Sales Forecasting &

Methods

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Programme Educational Objectives
 Our program will create graduates who:

 1.Will be recognized as a creative and an enterprising team

leader.
 2.Will be a flexible, adaptable and an ethical individual.
 3.Will have a holistic approach to problem solving in the
dynamic business environment.

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Sales and Distribution Management Course
Outcomes

• CO1- Given a situation of Festival, student manager will be

able to identify appropriate Sales Forecasting method to be
adopted by a company.

• CO2- Given a situation of opening a new outlet, student

manager will be able to draft a sales plan.

• CO3- Given a situation of Selling products / services,

student manager should be able to explain Personal Selling
Process.

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• CO4-Given a criteria of newly launched company, student
manager should be able to design an effective Sales
Compensation Plan for Sales Executive.

• CO5-Given a criteria of distribution channel of a company,

student manager should be able to outline different levels
of Marketing channel used by the company.

• CO6-Given a situation, student manager should be able to

explain the process of Reverse Logistics.

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 Sales Research
 Sales Research is the identification and
measurement of all those variables which
individually and in combination have an effect on
sales.
 It encompasses the marketing studies pertaining to
sales forecasting, market potentials, market
share analysis, and determination of market
characteristics and sales analysis.

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 Sales Research
 Market Potential: It is the entire size of
the market for a product at a specific time. It
represents the upper limits of the market for a
product.
 Sales Potential: The highest market share that a
product can reasonably be expected to achieve
within a given time frame by a co.
 Market share analysis is a part of market
analysis and indicates how well a firm is doing in
the marketplace compared to its competitors.
 Sales analysis examines sales reports to see
what goods and services have and have not sold
well.

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 Sales Forecasting
 Sales forecasting is the process of estimating future
sales.
 A sales forecast is an estimation of sales volume
that a company can expect to attain within the
plan period. A sales forecast is not just a sales
predicting.
 Sales forecasting is the determination of a firm’s share in
the market under a specified future. Thus sales
forecasting shows the probable volume of sales.
 “Sales forecast is an estimate of sales during a specified
future period, whose estimate is tied to a proposed
marketing plan and which assumes a particular state of
uncontrollable and competitive forces.” —Candiff and
Still

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 Sales Forecasting
 According to American Marketing
Association, “Sales forecast is an
estimate of Sales, in monetary or
physical units, for a specified future
period under a proposed business plan
or programme and under an assumed
set of economic and other forces
outside the unit for which the forecast
is made.”
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 Sales Forecasting
 Accurate sales forecasts enable companies to
make informed business decisions and predict
short-term and long-term performance.
 Companies can base their forecasts on past sales
data, industry-wide comparisons, and
economic trends.
 It is easier for established companies to predict
future sales based on years of past business
data. Newly founded companies have to base their
forecasts on less-verified information, such as
market research and competitive intelligence to
forecast their future business.
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 Sales Forecasting
 Sales forecasting gives insight into how a
company should manage its workforce,
cash flow, and resources.
 In addition to helping a company allocate its
internal resources effectively, predictive
sales data is important for businesses
when looking to acquire investment
capital.
Sales forecasting allows companies to:
◦ Predict achievable sales revenue;
◦ Efficiently allocate resources;
◦ Plan for future growth
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 Terms used in Sales Forecasting
 Market Forecast – It is the expected
industry sales of a given product or
service at one specific level of industry
marketing expenditure, in a given market, for
a specific period of time.
 Sales Forecast – It is the expected
company sales of a given product or
service under a proposed marketing
plan, in a given market, for a specific period
of time. There is a relationship betw. The co’s
sales forecast and proposed marketing
expenditure (or marketing plan)
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 Terms used in Sales Forecasting
 Sales Budget- It is the estimate of
expected sales volume in units or
revenues from the co’s products and
services and the selling expenses. It is
used for making purchasing, production,
manpower and cash flow decisions.
 Sales Quota – It is a sales goal set for a
marketing unit for a specific period of
time. The marketing unit may be a
salesperson, a branch, a region, a dealer or a
distributor. A co. Mgmt. sets sales quotas on
the basis of the co. sales forecast.
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 Objectives of Sales Forecasting
 To set the sales target – The primary purpose of sales forecasting is to
establish sales performance goals for the organization. To get the real
and accurate picture of sales, forecasting should be first made for small region
and then for large territories.
 To maintain inventory – An accurate sales forecasting helps in estimating
the amount of raw materials required for future goals. It helps in
keeping the inventory up for peak periods.
 To regulate manpower requirement – Appropriate manpower is required
for continuous production. A good manpower policy is needed to prevent the
shortage of manpower.
 To decide plant capacity – On the basis of sales forecasting the
organization can plan the plant with output of desired capacity.
 To predict expenses – It helps in predicting the expenses and planning
budget. It is also useful in preparing credit policy of the company. It is also
required for uninterrupted supply of input resources.

