SALES

FORECASTING

Sales Forecasting
Estimate

of company sales for a specified

future period

 Sales

forecasting is an important aspect of

sales management.
These forecasts are the result of painstaking
efforts by a number of individuals and
departments in the firm.
Forecasts aids sales managers in improving
decision making.

 However

no one sales forecasting method is

suitable for every situation.
Sales managers must be familiar with the
various forms of forecasting and their use.
Particular attention must be given to
matching the sales forecasting method to the
decision-making situation.

Importance Of Sales Forecasting

Sales Quotas and Budgets

Two

of the most vital managerial uses of the

sales forecasts are the setting of sales
quotas and the developing of sales budget.

Sales Quotas
Sales

goals and objectives sought my

management.
They are the performance standards for the
sales force; comparison of the actual sales
with assigned quotas is the basis of much of
the sales functions evaluative effort.
The establishment of the realistic quotas is
one of the most critical tasks faced by a sales
manager.

 The

forecast is the companys actual

prediction of what sales will be in a
forthcoming time period.

If

sales quotas are realistic, they are the best

and fairest method for setting sales quotas.

Sales Budgets
Another

important evaluative technique.

Sales Budget is a management plan for
expenditures to accomplish sales goals.
Its a blueprint for sales force action.

Sales Forecasting Concepts

1.
2.
3.

There are 3 levels of concern in sales

forecasting
Market Potential
Sales Potential
Market Share

Market Potential

Highest possible expected industry sales of

a good or service in a market for a given time
period

Sales Potential
Individual

Firms share of the market

potential
it can be expressed as:
Sales Potential = maket share x market potential

Market Share
Percentage

of a market controlled by a
company or product
The sales forecast, by contrast, is the sales
estimate that the company actually expects to
obtain.
Is based on marketplace circumstances,
company resources, and the firms marketing
plan.

ESTIMATING MARKET AND

SALES POTENTIAL

ESTIMATING MARKET AND SALES

POTENTIAL
Continuous

assessment and monitoring of

market and sales potentials is important to
effective sales forecasting.
a company must keep track of trends in sales
and market share.
it must also remain alert to basic shifts in
product offerings and competitive marketing
program.

ESTIMATING MARKET AND SALES

POTENTIAL
Market

and sales potential assumes that the

current product offerings are relevant to a
particular market.
If a competitor were to come out with a greatly
improved product, companys sales would be
effected.

Market potential is dependent upon two major

factors:
Ability To Buy
Willingness To Buy

Ability To Buy
The

ability to buy refers primarily to wether or

not a buyer has the financial resources to
purchase a product.
Sales potential is also dependent upon the
buyers ability to purchase the good or
service.

Willingness To Buy
The

willingness of customers to buy also

influences market potential, but is far more
difficult to assess.
Marketing research studies are the most
common method of estimating the effect of
customer willingness to buy upon sales
potential.

Willingness To Buy
Marketing

research methodology is quite

varied; it ranges from simple mail
questionnaires to focus groups to actual test
marketing of a product in selected localities.

Test Marketing
Test

marketing is expensive in terms of time

and money.
Some firms are turning to it as a way of
estimating market and sales potential.
Test marketing involves marketing a product
in a limited geographic region, measuring
sales, and then using the results to predict
the products sales over a larger market area.

Test Marketing
The

most frequent use of test marketing is to

estimate demand and project sales for a new
product.
Test marketing can also be used to assess
different product features, marketing options,
and sales strategies.

The Product Life Cycle

The Product Life cycle

Is

an important sales planning and control

tool, since it projects the changes in a
products sales and profits that will occur
overtime.
When estimating market and sales potential,
sales managers must also take into account
the stage, the product has reached in its life
cycle.

The Product Life cycle

It

provides a conceptual framework for

developing sales objectives and strategies for
different stages of a products life.

