Estimation of sales, in a future period under an assumed set of economic and other factors
Sales forecast help an organization to determine accurately the market demand for products, customer tastes & usage patterns It predicts, how much of a companys particular product can be sold during a future period under a given market program & assumed set of factorsSales forecasting, according to Cundiff and Still, is an estimate of sales during a specified future period which is tied to a proposed marketing plan and which assumes a particular set of uncontrollable and competitive forces.
Steps in Sales Forecasting1. Defining the objectives to be achieved.
2.3. 4. 5. 6. 7.
Dividing various products into homogeneous groups.Analysing the importance of various factors to be studied for sales forecasting. Selecting the method. Collecting and analysing the related information. Drawing conclusions from the analysis made. Implementing the decisions taken.
Reviewing and revising the sales forecasting from time to time.
Sales Forecasting Methods
User Expectations Jury of Executive opinion Method Sales force Composite Delphi technique Market test
Time series analysis Moving average Exponential Smoothing Regression and correlation analysis
Normally carried for industrial products, having less number of customers & product is well defined. Here customer requirements are found out by directly meeting the customers Through simples questionnaires
Direct contact with costomers
Under/overestimate the requirement without considering the changes in business environment
Sales Force CompositeThis method is also called BOTTOM-UP approach or GRASS ROOTS approach Derived by taking an estimate of expected sales in the forecast period from each salesperson
Forecast here is based upon experience and expectations of the sales person
Done by salespeople who are closest to market Detailed estimates(customer,product,territory) salesperson might sometimes over or under estimate The salesperson might not consider the overall environment while forecasting
Jury of Executive opinion Method
Oldest,simplest & most widely used method. This method includes getting the views of TOP EXECUTIVES regarding Sales. Sales forcasts are either taken by average of all individual opinions or through discussions
Executive opinions are based either on some forcasting method or based on experience,judment & intuition.
A study of 150 companies found that 86% cos use this method.
Quick and easy Less expensive Popular among small & mediun type cos.
Unscientific Subjective Difficult to break down the sales into sub units (region,branches)inaccuracies may be there as these people are not in direct contact with the market
Delphi TechniqueThis method is developed by Rand Corporation during late 1940.
Experts(within & ouside the organisation) are asked to forecast the sales of an organization Experts are usually from universities, govt. institutions, industry etc Opinion of all experts are combined and an average figure is taken out Experts are kept informed about the general opinion of the group, so that they an modify their decision This continues till consensus is reached
Useful for new products
Difficulty in getting a panel of experts Longer time for getting consensus Break down into product territories is not piossible
used for forcasting sales for new product,where no historical data is available.
Here, the product is tested in a limited area to find out about consumer acceptance of the productBased on sales in that particular market, future sales are forecasted Generally those cities are chosen which represent the country as a whole Customers reaction in that particular market is taken as a base for forecasts of overall sales of the product in the country as a whole
3 major methods used are:
Full blown Test Markets Controlled Test Marketing Slimulated Test Marketing
Full Blown Test Markets
Co. chooses 2 to 6 representative cities,does full promotional campaign,similar to what would be done at National level. Duration varies from few months to 1 yr,depending upon repurchase period of new product buyers surveys are carried out to know about consumer attitude,usage and satisfaction towards the product.
If results show high trails & repurchase rate product is launched nationally If results show high trail & low repurchase rate product is redesigned or dropped If results show low trail & high repurchase rate product is acceptable If results show low trail & low repurchase rate product is left out permanetaly
Controlled Test Marketing:
Co.hires a research firm & gets the panel of stores at specified geographical location Research firm delivers the new product to the panel stores,arranges for the promotion at stores & measures the sales also. Research form also interviews the sample consumers to know the perception about the new product.
Stimulated Test Marketing:
In ths 30-40 shoppers are selected,based upon their brand Familiarity,preferance in a paticular product category eg Babycare They are shown print advertisements & commercials of well know brands and also of new product. The shoppers are given small amt of money & asked to buy any item in the store. Researches co.notes how many buy the new product & how many competing product
Later consumers are intervied to find reasons for buying or not buying,after usage of product their satisfaction Level &repurchase intention New product is not exposed to competitors
Forcasting sales for new products Helps co. to decide whether to launch the product nationally
If the repurchase period is long,it is difficult for the co.to wait for results
For industrial products the test marketing is done by:
Alpha testing(within the organisation) Beta testing(outside the organisation)
Example:infosys did beta testing for its banking software,to check if its fit for multiple billion dollar US market Another method cos can use is Industry Trade Shows
Time Series Analysis/Decompostion method
Here future trends are estimated based on organization's past performance Method normally used for long term forecasts i.e. 10yrs & above Sales are broken down into 4 major components
Trends Cyclic variations Seasonal Erratic events
Sales = T X C X S X I where T=Long term variations, C=Cyclical variations, S=Seasonal changes, I=Irregular/unexpected changes in environment Companies like Coca Cola use this method.
Assuming that previous yrs sales have been broken down as follows:
Growth of 3% due to tech.,population(trend) Increased terroriost activities sales are expected to reduce sales by 5%(erratic event) 10% reduction in sales due to recession in demand(cyclic) 15% increase due to festive season in last quater Sales for 2009 were 956 million
Forecast for 2010 sales are:
Trend component shows sales will be985(956*1.03) Sales reduced due to erratic component,will be 936(985*.95) Sales reduced due to cyclic component will be842(936*.90) Quaterly sales will be 210(842/4) Increase in sales in last quarter 242(210*1.15) Sales in rest of 3 quarters 200 million (842 Conceptually sound Difficult to break the data into various components
Sales are forecasted based on sales of previous year. Here average of sales for several periods is used for projecting future sales. when a forecast is developed for next period,the sales in the oldest period is dropped from the average and is replaced by sales in the newest period,hence the name is moving avg Formula:
Sales forcast for nxt yr =actual sales for past 3 or 6 yrs/no of yrs(3 or 6)
If co operates in stable environment 2 or 3 yr avg is most useful If a firm. In a industry operates in cyclic varitions,the moving avg should use data equal to length of cycle
Moving Averages forecastYear Actual sales 3 yr moving avg 6 yr moving
1999 20002001 2002 2003 2004
864 832862 948 956
861858 852 880 922 871 890
Relatively simple Easy to calculate Widely used for short term/medium term sales forcasts
Cannot perdict long term sales forecasts accurately Historical data is required Unable to predict the upturn or down turn in market
It is refinement of moving average method. Under this method greater weightage is attached to sales in recent periods compared to sales of earlier periods Best suited for short term forecasting when market is relatively stable. Usually of great help in updating quarterly forecasts. Sales forcast for next year =(L)actual sales this yr + (1-L)this yrs sales forecast where L is smoothing or probability weighting factor
Sales of 2004 will be 0.2*956+80.8*880=895
Simple to operate Useful when data has a trend or seasonal pattern
Smoothing constant is arbitary Long term & new product forcasting is not possible
Based upon the assumption that wh