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 Factors affecting Sales
Forecasting
 General Economic Condition: -
General economic trend- inflation or
deflation, Past behavior of market, national
income, disposable personal income, consuming
habits of the customers etc.,
 Consumers: -
The size of population by its composition-
customers by age, sex, type, economic condition,
And trend of fashions, religious habits, social
group influences etc.,

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 Factors affecting Sales
Forecasting
 Industrial Behaviours (Competitions):-
As such, the pricing policy, design, advanced
technological improvements, promotional
activities etc., of similar industries must be
carefully observed.
Unstable conditions — Industrial unrest,
government control through rules and regulations,
improper availability of raw materials etc., directly
affect the production, sales and profits.

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 Factors affecting Sales
Forecasting
 Changes within Firm:-
Future sales are greatly affected by the changes in
pricing, advertising policy, quality of products
etc.
Period:-
The required information must be collected on the
basis of period — Short run, Medium run or
Long run forecasts.

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Importance of Sales Forecasting

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 Importance of Sales
Forecasting
1. Regular supply is facilitated- Supply and demand for
the products can easily be adjusted, by overcoming
temporary demand, in the light of the anticipated
estimate;
2. A good Inventory control is advantageously benefited
by avoiding the weakness of under stocking and
overstocking.
3. Allocation and reallocation of sales territories are
facilitated.
4. It is a forward planner as all other requirements of
raw materials, labour, plant layout, financial
needs, warehousing, transport facility etc., depend
in accordance with the sales volume expected in
advance.
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 Importance of Sales
Forecasting
5.Sales opportunities are searched out on the
basis of forecast;
6. Advertisement programmes are beneficially
adjusted with full advantage to the firm.
7. It is an indicator to the department of finance as to
how much and when finance is needed; and it
helps to overcome difficult situations.
8.It is a measuring rod by which the efficiency of
the sales personnel or the sales department,
as a whole, can be measured.

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 Importance of Sales
Forecasting
9.Sales personnel and sales quotas are also
regularized-increasing or decreasing-by knowing the
sales volume, in advance.
10. It regularizes productions through the vision of
sales forecast and avoids overtime at high premium
rates. It also reduces idle time in manufacturing.

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Sales Forecasting Methods

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 Qualitative Research Method.
 It aims to gain an in-depth insight into what individuals think, feel
or do.
 These methods focus on exploring the ‘why’ and ‘how’ reasons
behind customers behaviours and decisions. It is designed to reveal
the behaviours and perceptions that drive a target audience in
reference to specific topics or issues.
 It is carried out on small samples of the population. For example,
you may be interested in researching a segmented group of your
target audience such as a particular buyer persona or age group
(e.g. Travel enthuastists, females in the 20-25 age bracket.) The
most common methods used are that of an in-depth interview or
a focus group.

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 Executive Opinion Method.
 It is also termed as ‘top-down’ approach.
 It includes getting the views of top executives of the
company regarding future sales.
 The sales forecast are made either by taking the average of all
the executives’ individual opinion or through discussions among
the executives.
 Advantages – Forecasting can be done quickly and easily.
 Disadvantages – Unscientific, Subjective, difficult to break
down the forecast into subunits (like regions, branches) of the
organization.

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 Delphi Method
 The difference between this method & Executive Opinion
method is that the members of expert panel do not meet
or discuss in a committee.
 The procedure includes selection of panel of experts from within
and outside the organisation.
 The basic belief here is that experts, without any pressure or
influence will develop a more accurate prediction of the future.
 Useful for technology, new product and industry sales
forecast but difficulty in getting a panel of experts.

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 Sales force Composite Method
 It is also termed as ‘bottom-up’ approach.
 This method involves each salesperson making a product-by-
product forecast for their particular sales territory.
 Thus individual forecasts are built up to produce a company
forecast; this is sometimes termed a `grass-roots’ approach.
 Each salesperson’s forecast must be agreed with the
manager, and divisional manager where appropriate, and
eventually the sales manager agrees the final composite forecast.

