CHAPTER 7CHAPTER 7

Estimating Potentials and Estimating Potentials and Forecasting SalesForecasting Sales

FORECASTFORECAST

A forecast is a prediction of a A forecast is a prediction of a future statefuture state

IMPORTANCE OF IMPORTANCE OF FORECASTSFORECASTS Determining sales force sizeDetermining sales force size Designing territoriesDesigning territories Establishing quotas and Establishing quotas and

budgetsbudgets Determining compensationDetermining compensation Evaluating performanceEvaluating performance

MARKET POTENTIALMARKET POTENTIAL

Best possible level of industry Best possible level of industry sales for a product in a specific sales for a product in a specific market over a stated time market over a stated time periodperiod

BUYING POWER INDEX BUYING POWER INDEX (BPI)(BPI) A composite measure of A composite measure of

regional buying powerregional buying power Composed of area’s Composed of area’s

percentage ofpercentage of– US disposable incomeUS disposable income– US retail salesUS retail sales– US population US population

SALES POTENTIALSALES POTENTIAL

The best possible share of the The best possible share of the market potential that a firm market potential that a firm can achievecan achieve

SALES FORECASTSALES FORECAST

Level of sales that a firm Level of sales that a firm expectsexpects to make to make

FORECASTING FORECASTING METHODSMETHODS

TOP-DOWN TOP-DOWN FORECASTINGFORECASTING Use annual Survey of Buying PowerUse annual Survey of Buying Power

((Sales and Marketing ManagementSales and Marketing Management)) Example- To get state-by-state Example- To get state-by-state

sales forecastsales forecast– 6% of U.S. retail sales come from New 6% of U.S. retail sales come from New

York York – Shoe mfg. takes U.S. sales forecast Shoe mfg. takes U.S. sales forecast

and multiplies by .06 for New York and multiplies by .06 for New York state forecaststate forecast

DETERMINING MARKET DETERMINING MARKET AND SALES FORECASTSAND SALES FORECASTS Market factor methodsMarket factor methods Regression analysisRegression analysis Surveys of buyer intentionsSurveys of buyer intentions Test marketsTest markets Executive opinionExecutive opinion Delphi TechniqueDelphi Technique Sales Force CompositeSales Force Composite Projection of TrendsProjection of Trends Capacity Based ForecastsCapacity Based Forecasts

MARKET FACTOR MARKET FACTOR METHODMETHOD Market factors are elements Market factors are elements

that cause demand for a that cause demand for a product or are related to the product or are related to the demand of the gooddemand of the good

MARKET FACTOR MARKET FACTOR FORECASTING--FORECASTING--EXAMPLEEXAMPLEA manufacturer of baby playpens A manufacturer of baby playpens

estimated that the firm sold 16 estimated that the firm sold 16 playpens for every 1000 births. playpens for every 1000 births. Using births as a market factor, Using births as a market factor, compute a sales forecastcompute a sales forecast

Estimated births, 1999: 4,000,000Estimated births, 1999: 4,000,000 Rate of sales: 16 per Rate of sales: 16 per

1,0001,000 Sales forecast: 64,000Sales forecast: 64,000

MARKET FACTOR--MARKET FACTOR--ADVANTAGESADVANTAGES High validityHigh validity SimplicitySimplicity InexpensiveInexpensive

REGRESSION ANALYSISREGRESSION ANALYSIS

We predict how one variables We predict how one variables (sales) is affected by change in (sales) is affected by change in other variables (advertising other variables (advertising expenditures, number of sales expenditures, number of sales calls, etc.)calls, etc.)

Territory Sales = a + b1 (factor) + Territory Sales = a + b1 (factor) + b2 (factor) + b3 (factor)b2 (factor) + b3 (factor)

a = constant; b’s = regression a = constant; b’s = regression coefficientscoefficients

REGRESSION ANALYSISREGRESSION ANALYSIS

Use of multiple factors Use of multiple factors provides a high degree of provides a high degree of reliabilityreliability

Many do not understand the Many do not understand the conceptconcept

SURVEYS OF BUYERS SURVEYS OF BUYERS INTENTIONSINTENTIONS Contact customers and Contact customers and

question themquestion them High costHigh cost Time consumingTime consuming Socially acceptable answersSocially acceptable answers

TEST MARKETSTEST MARKETS

AccurateAccurate Considerable time and effortConsiderable time and effort

EXECUTIVE OPINIONEXECUTIVE OPINION

SimpleSimple QuickQuick UnscientificUnscientific Managers somewhat removed Managers somewhat removed

from marketfrom market

DELPHI TECHNIQUEDELPHI TECHNIQUE

Consensus approachConsensus approach

SALES FORCE SALES FORCE COMPOSITECOMPOSITE Ask the sales repsAsk the sales reps Sales people are poor Sales people are poor

forecastersforecasters

PROJECTION OF PROJECTION OF TRENDSTRENDS Use sales data for the past 10 Use sales data for the past 10

yearsyears Exponential smoothingExponential smoothing

PROJECTION OF PROJECTION OF TRENDSTRENDS Trend Component Trend Component

– General trend due to long-term General trend due to long-term factors (e.g., demographic population factors (e.g., demographic population shifts, lifestyle changes, technological shifts, lifestyle changes, technological advances etc.) advances etc.)

Cyclical Component Cyclical Component – Patterns lasting more than a year due Patterns lasting more than a year due

to cyclical changes in the economy to cyclical changes in the economy (e.g., recession, inflation) (e.g., recession, inflation)

PROJECTION OF PROJECTION OF TRENDSTRENDS Seasonal Component Seasonal Component

– Trends within one-year period Trends within one-year period from seasonal change (e.g., lower from seasonal change (e.g., lower swimming pool sales in fall and swimming pool sales in fall and winter) winter)

Irregular Component (Residual) Irregular Component (Residual) – Random deviations due to Random deviations due to

unanticipated, nonrecurring unanticipated, nonrecurring factorsfactors

CAPACITY BASED CAPACITY BASED FORECASTSFORECASTS Production capacity becomes Production capacity becomes

limitationlimitation

GUIDELINES FOR GUIDELINES FOR FORECASTINGFORECASTING Minimize the number of market Minimize the number of market

factorsfactors Use logicUse logic Use more than one methodUse more than one method Recognize limitationsRecognize limitations Use max/min analysisUse max/min analysis Understand mathematics and Understand mathematics and

statisticsstatistics

SALES QUOTASSALES QUOTAS

a performance goal assigned a performance goal assigned to a marketing unit for a to a marketing unit for a specific period of timespecific period of time

is related to the sales forecastis related to the sales forecast

SALES QUOTAS--SALES QUOTAS--PURPOSESPURPOSES Furnish goals and incentivesFurnish goals and incentives Control activities of sales Control activities of sales

personnelpersonnel Evaluate productivityEvaluate productivity CompensationCompensation Control selling expensesControl selling expenses Evaluate sales contest resultsEvaluate sales contest results

SALES QUOTAS--TYPESSALES QUOTAS--TYPES

Sales volumeSales volume Gross margin or net profitGross margin or net profit ExpenseExpense ActivityActivity CombinationCombination

FROM THE TEXT...FROM THE TEXT...

Read all of Chapter 7 except:Read all of Chapter 7 except:– Chain Ratio Method (page 325)Chain Ratio Method (page 325)– SIC Method (pages 327 - 328)SIC Method (pages 327 - 328)– Scrappage Method (pages 328 - Scrappage Method (pages 328 -

329)329)– Naïve approach / MAPE (pages Naïve approach / MAPE (pages

335 -336)335 -336)