FORECASTING MARKET DEMAND

& Product Market Strategies

Pranav Shandil

FORECASTING MARKET DEMAND

A marketing decision support system (MDSS) is an ongoing, future-oriented structure designed to generate, process, store, and later retrieve information to aid decision making in an organizations marketing program. It involves problem-solving technology composed of people, knowledge, software, and hardware wired into the sales management process.

USES OF SALES FORECASTS

A sales forecast is the estimated dollar or unit sales for a specific future time period based on a proposed marketing plan and an assumed market environment.

A sales forecast is important for at least five reaso

1. A sales forecast becomes a basis for setting and maintaining a production schedule manufacturing. 2. It determines the quantity and timing of needs for labor, equipment, tools, parts, and raw materials purchasing, personnel. 3. It influences the amount of borrowed capital needed to finance the production and the necessary cash flow to operate the business controller. 4. It provides a basis for sales quota assignments to various segments of the sales force sales management. 5. It is the overall base that determines the companys business and marketing plans, which are further broken down into specific goals marketing officer.

FIGURE 5.1 PLANNING/FORECASTING/BUDGETING SEQUENCE

Marketing Plan

Sales Forecasts

Sales Force Budget

THE FORECASTING PROCESS

The forecasting process refers to a series of procedures used to forecast.

A market factor is an item or element that (1) exists in a market, (2) may be measured quantitatively, and (3) is related to the demand for a product or service.

A market index is simply a market factor expressed as a percentage relative to some base figure.

BASIC STEPS IN BREAKDOWN METHOD OF FORECASTING SALES

General Environment Forecast Industry Sales Forecast Company Sales Potential Company Sales Forecast Product Lines Individual Products Customers-Territories-Regions-Divisions-U.S.A.-World

fo r

Industry sales forecast, or market potential, is the estimated sales for all sellers. Company sales potential is the maximum estimated or potential sales the company may reach in a defined time period under given conditions. The companys share of the estimated sales for an entire industry is referred to as market share.

SALES FORECASTING METHODS

Two categories of sales forecasting methods exi

Survey methods are qualitative and include executive opinion, sales force composite, and customers intention surveys.
Mathematical methods are test markets, market factors, nave models, trend analysis, and correlation analysis.

FIGURE 5.4 THE MORE POPULAR OF MANY FORECASTING METHODS

S u r v e y M e t h o d s

M a t h e m a t i c a l M e t h o d s

Executive Opinion

Users Expectation Build-toOrder

Test Market
N a i v e

Regression
T r e n d

Sales Force Composite

Moving Average

Exponential Smoothing

SURVEY FORECASTING METHODS

Four basic survey methods are

Executive Opinion Sales Force Composite Users Expectations Build-to-Order

Executive Opinion

Executive forecasting is done in two ways: 1. By one seasoned individual (usually in a small company).
2. By a group of individuals, sometimes called a jury of executive opinion.

The group approach uses two methods:

1. Key executives submit the independent estimates without discussion, and these are averaged into one forecast by the chief executive.
2. The group meets, each person presents separate estimates, differences are resolved, and a consensus is reached.

Delphi Method

Administering a series of questionnaires to panels of experts.

Sales Force Composite

Obtaining the opinions of sales personnel concerning future sales.

Users Expectations

Consumer and industrial companies often poll their actual or potential customers.

Build-to-Order
Companies build final products only after firm orders are placed.

MATHEMATICAL FORECASTING METHODS

Test markets are a popular method of measuring consumer acceptance of new products.

FIGURE 5.5 CITIES COMMONLY USED AS TEST MARKETS RESIDENTS ARE MOST LIKELY TO SEE NEW PRODUCTS.

Spokane, WA Eugene, OR Portland, ME Madison, WI Fresno, CA Bakersfield, CA Oklahoma City, OK Tucson, AZ Lubbock, TX Salt Lake City, UT Omaha, NE Syracuse, NY Erie, PA Toledo, OH Johnstown, PA Peoria, IL Lexington, KY Knoxville, TN Chattanooga, TN Charlotte, NC Charleston, SC Savannah, GA Jacksonville, FL

Little Rock, AR Baton Rouge, LA

Beaumont, TX Corpus Christi, TX

Time Series Projections

Time series methods use chronologically ordered raw data.

Classical approach to time series analysis:

The trend component. The seasonal component. The cyclical component. The erratic component.

Nave Method
Next Years Sales = This Years Sales X This Years Sales Last Years Sales

Moving Average

Moving averages are used to allow for marketplace factors changing at different rates and at different times.

TABLE 5.1 EXAMPLE OF MOVING-AVERAGE FORECAST

PERIOD 1 2 3 4 5 6

SALES VOLUME 200 250 300 350 450 ?

SALES FOR THREE-YEAR THREE-YEAR PERIOD MOVING AVERAGE

750 900 1100 ( 3) = 300 366.6

Period 6 Forecast = 366.6

Exponential Smoothing

Exponential smoothing is similar to the moving-average forecasting method. It allows consideration of all past data, but less weight is placed on data as it ages.

Next Years Sales = a (This Years Sales) + (1-a) (This Years Forecast)

Trend Projections Least Squares

Eyeball fitting is simply a plot of the data with a line drawn through them that the forecaster feels most accurately fits the linear trend of the data.