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 Survey of Buyer’s Intention
 It also termed as ‘Market research’
 It includes asking existing and potential customers about their
likely purchase of the co’s product and services for the forecast
period.
 Example – Do you intend to buy a T.V. in next 6 months?
 The customers also asked other questions, such as product
quality, features, price and service. The information collected
from buyers help the co. to make effective decisions not only in
the sales and marketing areas, but also on production, research
and development.
 Useful in forecasting sales for industrial products, consumer
durables, and new products.

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 Test Marketing Method
 Test marketing is a tool used by companies to provide insight
into the probable market success of a new product, or
effectiveness of a marketing campaign. Test marketing can be used
by a business to evaluate factors such as the performance of the
product, customer satisfaction or acceptance of the product, the
required level of material support for the full launch, and
distribution requirements for a full launch.
 Major methods used for consumer-product market testing
include;
1. Full-blown Test Markets
2. Controlled Test Marketing
3. Simulated Test Marketing

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 Test Marketing Method
 Full-blown Test markets: It consists of the co. choosing a few
(2-6) representatives cities, in which full promotion campaign is
introduced, similar to what would be done in national marketing.
The duration of test market varies from a few months to one
year, depending on the repurchase period of the new product.
A)If the test market show high trial and repurchase rates, the new
product should be launched nationally;
B)If they show a high trial rate and a low purchase rate, the new
product should be redesigned or dropped;
C)If they show a low trial rate and a high repurchase rate, the
product is acceptable.
D)If both trial and repurchase rates are low, the new product
should be left permanently.
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 Test Marketing Method
Controlled Test Marketing: The co. with the new product
hires a research firm and gets a panel of stores at specified
geographic locations.
 The research firm delivers the new product to the panel of
stores, arranges promotions of the stores, and measures the
sales of the new product.
 They also interviews sample consumers to get their perceptions
on the new product.
 But both Full blown test markets and controlled test marketing
expose the new product to the competitors.

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 Test Marketing Method
 Simulated Test Marketing: Here, customers are exposed to
a simulated market situation to gauge the consumer's
reactions to a product, service or marketing mix variations.
 In this method, 30-40 consumers (or shoppers) are selected,
based on their brand familiarity and preferences in a particular
product category, such as babycare and soft drink products.
 These consumers are shown commercials or print
advertisements of well known products and also the new
product,
 Then they are given small amount of money and asked to buy
any items in a store.

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 Test Marketing Method
 Then, they are interviewed to find reasons for buying or not
buying, and later after usage of the new product, satisfaction
levels and repurchase intentions.
 Thus new products are not exposed to competitors.

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Industrial product Test Marketing

Another method used for introducing a new industrial

product is participating in the industry trade shows.
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 Quantitative Research Method
 It uses statistical and mathematical methods in order to research
a larger sample group of the population.
 It asks individuals for their opinions in a more structured way
than that of qualitative research.. This is done so that
the data produced will provide solid and definitive results.
 The most common forms of quantitative research used in
marketing are customer surveys and questionnaires.
Usually, these surveys are carried out either online, over the
phone, via post or face-to-face.
 In general, customer surveys and questionnaires follow a more
structured layout than that of qualitative methods.

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 Qualitative & Quantitative Research Method.
 Qualitative research is an in-depth exploration of what
people think, feel or do and, crucially, why. If you want to know
why your customers behave as they do and what barriers there
may be to their changing that behaviour, you would use QR to
explore those issues. It does not give statistically robust findings.
 Quantitative research provides a measure of how many
people think, feel or behave in a certain way and uses statistical
analysis to determine the results. If you want to know how many
of your customers support a change in a product or service -
and how strongly they support it - so that you can determine
whether you have a business case for making that change - you
would use quantitative research.

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 Qualitative & Quantitative Research Method.
 It is advised that a business should always use a mixture of
qualitative and quantitative methods when researching
their customers and the performance of their products and
services.
 A recommended approach to market research is to start off by
going straight to the source and conducting qualitative research.
This will provide your business with actual information and data
straight from your target audience.
 Following this, the business can then use quantitative methods in
order to test the insights that they have been provided with.

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 Moving Average Method
 A co. forecast by calculating the average co. sales for
previous years.

Sales forecast for next year

= Actual Sales for past 3 years/No. of years.
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 Exponential Smoothing Method
 By using this method, the sales forecaster can allow sales in
certain periods to influence the sales forecast more than sales in
other periods.
 Sales forecast for this year =
(L)(Actual Sales this year) + (1-L) (this year’s sales forecast);
Where (L) is a smoothing constant.
For instance, a smoothing constant (L) with a high value of 0.7 or
0.8 allows most recent periods of actual sales to influence sales
forecast more than sales in earlier periods, whereas a smoothing
constant with a low value of 0.2 or 0.3 allows earlier period of
actual sales to influence forecasted sales more than sales in
recent periods.

