A Two-Stage Sales Forecasting Procedure Using Discounted Least Squares

Abstract

The authors develop a two-stage forecasting methodology for estimating the sales responses to marketing and environmental variables when it is likely that their impacts will change unpredictably over time. The methodology is based on an integrated least squares procedure that uses regression analysis in Stage 1 to estimate the coefficients of the controllable and environmental variables in combination with a Stage 2 discounted least squares smoothing procedure that updates key parameters in response to changing market conditions. The effectiveness of the methodology is demonstrated by applying it to weekly sales data from a major retail chain.