CHAPTER 5

FORECASTING MARKET
DEMAND AND SALES BUDGETS

Copyright 2001 by Harcourt, Inc. All rights reserved.

LEARNING OBJECTIVES
The process of forecasting helps an organization make decisions; it
is necessary for determining information about future markets. This
chapter should help you understand:

The importance of forecasting in a firms marketing decision

support system.
The uses and different categories of sales forecasts.
The two forecasting methods survey and mathematical and
their different uses.
That the responsibility for approving the final forecast rests at
the top management level.
The need for knowledge of computers, because they are used
in forecasting and developing sales budgets.
Copyright 2001 by Harcourt, Inc. All rights reserved.

MANAGING SALES
INFORMATION
Our charge is to design, build, and implement decision
support systems that help our field and marketing
managers make business decisions.
Dan McKee
Marketing decision support systems
manager for Marion Merrell Dow, Inc.

Copyright 2001 by Harcourt, Inc. All rights reserved.

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.

Copyright 2001 by Harcourt, Inc. All rights reserved.

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.

Copyright 2001 by Harcourt, Inc. All rights reserved.

A sales forecast is important for at least five reasons:

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.
Copyright 2001 by Harcourt, Inc. All rights reserved.

FIGURE 5.1 PLANNING/FORECASTING/BUDGETING SEQUENCE

M a r k e t in g P la n

S a le s F o r e c a s t s

S a le s F o r c e B u d g e t

Copyright 2001 by Harcourt, Inc. All rights reserved.

THE FORECASTING PROCESS

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

Copyright 2001 by Harcourt, Inc. All rights reserved.

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.

Copyright 2001 by Harcourt, Inc. All rights reserved.

FIGURE 5.2 THE FORECASTING PROCESS

F o r e ca s t
O b j ect i v e

D e t er m i n e D e p en d e n t a n d
I n d e p en d e n t V a r i a b l es

D e v el o p F o r eca s t
P r o ced u r e
S el ect F o r eca s t
A n a l y s i s M et h o d

E v a l u a t e R es u l t s
v er s u s F o r eca s t

M a k e a n d F in a liz e
F o r eca s t

T o t a l F o r eca s t
P r o ced u r e
P r es en t A s s u m p t i o n s
a b o u t D a ta

Copyright 2001 by Harcourt, Inc. All rights reserved.

G a th er a n d A n a ly z e
D a ta

FIGURE 5.3 BASIC STEPS IN BREAKDOWN METHOD OF FORECASTING SALES

G e n e r a l E n v ir o n m e n t F o r e c a s t
I n d u s tr y S a le s F o r e c a s t
C o m p a n y S a le s P o t e n tia l
C o m p a n y S a le s F o r e c a s t
P r o d u c t L in e s
I n d iv i d u a l P r o d u c t s
C u s t o m e r s - T e r r it o r i e s - R e g i o n s - D iv i s i o n s - U .S .A .- W o r l d

Copyright 2001 by Harcourt, Inc. All rights reserved.

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.
Copyright 2001 by Harcourt, Inc. All rights reserved.

SALES FORECASTING
METHODS
Two categories of sales forecasting methods exist:
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.
Copyright 2001 by Harcourt, Inc. All rights reserved.

FIGURE 5.4 THE MORE POPULAR OF MANY FORECASTING METHODS

S u r v e y M e th o d s

E x e c u t iv e
O p in io n

U s e r s
E x p e c ta tio n

S a le s F o r c e
C o m p o s it e

M a th e m a tic a l M e th o d s

T est M ark et

B u ild - t o O rd er

N a iv e
M o v in g
A v erag e

Copyright 2001 by Harcourt, Inc. All rights reserved.

R e g r e s s io n
T re n d
E x p o n e n tia l
S m o o th in g

SURVEY FORECASTING METHODS

Four basic survey methods are
Executive Opinion
Sales Force Composite
Users Expectations
Build-to-Order

Copyright 2001 by Harcourt, Inc. All rights reserved.

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.

Copyright 2001 by Harcourt, Inc. All rights reserved.

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.

Copyright 2001 by Harcourt, Inc. All rights reserved.

Delphi Method
Administering a series of questionnaires
to panels of experts.

Copyright 2001 by Harcourt, Inc. All rights reserved.

Sales Force Composite

Obtaining the opinions of sales
personnel concerning future sales.

Copyright 2001 by Harcourt, Inc. All rights reserved.

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

Copyright 2001 by Harcourt, Inc. All rights reserved.

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

Copyright 2001 by Harcourt, Inc. All rights reserved.

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

Copyright 2001 by Harcourt, Inc. All rights reserved.

FIGURE 5.5 CITIES COMMONLY USED AS TEST MARKETS RESIDENTS ARE

MOST LIKELY TO SEE NEW PRODUCTS.

