Sales forecasting


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Sales forecasting

  2. 2. Sales Forecasting  Estimate of company sales for a specified future period…
  3. 3.  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.
  4. 4.  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.
  5. 5. Importance Of Sales Forecasting
  6. 6. 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.
  7. 7. 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 function’s evaluative effort.  The establishment of the realistic quotas is one of the most critical tasks faced by a sales manager.
  8. 8.  The forecast is the company’s 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.
  9. 9. Sales Budgets  Another important evaluative technique.  Sales Budget is a management plan for expenditures to accomplish sales goals.  It’s a blueprint for sales force action.
  10. 10. Sales Forecasting Concepts  1. 2. 3. There are 3 levels of concern in sales forecasting… Market Potential Sales Potential Market Share
  11. 11. Market Potential  Highest possible expected industry sales of a good or service in a market for a given time period…
  12. 12. Sales Potential  Individual Firm’s share of the market potential…  it can be expressed as: Sales Potential = maket share x market potential
  13. 13. 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 firm’s marketing plan.
  15. 15. 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.
  16. 16. 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, company’s sales would be effected.
  17. 17. • • Market potential is dependent upon two major factors: Ability To Buy Willingness To Buy
  18. 18. 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 buyer’s ability to purchase the good or service.
  19. 19. 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.
  20. 20. 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.
  21. 21. 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 product’s sales over a larger market area.
  22. 22. 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.
  23. 23. The Product Life Cycle
  24. 24. The Product Life cycle  Is an important sales planning and control tool, since it projects the changes in a product’s 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.
  25. 25. The Product Life cycle  It provides a conceptual framework for developing sales objectives and strategies for different stages of a product’s life.
  26. 26. 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.
  27. 27. 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.
  28. 28. 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.
  29. 29. Sales Forecasting Procedures
  30. 30. 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.
  31. 31. 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.
  32. 32. 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.
  33. 33. 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.
  34. 34. 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.
  35. 35. Projecting Company and Product Sales  Company and product sales estimates are the major areas of concern for a firm’s 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.
  36. 36.  Qualitative Methods rely upon subjective, but informed, opinions or judgments.  Quantitative Forecasting applies mathematical and statistical techniques.  Both are useful in sales forecasting function.
  37. 37. QUALITATIVE METHODS  Jury of Executive opinion  Delphi Technique  Sales force Composite  Survey of Buyer’s Intentions  Factor Listing
  38. 38. 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.
  39. 39. 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.
  40. 40. 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.
  41. 41. Survey of Buyer’s 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.
  43. 43. 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.
  44. 44. Methods  Continuity Extrapolation  Time series Analysis  Exponential Smoothing  Regression & Correlation Analysis  Multiple regression analysis  Leading indicators  Econometric models
  45. 45. 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.
  46. 46. 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.
  47. 47. A 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
  48. 48. 3.Exponential Smoothing A weighted-average time series analysis technique.  Exponential smoothing is best suited to shortterm forecasting in relatively stable markets.
  49. 49. 4.Regression and Correlation Analysis  Simple Regression: Forecasting technique using only one independent variable.  Multiple Regression: forecasting technique using two or more independent variables.
  50. 50. 5.Leading Indicators  Time series of an economic activity whose movement leads changes in sales volume.
  51. 51. 6.Econometric Models  Input-Output Models: models showing that the output (sales) of one industry is the input (purchases) of another industry.
  53. 53.  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?
  54. 54. 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.
  55. 55.  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.
  56. 56. 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.
  57. 57. 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.
  58. 58.  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.
  59. 59. 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.
  60. 60.  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.
  61. 61. 1.Comparison with total sales.  This approach matches sales performance forecasts with actual sales performance.
  62. 62. 2.Comaprison with actual change in total sales.  Here, the forecast’s 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.
  63. 63. 3.Comparison with other forecasting techniques.  Another evaluating approach is to compare a firm’s actual sales forecast with the results obtained through some naïve method of estimating future sales such as extrapolating the last increment of change in sales.
  64. 64. Thank You…