Sales Management

Chapter 4
Chapter 4

Managing Sales
Information
 Learning Objectives
• Understand the meaning and type of sales information
• Understand the importance of sales information in forecasting
market demand
• Know the uses of sales forecasts
• Know the forecasting process
• Apply the breakdown and build up approach to forecasting
• Explain the sales forecasting methods
• Understand the qualitative forecasting methods
• Apply the quantitative methods to forecasting
 Forecasting market demand
It is the estimated rupee or unit sales for a specific future time period based on the company’s
marketing plan on an assumed marketing environment.

Market Demand Curve

 Market demand function
QD = F (P, I, P0, T)

P- Price of the product

I- Consumer Income
T- Consumer preference
P0 Price of other goods and services

QD = B + aP P + a1I + a0P0 + aTT

aP, a I, a0, aT represents the one unit change in quantity
associated with the variables.
 Market demand function
Linear form of the demand equation

QD = B + aP P
B represents the combined influence of all the other
determinants of the demand
 Market demand forecasting
• Involves predicting future economic conditions and evaluating
their effects on the performance of the firm.

• Marketing Decision Support System

- an MDSS is an ongoing future-oriented information
structure designed to collect, collate, categorize, edit, store, and
retrieve information on demand to aid decision making in an
organization’s sales and marketing programme
 Forecasting process
The forecasting process is defined as the series of decisions and
actions taken by a business organization in:
 identifying the forecasting objectives
 determining the independent and dependent variables
 developing a forecasting procedure
 using the available data in the selected method to estimate
the sales in future
 Forecasting process
Develop forecast Determine independent Forecast objectives
procedure and dependent variables

Select forecast analysis

method Evaluate performance
results against the
Comprehend total forecasts
forecast procedure
Present all the
assumptions about data
Make and finalize the
Collect, collate, gather, forecast
and analyze data
 Steps in Breakdown Method of Sales
Forecasting

General Industry Company Sales Individual

environmental sales sales forecast for product
forecast forecast forecast the product forecasts
lines
 Popular methods of forecasting
Qualitative methods

Expert opinion Survey of buyer’s Sales force Delphi

expectation composite technique

Historical analogy

Quantitative methods

Test marketing Naive method Trend projections

Moving average Regression method Exponential

smoothening
Trend forecast of Sales
 Naive Method
Sales (at the period t) = Sales T+1

The following formula shows how to adjust the naïve method to

account for a change in rate of sales levels. The formula is stated
this way:
 
Next Year’s Sales = This Year’s Sales X This Year’s Sales
Last Year’s Sales
Freehand Method
 Method of semi-averages
In this method available data are divided into two parts, usually with
equal number of years on both the parts
Year Sales
The average of the first three years will
1993 102 be:
1994 105 102+105+114 321
1995 114 ----------- = -------- = 107
3                    3
1996 110
 Similarly, for the last three years,
1997 108
108 + 116 + 112 336
1998 116 ---------------------- = --------- = 112
3                            3
1999 112
 Method of semi-averages
The 3-yearly moving average can be computed with the following
formula:
a+b+c b+c+d c+d+e d+e+f
--------- , ----------- , ---------- , --------- , ………….
3 3 3 3

Method of Least Square

The least squares method is a formalization of the eyeball-fitting or
graphical technique. It is used to mathematically project the trend
line to the forecasting period with the time as the independent
variable that influences the dependent variable i.e sales.
 Exponential smoothing method
• It is similar to the moving- average forecasting method

• The forecaster is allowed to vary the weights assigned to past

data points

• It allows consideration of all past data, but less weight is placed

on data as it ages

• Exponential smoothing is basically a weighted moving average of

all past data

• The method is used to forecast only one period in the future

• Exponential smoothing techniques vary in terms of how they

address trend, seasonality, cyclical and irregular
influences
 Exponential smoothing method
Next Year’s Sales = a (This Year’s Sales) + (1 – a) (This Year’s Forecast)

Autoregressive moving averages

It uses a different procedure than the other models explained
above in identifying the proper number of past observations to be
included in the analysis and the weights that should be attached
those observations.
 Correlation analysis
• Correlation is basically the degree of linear association between
two variables where one variable is treated as independent
variable and sales as the dependent variable.

• Sales managers look for variables that correlate with or relate to

sales.

• correlation analysis involves the determination of whether a

relation exists, and if it does, then measuring it, testing whether
it is significant, and establishing the cause and effect relation.
• The degree of relationships between the variables is called co-
efficient of correlation .
 Regression analysis
• Regression analysis is another form of correlational technique.

• Reveals average relationship between two variables and this makes

possible estimation or prediction.

• Statistical method used to incorporate independent factors that are

thought to influence sales into forecasting procedures.
 Market factor indices methods
• The most commonly used market factor index method is Buying
Power Index Method (BPI).

• BPI is used to predict sales for specific geographic regions for

retailer and FMCG sector such as clothing, food, auto, and other
consumer items.

• BPI is also used to determine sales quota by many multinational

organizations.

• Applications are limited in Indian organizations as we do not have

data bases to support this method at different levels of the
market.
 Market factor indices methods
Factors affecting selection of a forecasting technique
• Data availability
• Cost
• Variability
• Consistency of the data
• The degree of detail necessary
• Timing
• Technical sophistication
• Ability of the method to capture the level of risk and variability
• The level of accuracy of the forecast
• Fundamental change indicators
MAPE (Mean Absolute Percentage Error)
• Level of accuracy is an explanation of the gap between the actual
and predicted sales
• Techniques with lower level of gap are more accurate
• Statistic used to calculate the level of accuracy of a forecast is
called MAPE (Mean Absolute Percentage Error)
• MAPE is the average percentage forecast error and is a popular
way to measure accuracy