The Product Life cycle

The

most difficult stage of the product life

cycle to forecast is the INTRODUCTION.
There is no historical sales record, and new
products have a high failure rate.
It is important for the sales forecaster to
prepare a realistic estimate of potential sales
so that management can assess the risks of
introducing the new item.

The Product Life cycle

Most

firms use marketing research

techniques such as focus groups, surveys,
and test marketing to project sales of new
products.
If a new product gains market acceptance
and enters the GROWTH STAGE, traditional
sales forecasting methods can be used.
The forecaster must be aware of the adoption
rate for the new product, and of the potential
impact of competitive products.

The Product Life cycle

During

the MATURITY and DECLINE stage,

traditional forecasting techniques are
appropriate.
Historical data can be analyzed statistically to
project sales.
The sales forecaster must be alert to other
factors, such as new uses for the product,
that may suggest significant changesin the
sales trend.

Sales Forecasting
Procedures

Sales forecasting procedures

Preparing

a forecast of general
economic conditions,
Preparing a forecast of industry
sales,
Preparing a forecast of the product
or company sales.

1. Forecasting general
Economic Conditions
Sales

forecasting is based upon an

assessment of general economic conditions.
The standard yardstick for measuring general
economic activity is the Gross Domestic
Product (GDP).
GDP is the value of all the goods and
services produced within a country during a
given year.

1. Forecasting general
Economic Conditions
For

many sales forecasters, estimates of

general economic conditions are difficult to
evaluate because of problems in determining
their accuracy and their economic
usefulness.

2. Estimating Industry Sales

Many

firms attempt to predict industry sales.

The development of industry forecasts seems
to be related to the size of the firm:
Smaller firms are apparently less concerned
with, or less able to develop, such forecasts.
They often rely on industry estimates
available from trade associations and
government sources.

2. Estimating Industry Sales

Some

of the estimates are based upon the

relationship between industry sales and a
national economic indicator such as GDP or
National Income.
Large organizations are likely to have a
corporate economist who provides support
and information for sales forecasting.

Projecting Company and

Product Sales
Company

and product sales estimates are

the major areas of concern for a firms sales
forecasting function, since they are the
revenue forecasts upon which other planning
activity throughout the company are based.
Forecasting methods can be classified as
either Qualitative or Quantitative.

 Qualitative

Methods rely upon subjective,

but informed, opinions or judgments.

Quantitative

Forecasting applies
mathematical and statistical techniques.

Both

are useful in sales forecasting function.

QUALITATIVE METHODS
Jury

of Executive opinion
Delphi Technique
Sales force Composite
Survey of Buyers Intentions
Factor Listing

Jury of Executive Opinion

The

jury of executive opinion is probably the

oldest approach to forecasting, and is used
by many firms.
Managers from sales, marketing research,
accounting, production & advertising
assemble to discuss their opinions on what
will happen to sales in future.
These forecasts are usually made for only the
most aggregate of the sales categories such
as districts, product groups, or customer
classes.

Delphi Technique
A

similar, forecasting method, which has

been developed recently is called the
DELPHI Method.
Its is used to make long-range projections by
group of experts.
Delphi Method also gathers, evaluates, and
summarizes expert opinions as the basis for
a forecast, but the procedure is more formal
than that for the jury of executive opinion
method.

Sales Force Composite

A

sales forecasting technique that predicts

future sales by analyzing the opinions of
sales people as a group.
Salespeople continually interact with
customers, and from this interaction they
usually develop a knack for predicting future
sales.
It is considered very valuable management
tool and is commonly used in business and
industry throughout the world.

Survey of Buyers Intentions

Applicable

to situations in which potential

purchasers are well defined and limited in
number, such as industrial markets.
Forecast survey of a limited and well-defined
group of buyers.

QUANTITATIVE METHODS

QUANTITATIVE METHODS
Quantitative

methods of sales forecasting

have the advantage of impartial objectivity
not possible with the qualitative methods.
The basic disadvantages and limitations of
quantitative methods concern the nature and
the validity of the assumptions used, the lack
of data, and the fact that mathematical
forecasting techniques tend to generalize on
the basis of past experience.

