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Sales Forecasting - Lecture notes 10
Sales Management (Loughborough University)
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Sales Forecasting
06 December 2017
11:28
A sales forecast is a prediction of the future market potential for a specific product. It sets
the sales expectations for a given time period and can indicate what types of products
customers are likely to want.
Market potential is a quantitative estimate, in either physical or monetary units, of the total
sales for a product within a market.
Sales potential is the portion of market potential that one among a set of competing firms
can reasonably expect to obtain.
Sales quota is a proportion of the sales forecast that is allocated to a particular area, sales
person, product group, customer, group of customers etc
Reasons Why Forecasting Is Important:
Sales Marketing and planning
Production Scheduling
Cash flow projections
Financial Planning
Capital Investment
Procurement
Inventory Management
Human Resource Planning (Hiring Salespeople)
Budgeting
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Steps in Forecasting Sales - Using the Breakdown Approach
1. Forecast general economic conditions
2. Estimate the industry's total market potential for a product category
3. Determine the share of this market the company currently holds and is likely to retain in
view of competitive efforts.
4. Forecast sales potential of the product.
5. Use the sales forecast for operational planning and budgeting.
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Sales Forecasting Techniques:
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User Expectations Method:
Also known as buyers' intentions method as it is based on an aggregation of forecast
purchases from customers.
Tends to be slightly optimistic, and closer to market potential
Buyers (customers) can't anticipate, or always know about, a firms marketing efforts,
internal issues, staffing, or other obstacles.
Reflect anticipated needs and therefore show potential for sales.
Sales Force Composite:
Opinions on each sales area rep on how much will be sold to customers in that area
Wont make it through to official forecast until having gone through several layers,
supervision, sales managers.
However, sales teams may be inclined to:
Underestimate to gain a lower sales quota or...
Overestimate if they are concerned about their area being undersupplied (due to shortages)
Jury of Executive Opinion
Formal or informal agreement between key executives within the firm regarding likely sales
possibilities.
Different views may be talked out in discussion groups
Individual judgements may sometimes be averaged
Based on the executives experience and feel for market/customers etc.
Not unusual for more senior executives within the groups to have a disproportionate
influence on outcome
May be based on forecast created by other methods.
Delphi Technique
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A panel of supposed experts is identified, may represent different perspectives (eg.
customers, reps, & managers)
Individual forecasts are submitted to a central individual/function anonymously –
sometime with justifications
They are then analysed and a table of results with average median, range, upper lower
limits etc identified.
This analysis is then recirculated and panel members asked to repeat their forecast in the
light of this data –along with justifying comments.
This is repeated 3‐4 times to arrive at a closer consensus
Test Marketing
Market Test
Products are sold in a number of representative areas and sales results scaled up to national
level.
Widely regarded as a good indicator of product success and consumer acceptance
Drawbacks include high administering cost, long timescale, bias due to disproportionate
attention, and signal to competitors of what is to come.
Time-Series Methods
Using historical data to predict sales, forecasters look for the following:
1. Trends ‐ Movements in a time series as a result of developments in population,
technology, or capital formation.
2. Periodic Movements‐ consistent patterns of sales changes in a given period generally
called seasonal variations
3. Cyclical movements ‐ wave‐like movements of sales that are longer in duration than a
year, such as business recessions.
4. Erratic movements are one‐time specific events ‐ such as wars, strikes, snowstorms,
hurricanes etc... That are not predictable.
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Criteria for Evaluating Forecasting Methods:
1. Comprehensibility: sales managers must understand the basic methods of developing
forecasts
2. Accuracy: A Forecasting method must provide results that are sufficiently accurate for
the purpose desired.
3. Timeliness: The forecasting method must generate forecasts in time for managers to use
them.
4. Quality and quantity of information: In forecasting as in other areas ‐ Shit input leads to
shit output.
5. Qualified Personnel :Experts can give opinions on qualitative techniques like the jury of
executives’ opinions or the Delphi method.
6. Flexibility: Managers continually monitor actual sales for any deviations from forecast
that may indicate the need for revised sales forecasting tools.
7. Costs/Benefits: The benefits from forecasting must more than offset the costs of
generating the sales forecast.
Developing Targets and Quotas:
Sales goals assigned to different sales reps are known as sales targets or sales quotas
Developing these estimates is necessary as it can influence
The design
Level of performance
Remuneration of sales people
Primarily the serve to incentivise salespeople and evaluate performance.
Good Targets are:
Attainable
Easy to understand
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Complete
Timely
Types of Targets:
Volume/Value and Revenue Targets
Activity/Behavioural Targets
Financial Targets.
