Sales Forecasting

Introduction

 Sales forecasting is a difficult area of

management. Most managers believe they
are good at forecasting. However, forecasts
made usually turn out to be wrong!
Marketers argue about whether sales
forecasting is a science or an art. The short
answer is that it is a bit of both.
 Reasons for undertaking sales
forecasts
 Businesses are forced to look well ahead in order
to plan their investments, launch new products,
decide when to close or withdraw products and so
on. The sales forecasting process is a critical one
for most businesses. Key decisions that are
derived from a sales forecast include:

- Employment levels required

- Promotional mix
- Investment in production capacity
 Types of forecasting
 There are two major types of forecasting, which
can be broadly described as macro and micro:
 Macro forecasting is concerned with forecasting
markets in total. This is about determining the
existing level of Market Demand and considering
what will happen to market demand in the future.
 Micro forecasting is concerned with detailed unit
sales forecasts. This is about determining a
product’s market share in a particular industry and
considering what will happen to that market share
in the future.
 The selection of which type of forecasting to use
depends on several factors as under:

 (1) The degree of accuracy required – if the decisions that are to be

made on the basis of the sales forecast have high risks attached to
them, then it stands to reason that the forecast should be prepared as
accurately as possible. However, this involves more cost
 (2) The availability of data and information - in some markets there
is a wealth of available sales information (e.g. clothing retail, food
retailing, holidays); in others it is hard to find reliable, up-to-date
information
 (3) The time horizon that the sales forecast is intended to cover.
For example, are we forecasting next weeks’ sales, or are we trying to
forecast what will happen to the overall size of the market in the next
five years?
 (4) The position of the products in its life cycle. For example, for
products at the “introductory” stage of the product life cycle, less sales
data and information may be available than for products at the
“maturity” stage when time series can be a useful forecasting method.
 Stage two in the forecast is to
estimate Company Demand
 Company demand is the company’s share of market demand.
 This can be expressed as a formula:
 Company Demand = Market Demand v/s Company’s
Market Share
 For example, taking our package holiday market example; the
company demand for First Choice Holidays in this market can
be calculated as follows:
 First Choice Holidays Demand = £7.9 billion x 15% Market
Share = £1.2 billion
 A company’s share of market demand depends on how its
products, services, prices, brands and so on are perceived
relative to the competitors. All other things being equal, the
company’s market share will depend on the size and
effectiveness of its marketing spending relative to competitors.
 Step Three is then to develop the
Sales Forecast
 The Sales Forecast is the expected level of company sales
based on a chosen marketing plan and an assumed marketing
environment.
 Note that the Sales Forecast is not necessarily the same as a
“sales target” or a “sales budget”.
 A sales target (or goal) is set for the sales force as a way of
defining and encouraging sales effort. Sales targets are often
set some way higher than estimated sales to “stretch” the
efforts of the sales force.
 A sales budget is a more conservative estimate of the
expected volume of sales. It is primarily used for making current
purchasing, production and cash-flow decisions. Sales budgets
need to take into account the risks involved in sales forecasting.
They are, therefore, generally set lower than the sales forecast.
Obtaining information on existing
market demand
 As a starting point for estimating market demand, a company needs to
know the actual industry sales taking place in the market. This involves
identifying its competitors and estimating their sales.
 An industry trade association will often collect and publish (sometime
only to members) total industry sales, although rarely listing individual
company sales separately. By using this information, each company
can evaluate its performance against the whole market.
 This is an important piece of analysis. Say, for example, that Company
A has sales that are rising at 10% per year. However, it finds out that
overall industry sales are rising by 15% per year. This must mean that
Company A is losing market share – its relative standing in the
industry.
 Another way to estimate sales is to buy reports from a marketing
research firm such as AC Neilsen, Mintel etc. These are usually good
sources of information for consumer markets – where retail sales can
be tracked in great detail at the point of sale. Such sources are less
useful in industrial markets which usually rely on distributors.
 Estimating Future Demand
 So far we have identified how a company can determine
the current position:
 Current Company Demand = Current Market Demand x
Current Market Share
 How can future market demand and company demand be
forecast?
 Very few products or services land themselves to easy
forecasting . These tend to involve a product whose
absolute level or trend of sales is fairly constant and where
competition is either non-existent (e.g. monopolies such as
public utilities) or stable . In most markets, total demand
and company demand are not stable – which makes good
sales forecasting a critical success factor.
 A common method of preparing a
sales forecast has three stages
(1) Prepare a macroeconomic forecast – what will
happen to overall economic activity in the
relevant economies in which a product is to be
sold.
(2) Prepare an industry sales forecast – what will
happen to overall sales in an industry based on
the issues that influence the macroeconomic
forecast.
(3) Prepare a company sales forecast – based on
what management expect to happen to the
company’s market share.
 Sales forecasts can be based on
three types of information:
(1) What customers say about their intentions to continue
buying products in the industry
(2) What customers are actually doing in the market.
(3) What customers have done in the past in the market.

There are many market research businesses that

undertake surveys of customer intentions – and sell this
information to businesses that need the data for sales
forecasting purposes. The value of a customer intention
survey increases when there are a relatively small number
of customers, the cost of reaching them is small, and they
have clear intentions. An alternative way of measuring
customer intentions is to sample the opinions of the sales
force or to consult industry experts
 Time Series Analysis
 Many businesses prepare their sales forecast on the basis of
past sales.
 Time series analysis involves breaking past sales down into
four components:
 (1) The trend: are sales growing, “flat-lining” or in decline?
(2) Seasonal or cyclical factors. Sales are affected by swings
in general economic activity (e.g. increases in the disposable
income of consumers may lead to increase in sales for
products in a particular industry). Seasonal and cyclical
factors occur in a regular pattern;
(3) Erratic events; these include strikes, fashion fads, war
scares and other disturbances to the market which need to be
isolated from past sales data in order to be able to identify the
more normal pattern of sales
(4) Responses: the results of particular measures that have
been taken to increase sales (e.g. a major new advertising
campaign).
Using time series analysis to prepare an
effective sales forecast requires Mgt. to:
Smooth out the erratic factors (e.g. by using
a moving average)

Adjust for seasonal variation

Identify and estimate the effect of specific

marketing responses
 SALES FORECAST VERSUS PLAN

 THE SALES FORECAST IS A

PROJECTION INTO THE FUTURE OF
EXPECTED SALES, GIVEN A STATED
SET OF ENVIRONMENTAL CONDITIONS.
 THE SALES PLAN IS A SET OF
SPECIFIED MANAGERIAL ACTIONS TO
BE UNDERTAKEN TO MEET OR EXCEED
THE SALES FORECAST.