Methods
Continuity

Extrapolation
Time series Analysis
Exponential Smoothing
Regression & Correlation Analysis
Multiple regression analysis
Leading indicators
Econometric models

1.Continuity Extrapolation
Projection

of the last increment of sales

change into the future.
Continuity extrapolation can be done on
either an absolute basis or percentage basis.

2.Time Series Analysis

Projection

of the average increment of sales

change into the future.
Time series analysis is best used for longterm company forecast and industry sales
projections.

time data series is determined by four basic

elements of sales variations: trends, or longrun changes (T), cyclical changes ,
seasonal variations (S), and irregular or
unexpected factors (I).
The analysis is based on the assumptions
that these elements are combined in the
following relationships:
Sales = T x C x S x I

3.Exponential Smoothing
A

weighted-average time series analysis

technique.
Exponential smoothing is best suited to shortterm forecasting in relatively stable markets.

4.Regression and Correlation

Analysis
Simple

Regression: Forecasting technique

using only one independent variable.

Multiple

Regression: forecasting technique

using two or more independent variables.

5.Leading Indicators
Time

series of an economic activity whose

movement leads changes in sales volume.

6.Econometric Models
Input-Output

Models: models showing that

the output (sales) of one industry is the input
(purchases) of another industry.

MANAGING THE
FORECASTING FUNCTION

 Sales

forecasting is a complex, challenging

task. Sales managers who become involved
in forecasting, must deal with the following
key issues:

Who

should be responsible for forecasting?

Which forecasting methods should be used?
What should the lengths of forecasts be?
How should forecasts be evaluated?

Responsibility for Forecasting

Although

it varies among firms

Accounting professionals originally became
involved in this activity because of their
natural interest in, and control over, much of
the internal data required to forecasts sales.
Today, marketing has assumed responsibility
for developing the forecasts in most
companies.

 Sales

managers are not always responsible

for preparing the sales forecasts.
Some companies have elected to make the
marketing research department responsible
for sales forecasting, particularly in regard to
its quantitative analysis aspects.

Selecting Forecasting Methods

The

best approach to sales forecasting is the

use of a combination of methods.
It is particularly important to balance a
forecast derived from a quantitative approach
against one developed by qualitative
methods.
Combining sales forecasting techniques
improves forecasting accuracy.

Lengths of Forecasts
Most

firms develop sales forecasts of varying

lenghts, ranging from weeks or a months to
several decades.
An appliance manufacturer might prepare
monthly, quarterly and annual forecasts.
As well as long range projections of periods
from two to ten years.

 Short-term

forecasting is necessary to
formulate production, human resources, and
sales plans.
Long-term forecasting is critical in capital
expenditure decisions.
Short-range forecasts are likely to be more
accurate than long-term predictions simply
because basic assumptions are usually more
correct over the short run.

Evaluation of Sales Forecasts

The

sales manager is often given the

responsibilty for periodically evaluating the
sales forecast.
In other cases, higher-level management is
charged with this duty.

1.
2.

3.

Three objective criteria can be employed for

assessing the accuracy of sales forecasts:
Comparison with total sales.
Comparison with actual change in total
sales.
Comparison with other forecasting
techniques.

1.Comparison with total sales.

This

approach matches sales performance

forecasts with actual sales performance.

2.Comaprison with actual

change in total sales.
Here,

the forecasts anticipated change is

compared with the actual change.
For example, if sales are expected to
increase from $200 million to $230 million,
but only go upto $215 million, then the sales
forecast has failed to predict 50% of the real
change.

3.Comparison with other

forecasting techniques.
Another

evaluating approach is to compare a

firms actual sales forecast with the results
obtained through some nave method of
estimating future sales such as extrapolating
the last increment of change in sales.

Thank You