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 Exponential Smoothing Method
Year Acutal Sales 3 Year
2001 862 858
2002 948 852
2003 956 880
2004 922
To calculate the forecasted sales for the year 2004 by using exponential
smoothing method. The sales forecast for the year 2004 would be
0.2*956 + 0.8*880= Rs. 895. (Low Value)
0.8*956 + 0.2*880= Rs. 940.8 (High value)
Adv. – A)Useful method when sales data have a trend or a seasonal pattern.
B)Immediate response to a upturn or downturn in sales.

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 Decomposition Method
In this method the co’s previous periods sales data is broken
down into four major components, such as Trend, Cycle,
Seasonal and Erratic events.
 Trend – A growth of 3% in sales due to the development in
technology, capital formation and population
 Erratic Events- Unstable political, terrorist activities are
expected to reduce sales by 5%.
 Cyclic component – A 10% reduction in sales is expected due
to a recession in demand.
 Seasonal Component – A 15% increase in sales in 3rd quarter
due to festive season.

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 Decomposition Method
Sales in 2003 was Rs. 956 In order to forecast sales for 2004 ----
 Trend – 2004 sales will be (956*1.03)= 985
 Erratic – (985*0.95)= 936
 Cyclic – (936*0.90)= 842
Annual sales forecast for 2004 is 842, quarterly would be 842/4
= 210
Seasonal (210*1.15) = 242 for 3rd quarter & consistent sales
forecast of Rs. 200 (842-242/3) each for other three quarters.

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 Naïve/Ratio Method
 It is a time series method of forecasting, which is based on the
assumption that what happened in the immediate past will
continue to happen in the immediate future.
 Sales forecast for next year =
Actual sales of this year * Actual sales C.Y/L.Y
2004- ?, 2003- 956, 2002 – 948
2004 = 956*956/948= 964

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 Regression Analysis
 It is a statistical forecasting method that is used to predict sales,
called as dependent variable Ý.
 The co. then identifies causal (Cause and effect) relationship
between the company sales and the independent variables (or
factors), which influence the sales.
 Simple (or linear)regression – if there is only one
independent variable (x), say promotional expenditure .
 Multiple regression analysis – The co. sales are influenced by
several independent variables, such as Price, Promotional
expenditure, and Population.

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 Regression Analysis
 The availability of computer software packages such as Statistical
Analysis System (SAS), Statistical Package for the Social Sciences
(SPSS) has increased the usage of regression analsysis.
 Advantages:- a)High forecasting accuracy, if relationship
between variables are stable, b) objective method, and c)can
predict turning points of the co’s sales.
 Disadvantage:- a) Technically complex. b)can be expensive and
time consuming. C)use of computer and software packages are
essential.

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 Econometric Analysis
 In this method, many regression equations are built to forecast
industry sales, general economic conditions, or future events.
 To find out which factors or variable influence sales and the
relationship between sales and these factors as well as the
interrelationships between the factors, develop a no. of
regression equations representing these relationships.
 Adv. – Accurate forecast of economic conditions and industry
sales are possible.
 Dis. – Large volume of data is required representing the various
factors.

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 Exponential Smoothing Method
Month 1 2 3 4 5
Demand ('00s) 13 17 19 23 24
 Use a two month moving average to generate a forecast for
demand in month 6.
 Apply exponential smoothing with a smoothing constant of 0.9
to generate a forecast for demand for demand in month 6.

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 Exponential Smoothing Method
 The two month moving average for months two to five is given
by:
 m2 = (13 + 17)/2 = 15.0
 m3 = (17 + 19)/2 = 18.0
 m4 = (19 + 23)/2 = 21.0
 m5 = (23 + 24)/2 = 23.5
 The forecast for month six is just the moving average for the
month before that i.e. the moving average for month 5= m5 =
2350.

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 Exponential Smoothing Method
 Applying exponential smoothing with a smoothing constant of
0.9 we get:
 M1 = Y1 = 13
M2 = 0.9Y2 + 0.1M1 = 0.9(17) + 0.1(13) = 16.60
M3 = 0.9Y3 + 0.1M2 = 0.9(19) + 0.1(16.60) = 18.76
M4 = 0.9Y4 + 0.1M3 = 0.9(23) + 0.1(18.76) = 22.58
M5 = 0.9Y5 + 0.1M4 = 0.9(24) + 0.1(22.58) = 23.86
 As before the forecast for month six is just the average for
month 5= M5 = 2386

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