The seasonality index is a numerical value used to evaluate seasonal trends in the demand for a product or service. This index represents an important principle in economics, and is used to eliminate seasonal variations in demand to allow companies to monitor trends. The seasonality index provides an apples-to-apples comparison, and helps to correct for temporary fluctuations in demand that occur naturally throughout the year.
To calculate the seasonality index, companies start by finding the average sales per month in a year. This provides a set of 12 data points to represent sales, or demand. By consolidating this data into four seasons, or quarters, the company can then analyze sales without the influence of simple seasonal variations. Using complex economic formulas, the company calculates the seasonal index value using this data. By multiplying actual sales per month or quarter by the seasonal index, one can determine precise demand rates on a constant basis, without seasonal variations.
For example, consider a car dealership that sells 500 units each spring yet only 300 units in each of the other seasons. This increase in sales in the spring could be attributed to families buying new cars for summer road trips, or to people replacing vehicles damaged during a harsh winter. To provide an accurate picture of demand, the company could calculate the seasonality index. By multiplying this index value by the actual number of units sold each season, they could predict what demand will be each quarter regardless of seasonal factors.
The seasonality index helps companies spot shifts in demand over time. For example, if a company noticed that deseasonalized demand decreased over several years, they may decide to modify or update a product based on current customer demand. It may also help the company analyze the results of a marketing campaign or new product introduction. Finally, this index allows the company to look for irregularities or problems and address them to prevent future sales impacts.
By using the seasonality index to predict future demand, companies can also ensure they have enough units available to avoid shortages. If this index suggests that real demand will increase in the future, the company may decide to hire more workers or sales people so that additional products can be produced. They may also invest in new equipment, or expand hours at manufacturing plants or retail locations. If the trend points to a decrease in demand, the company may cut staff, slow production, or increase marketing to meet sales goals.