As of this writing, Central Banks’ efforts to reduce inflation are underway. Central Banks around the globe are increasing their interest rates in response to the rate increases by the U.S. Federal Reserve. Whether you’re in the USA or elsewhere, the impact of rising interest rates on firms and the broader economy can be severe, and requires robust planning responses. 

Rising interest rates are designed to tackle inflation by reducing demand. The cost of borrowing increases which impacts cash flows for firms and consumers alike, eroding economic growth and financial performance of businesses. Further, as equity markets decline around the globe (US equity markets have declined around 20% from their peak), consumer wealth is declining.

All this means we’re in for a rough ride ahead. Here’s what we as planning professionals can do to understand what is happening to our demand and mitigate the impacts of rising interest rates on our businesses.

What Rising Interest Rates Mean for Demand Planners

One thing is for sure – customer and consumer behaviors are changing in the face of attempts to dampen inflation. Time series models are typically used when forecasting demand in the short term but their accuracy is eroding rapidly in the current environment of volatility and of demand pattern change.

If our usual forecasting techniques are not working, we need a different approach

The accuracy of these methods is dependent upon the recurring patterns of demand through time and assumes that the factors affecting demand are stable. We have seen how COVID has disrupted these patterns and we are seeing it again with Central Banks’ efforts to reduce inflation with increased interest rates. If our usual forecasting techniques are not working, we need a different approach.

Start Discussing the Drivers of Demand

Using historical time series data for estimating demand will be a risky proposition under the current circumstances. It is time for us to analyse and evaluate how the evolving economic and financial conditions are affecting our consumers, customers, and business. Collaboration is essential in gaining different perspectives on the situation and how behaviors are changing. [Ed: More on understanding changing consumer behavior here]

Develop hypotheses regarding the current drivers of behavior

The place to start is to develop an ongoing conversation and exploration with experts inside and outside of the company. This allows us to develop hypotheses regarding the current drivers of behavior that underline demand.

Test Alternate Drivers of Demand With Regression Analysis

Regression analysis can be an excellent means of evaluating and testing alternative drivers of demand that result from these discussions. It can also measure the degree of influence that each driver has on demand, both individually and collectively. The variables identified can be deployed to simulate alternative scenarios given assumed conditions that the demand forecaster wants to evaluate.

Regression analysis is an excellent means of testing alternative drivers of demand

The assumed conditions result from gathering information, experiences, and expectations from customers, consumers and related industry experts. This qualitative information is key in a collaborative process where one is dealing with shifting conditions and customers are adapting to new circumstances. Having this qualitative information gathered as part of the demand forecasting and planning process is essential when prevailing conditions make assumptions of time series models invalid.

Tap Sales & Marketing for Insight

Two of the best internal sources of customer and consumer behavior information are Marketing and Sales. Quite often they are fielding research that provides key insights into behavioral shifts and changes. These field studies in conjunction with their professional experience in market facing roles can be a valuable source of information which can improve the quality of demand forecasts and plans.

Used in conjunction with the regression analytics, this can marry quantitative and qualitative demand information. Diversity of perspectives and opinions is an important dimension that time series projections cannot capture during times of momentous change and behavioral shifts.

Things You Can Do Now

Act now: Review your demand forecasting and demand planning processes. Expand the qualitative information dimensions of these processes and develop regression analysis and modeling activities to capture how consumers and customers are reacting to current circumstances.

Collaborate: Expand the breadth of collaboration to add market information research to your demand forecasting efforts. Continuously update this information to track behavioral adaptations of your customers and consumers. Seek out information and opinions from stakeholders.

Be Dynamic: Be prepared to roll with changes. The situation requires a dynamic rather than a static mindset to capture the evolving conditions affecting customer and consumer demand.

Scenario Plan: Develop alternative scenarios and contingency plans. Think in terms of hedging where possible. Collaborate on multiple fronts – demand planning’s efforts in this regard can aid in informing marketing and sales strategies that respond effectively to changing demand. [Ed: More on scenario planning in high interest rate environments here]

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