that offer. An actual example will make the matter clear. Of offer A, the offer that serves as prediction base, 240,000 items were sold at the price of I/3 each, when 45 per cent of the readers of Womanin the sample said that they would send for the offer. Offer B, the offer the sales of which are to be predicted, costs 2/- per unit and 38 per cent of the readers of Womenin the sample said that they would send for it; how many units will be sold?
xp

240.

38
24
=I27

approx.

45
I5

The sales forecast is, therefore I27,000

4.

units.

Results of the Forecasting. The practical applications of this

48

MAX K. ADLER

sales forecasting formula are not without interest, for they show both its successes and its failures. So far, eight forecasts have been made;3 the percentage deviations from the actual sales were as follows: Offer A I.53/ B + I.Oi% C 4.47% D + I.Oi% E 4.2 I%

I2.03%

G + 79.I3% H +I52.55% On the arbitrary assumption that forecasts with errors up to 5 per cent are full successes, forecasts with errors of between 5 and I 5 per cent are partial successes, while forecasts with an error greater than I5 per cent are failures, the table shows that the forecasting for offers, A, B, and D was very good, and that for offers C and E was reasonably good, while the forecast for offer F was a partial success only, and those for offers G and H were complete failures. It is, perhaps, illuminating to discuss the reasons for the partial success and for the failures. In the case of offer F, the comparable offer on which the forecast had been based was published about a year before offer F; the change in the economic climate of the country between the two dates apparently induced more women in the higher income groups to send for this relatively cheap offer, while a number of working-class women did not send for it; an inspection of the Intensity of Interest Scores of the various social classes fortifies this opinion. Within the first four days after offer G, a summer dress, coupons came in in a satisfactory manner, and the experts considered that it was yielding the number of sales as forecast. However, four days after publication, rain fell heavily and the temperature became very low, and from then on only a trickle of coupons arrived. The case of offer H is a very curious one. There are several reasons for the failure of the forecast for this offer. One reason was the omission of a key word from the questionnaire. But the main reason, the existence of which was unknown at the time of the forecast, consisted in the fact that underneath the coupon for the offer another coupon was printed with which the readers could place a regular order for the magazine with a newsagent. Both coupons appeared under the same headline which, to casual readers, seemed to indicate that they could send for the offer only when, at the same
8 Since this paper was prepared two more forecasts have been made; in both cases the error was less than 4 per cent.

FORECASTING DEMAND FOR SPECIAL OFFERS

49

time, placing a regular order for the magazine; many readers may have had still in their minds the pre-warpractice of a number of publishers who coupled free and special offers with the taking out of a subscription for aJournal. Since the coupons appeared on a later page that also contained advertising matter, it is certain that large numbers of readers refrained from sending for the offer, erroneously believing that they committed themselves to much more than was, in fact, indicated. The partial success only of forecasting offer F and the breakdown of forecasting in the cases of offers G and H show clearly how the successful use of the forecasting formula can be vitiated by unpredictable changes in relevant factors. 5. Extension the Formula'sUse. The forecasting formula may, of however, be used for an additional plrpose, for the forecasting of how demand will be affected by changes in the price at which the offer is made. Thus by successive substitutions a table can be constructed from which the total sales, the total turnover and the total profit at each price level can be read.' The formula assumes sales to decrease in strict proportion to the increase in price; in other words, the public is more sensitive to a price increase at a lower than at a higher price. Given this, it could lead to a policy of maximizing profits by raising the price and sacrificing a number of sales. However, these results should not be taken too far. Each commodity has, in the minds of the buying public, a lowest and a highest price limit; this is true even if the public themselves are only vaguely aware of it. If the price is below this limit, fewer people will buy the commodity than would be shown by the formula through continuous substitution because a number of potential buyers will grow suspicious of the quality of the commodity offered. On the other hand, buyers' resistance will be experienced if the price is beyond the psychological limit. Where these actual limits are cannot be discovered by the application of the sales forecasting formula. In addition, competition restricts, of course, the price range at which
4 As an example, the following table shows the substitutions beginning with a price of Is. 3d. to a price of is. gd. for the same article. Price Total Total Total Profit Sales Turnover per Unit per Unit Profit 0 sh d. 'ooo

Is. 5d. 200 4 14, 67 3,333 Is. 6d. 5 189 14, 75 3,938 Is. 7d. 6 179 14, 70 4,558 Is. 8d. 7 170 14,167 4,958 8 162 Is. gd. 4,1 75 5,400 It can be seen that with increasing price total sales fall proportionately, while the total turnover remains stable. Therefore, total profits increase very rapidly. money D

Is. 3d. Is. 4d.

2 3

226 213

14,125 14,200

1,883 2,663

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MAX K. ADLER

a certain commodity can be marketed. The experience from which the formula has been constructed has been from commodities sold as special offers, and, therefore, having the attraction that their prices were belowthose at which they would regularly be available through ordinary channels of distribution. It does not follow that such results would obtain for prices which were higher than 'outside' competitive prices. As in so many other fields of economic activity research can provide only a base for decision; the decision itself has to be made by the businessmanwhose experience tells him how far he can go. 6. Conclusion. Forecasting is generally agreed to be one of the most important tasks of the statistician in business. The attempt at forecasting, as described in this note, is by no means exact, but the practical results have been sufficiently good to serve as a guide to the decision makers, provided no unpredictable elements make themselves felt. Beyond its practical usefulness, however, and subject to the qualifications made earlier, the relative success of the forecasting formula suggests two general conclusions. The first is that a consumer's intention of buying a commodity is less likely to be negatived for low-priced commodities than for high-priced ones, so that there may be more uncertainty of consumer conduct for commodities whose prices are high in relation to normal budgets. This conclusion is outside the scope of usual economic theory, which is concerned with actual happenings and not with intentions. The second conclusion is that for high-priced commodities, price increases have less effect on the stability of demand intentions than similar absolute increases will have on lower-priced commodities. The economist would perhaps expect this, since the same absolute increase in price has lower proportional significance the higher the initial price of a commodity. A further interesting point is the implication of the forecasting formula that the effective demand for special offers of this kind has unit elasticity. This has had its empirical justification - theoretical justification is another matter and without further evidence can only be speculative. It would be interesting to have the forecasting formula here described 'applied to other businesses and to other methods of selling. It seems likely that it would be useful to them, perhaps adapted and modified as necessary. The author would be pleased to co-operate with other market research practitionersif they would experiment with its use.
LONDON