Sales Forecasting Methods

Qual

itativ

e M

etho

ds

Executive Opinion

Delphi Method

Sales Force CompositeSurvey of Buyers’

Intentions

Sales forecasting methods or techniques can be classified as:

Quan

titat

ive

Met

hods

Moving Averages

Exponential Smoothing

Decomposition

Naive/Ratio Method

Regression Analysis

Econometric Analysis

Executive Opinion MethodIn this method of forecasting, the views of senior executives of the company are obtained for forecasting sales.

The oldest, simplest and the most widely used method.

Advantages: Disadvantages(i) Forecasting can be done quickly and easily.

(i) unspecific

(ii) Less expensive than other method.

(ii) subjective

(iii) Very popular (iii) Difficult to breakdown the forecast into sub units

Delphi MethodDeveloped during late 1940’sBy Rand CorporationForecasts of experts are taken by a coordinator separately, which are summarized and informed to experts, who again give their coordinator separately, which are summarized and informed to experts, who again give their opinions on the same matter. This process is continued till there is a near consensus.

Advantages: Disadvantages(i) Objective forecast is accurate.

(i) Difficulty getting a panel experts.

(ii) Useful foe technology, new product, and industry sales forecast.

(ii) Longer time for getting consensus.

(iii) Both long and short term forecasting possible.

(iii) Break-down of forecast into products or territories is not possible.

Salesforce composite method

Each salesperson estimates how much quantity or value each existing and prospective consumer will buy of each of the company’s product and services in his/her territory.

Advantages: Disadvantages

(i) Forecasting is don by a salespeople who are closest to the market.

(i) Sales forecast are often pessimistic or optimistic,

(ii)Detailed sales estimate broke down by customer, product and territory are possible.

(ii) If sales forecast are used to set sales quotas, which are linked to incentive schemes, salespeople may deliberately under estimate the demand.

(iii) Involvement of salespeople.

(iii) Many salespersons are not interested in sales forecasting, and prefer to spend time in the field meeting sustomers.

Survey of buyers’ intention method

Also called “market research” or “market survey”. In this method, existing and potential costumers are asked about their likely purchases of the company’s products and services, during the forecast period.

Advantages: Disadvantages(i) Useful in forecasting sales for industrial products, consumer, durables, and new products.

(i) Difficulty getting a panel experts.

(ii) It also gives customer’ reasons for buying or not buying.

(ii) Longer time for getting consensus.

(iii) Relatively inexpensive and fast.

(iii) Break-down of forecast into products or territories is not possible.

Test marketing method This is a forecasting method that

measures consumer acceptance of a new product. This is be done by estimating the sales or demand for a new product or service in a representative small market, which is extrapolated over the total market to estimate the total demand for the product.

Major methods used for consumer-product market testing include:

1.Full-blown test markets2.Controlled test marketing3.Simulated test marketing

Full-blown test marketsBuyer surveys are carried out to get

information about consumer attitude, usage and satisfaction towards a new product.

Controlled test marketingThe company with a new products hires a

research firm and gets a panel of stores at specified geographic locations.

Simulated test marketingIn this method, about 30-40 consumers

are selected, based on their brand familiarity and preferences in a particular product category.

Simulated test marketingAdvantages: Disadvantages

(i) Their usefulness for forecasting the sales of new or modified product.

(i) Chances of spoilages.

(ii) In deciding whether the company should go ahead for a national launch of a new product without spending huge amount.

(ii)It is difficult for the company to wait to measure test result.

Moving average method In this method of forecasting, the moving averages of the company sales of the previous periods are calculated for forecasting the sales of the future periods.

Sales for next year =Actual sales for past

3 or 6 yearsNumber of years

(3 or 6)

The formula used is:

Advantages: Disadvantages(i) Relatively simple method.

(i) Unable to predict a downturn or upturn in the market.

(ii) Easy to calculate (ii) Cannot predict long-term sales forecast accurately

(iii) Widely used for short term and medium term sales forecasts.

(iii) Historical data is needed.

Exponential smoothing method This is a forecasting method in which

the forecaster can allow sales in certain periods to influence the sales forecast more than the sales on other periods

By using a smoothing constant (L) in the equation:

sales forecasts for next period = (L) (actual sales this period) +

(1 – L) (this period’s sales forecast)

Advantages: Disadvantage

s(i) Simple to operate. (i) Arbitrary(ii) Forecasters knowledge or intuition can be used in forecasting.

(ii) Long term and new product forecasting are not possible.

(iii) Useful method when sales date have a trend or a seasonal pattern.

(iv) Immediate response to a upturn or downturn in sales.(v) Used by many firms.

Decomposition method

This is one of the methods of sales forecasting in which the company’s periods of sales data are broken down (or decomposed) into major components, such as trends, cycle, seasonal, and erratic events.These components are then recombined to forecast the sales for the future period.

Advantages: Disadvantages(i)Conceptually sound method.

(i) Difficult and complex statistical method are needed to break down sales data into various components.(ii) Historical data is needed.

Naïve/ratio method it is a forecasting method, which is based on the assumption that what happened in the immediate past will continue to happen in the immediate future.

Sales for next year =

The formula used is:

Actual sales for this year X

Actual sales for this year Actual sales for last year

Advantages: Disadvantages(i) Simple to calculate. (i) Cannot be used for

long-term and new products.

(ii) Requires less data. (ii) Accuracy of sales forecast would be less, if past sales fluctuate considerably.

(iii)Accuracy is good in short-term forecast.

Regression analysis It is a statistical method of sales

forecasting that derives an equation based on relationship between the company sales (dependent variable, x) and independent variables, or factors (y1, y2) which influence the sales.

Simple regression analysis Multiple regression analysis

Advantages: Disadvantages(i) High forecasting accuracy

(i)Technically complex

(ii) Objective method (ii) Expensive and time consuming.

(iii) Can predict turning points of the company’s sales.

(iii)Use of computer and software packages essential.

Econometric analysisThis is another method of forecasting

in which many regression equations are built to forecast industry sales, general economic conditions, or future events with the help of computer hardware and software.Advantages Disadvantages

Accurate forecasts of economic conditions and industry sales are possible.

Large volume of data is required.

How to improve forecasting accuracy?

Use Multiple Forecasting MethodsIdentify Suitable MethodsDevelop a Few FactorsObtain a Range FactorsUse Computer Hardware and Software

Sales Budgets It is the estimate of expected sales volume and selling expenses for the company’s products and services, for the budget period.The sales manager is responsible for preparing three detailed budgets.(i)Sales volume budget(ii)Selling expense budget(iii) administrative budget of the sales

department

(i) Sales Volume Budgetderived frim the sales forecast, is

broken down into:(a)Product-Wise Quantities

The average selling price per unit, and sales revenue.

(b) Territory-WiseQuantities to be sold and sales revenue

( c) Costumer-Wise and Salesperson-WiseSales volume quota during yearly, quarterly and monthly budget time.

(ii) Selling expense budget includes expenditures for personal selling activities.

(iii) Administrative budget of the sales department the budget should be include operating expenses.

Purposes of the Sales Budget

PlanningCoordinationControl

Methods Used for Deciding Sales Expenditure

BudgetingPercentage of Sales Method

-multiplying the sales volume budget by various percentages of each category of expenses.

Executive Judgement Methoduses judgement to decide the budgeted selling expenses for each category.

Objective and task Method1. Look at the sales volume objective2. Task and action are decided that are required and to be carried out.3. Estimate the costs of carrying out the task.

Sales Budget Process

1.Review situation

2.Communication

3.Subordinates budgets

4.Approval of the sales budgets

5.Other departments

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