FIGURE 5.6 A TREND FORECAST OF SALES

Observed Sales 600 500 400 Trend Line

Forecast Sales

Sales

300 200 100 0 1984 1985

1986

1987 Time

1988

1989

1990

Regression Analysis
Regression analysis is a statistical method used to incorporate independent factors that are thought to influence sales into the forecasting procedure.

FIGURE 5.7 REGRESSION ANALYSIS

Linear Relationship

Curvilinear Relationship

Sales

Population (A)

Sales
0

Population (B)

FIGURE 5.8 QUESTIONS TO ANSWER TO IMPROVE CHANCES OF HITTING THE FORECASTING BULLS-EYE

H th av I e e an ncr Ba Yo Fo d ea si u re Se sin cs Co ca le g to n s st cti A in n cc ide g gY u re M o ra d et ur cy ho d?

W M hi Yo eth ch u od Fo U S re se h ca ? ou s t ld (s

140% 130% 120% 110%

Have You Developed a Good Sales Forecasting Process?

Market Decision Support System

Breakdown Use Multiple Forecasting Methods Buildup

O R E C A S T
90% 80% 70% 60%

e s id ? ut lp O e d sH ul ce Co our S

r te pu lp? o m He e C re th a d ftw ul So Co nd a

TABLE 5.2 GUIDE TO FORECASTING

FORCASTING METHOD
Executive Opinion Delphi Method Sales Force Composite Users Expectations Test Markets Nave Method Moving Average Exponential Smoothing Least Squares Regression Analysis

TIME SPAN
Short to medium Medium to long Short to medium Short to medium Medium Present to medium Short to long Short to medium Short to long Short to Medium

MATHEMATICAL SOPHISTICATION
Minimal Minimal Minimal Minimal Needed Minimal Minimal Minimal Needed Needed

COMPUTER NEED
Not essential Not essential Not essential Not essential Needed Not essential Helpful Helpful Desirable Essential Limited

ACCURACY

Limited; good in dynamic conditions Accurate under dynamic conditions Limited Accurate Limited Accurate under stable conditions Accurate under stable conditions Varies widely Accurate if variable relationships stable

THE SALES MANGAGERS BUDGET

The sales force budget is the amount of money available or assigned for a definite period, usually one year.

BUDGET PURPOSES

Planning Coordination Control

TABLE 5.3 SALES FORCE OPERATING COSTS

1. Base salaries
a. Management b. Salespeople 2. Commissions 3. Other compensation a. Social Security b. Retirement plan c. Stock options d. Hospitalization

4. Special incentives
5. Office expenses 6. Product samples 7. Selling aids 8. Transportation expenses 9. Entertainment 10. Travel

BUDGETS SHOULD BE FLEXIBLE

Sales, costs, prices, or the competitions marketing efforts are some factors that may be higher or lower than expected.

THE BOTTOM LINE

Because of the growing trend in business to centralize data collections, the job of forecasting has become an integral part of a firms marketing decision support system (MDSS). A sales forecast is the estimated dollar or unit sales for a specific future period based on a proposed marketing plan and an assumed market environment.

Firms know sales forecasting is never 100 percent correct. Two categories of sales forecasting methods are survey methods and mathematical methods.
Because the sales forecast has a major impact on the company, the top executives give final approval. To create a sales forecast, sales managers should know how to use a computer.

Marketing Strategy
Marketing

strategy is the link between corporate goals and operational tactics are two primary considerations in marketing strategy

There

Where are we? Where do we want to go?

Portfolio Assessment Tool

Boston

Consulting Group matrix

Brands or products are classified according to whether each has a strong or weak market share and slow or growing market
Dog:

low share, low growth Star: high share, high growth Cash cow: high share, low growth Question mark: low share, high growth

BCG Matrix

BCG Portfolio Analysis

Stars:

optimize or hold Dogs: minimize or divest Cash cows: milk Question marks: unknown

New technologies, uncertain markets, etc.

If

stars and cash cows are sufficiently profitable, companies can carry dogs and question marks

Discussion Questions
Using

the BCG Matrix

Where would you likely categorize the market leader in the typewriter market?

10

years ago, where would you have likely categorized a small player in the cell phone business? Where would you categorize the market leader in cell phones today?

Corporate Identity
What

is the companys typical philosophy toward the marketplace

Offensive Defensive Leader Follower

Corporate Identity
Leader

has several meanings

Largest market share 1st to market

First

to market may or may not be beneficial because adoption can be slow followers can learn from leaders mistakes

Quick to innovate and improve, etc.

Quick

Corporate Identity
A

company may be a leader for some of its brands/products and not others company may be offensive and defensive to vary its portfolio companys products life cycles may influence its identity

Marketing Metrics
Profitability

Sales
Share Average

prices Levels of awareness Penetration in trial Customer satisfaction Employee satisfaction, etc.

Example: Metrics

Goals
Lets

make more money Lets delight our customers Lets redefine our position Goals about broader concerns

Goals
Goals

can be complex, numerous, interconnected and overwhelming on most important goals first

Focus

Consider

the time frame and the financial support need to achieve the goals

Basic Strategies
Do

nothing

Let the brand sink or swim on its own

Do

nothing differently

Maintain business as usual

Take

action

Do something different Marketers have control over STP and 4Ps