Sp okane, W A
E ugene, O R
P o r tla n d , M E
M a d is o n , W I
O m aha, N E

S a lt L a k e C i t y , U T

F re s n o , C A
B a k e r s fi e l d , C A

E rie , P A
T o le d o , O H
P e o ria , I L
L e x in g to n , K Y
K n o x v i lle , T N

O k la h o m a C ity , O K
T u cson , A Z

L ubbock, T X

C h a tt a n o o g a , T N

L i t t le R o c k , A R

B e a u m o n t, T X

S y ra c u s e , N Y

B a to n R o u g e , L A

C o r p u s C h ris ti, T X

Copyright 2001 by Harcourt, Inc. All rights reserved.

Jo h n s to w n , P A

C h a r lo t t e , N C
C h a r le s to n , S C
Savan n ah , G A
J a c k s o n v i lle , F L

Time Series Projections

Time series methods use chronologically
ordered raw data.

Copyright 2001 by Harcourt, Inc. All rights reserved.

Classical approach to time series analysis:

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

Copyright 2001 by Harcourt, Inc. All rights reserved.

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

Copyright 2001 by Harcourt, Inc. All rights reserved.

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

Copyright 2001 by Harcourt, Inc. All rights reserved.

TABLE 5.1 EXAMPLE OF MOVING-AVERAGE FORECAST

PERIOD

SALES
VOLUME

SALES FOR
THREE-YEAR
THREE-YEAR PERIOD MOVING AVERAGE

200

250

300

750

350

900

300

450

1100 ( 3) =

366.6

Period 6 Forecast = 366.6

Copyright 2001 by Harcourt, Inc. All rights reserved.

Exponential Smoothing
Exponential smoothing is similar to the movingaverage 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)

Copyright 2001 by Harcourt, Inc. All rights reserved.

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.

Copyright 2001 by Harcourt, Inc. All rights reserved.

FIGURE 5.6 A TREND FORECAST OF SALES

O b s e r v e d S a le s

F o r e c a s t S a le s

600
500
400

T re n d
L in e

S a le s

300
200
10 0
0

19 8 4

19 8 5

19 8 6

19 8 7
T im e

19 8 8

19 8 9

19 9 0

Copyright 2001 by Harcourt, Inc. All rights reserved.

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

Copyright 2001 by Harcourt, Inc. All rights reserved.

L i n e a r R e la t i o n s h i p

C u r v i li n e a r R e l a t i o n s h i p

S a le s

S a le s

FIGURE 5.7 REGRESSION ANALYSIS

P o p u la t i o n
(A )

Copyright 2001 by Harcourt, Inc. All rights reserved.

P o p u la t i o n
(B )

FIGURE 5.8 QUESTIONS TO ANSWER TO IMPROVE CHANCES OF HITTING THE

FORECASTING BULLS-EYE

H a v e Y o u D e v e lo p e d
a G ood
S a le s F o re c a s tin g
P ro c e s s?

M a rk e t D e c is io n S u p p o r t S y s te m

B re a k d o w n
U s e M u l t i p le
F o re c a s tin g
M e th o d s
B u i ld u p

Copyright 2001 by Harcourt, Inc. All rights reserved.

F
O
R
E
C
A
S
T

14 0 %
13 0 %
12 0 %
110 %

90%
80%
70%
60%

TABLE 5.2 GUIDE TO FORECASTING

FORCASTING
METHOD

TIME SPAN

MATHEMATICAL
SOPHISTICATION

COMPUTER
NEED

ACCURACY

Executive Opinion

Short to medium

Minimal

Not essential

Limited

Delphi Method

Medium to long

Minimal

Not essential

Limited; good in dynamic

conditions

Sales Force Composite

Short to medium

Minimal

Not essential

Accurate under dynamic conditions

Users Expectations

Short to medium

Minimal

Not essential

Limited

Test Markets

Medium

Needed

Needed

Accurate

Nave Method

Present to medium

Minimal

Not essential

Limited

Moving Average

Short to long

Minimal

Helpful

Accurate under stable conditions

Exponential Smoothing

Short to medium

Minimal

Helpful

Accurate under stable conditions

Least Squares

Short to long

Needed

Desirable

Varies widely

Regression Analysis

Short to Medium

Needed

Essential

Accurate if variable relationships

stable

Copyright 2001 by Harcourt, Inc. All rights reserved.

THE SALES MANGAGERS

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

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BUDGET PURPOSES
Planning
Coordination
Control

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TABLE 5.3 SALES FORCE OPERATING COSTS

1. Base salaries

4. Special incentives

a. Management

5. Office expenses

b. Salespeople

6. Product samples

2. Commissions

7. Selling aids

3. Other compensation

8. Transportation expenses

a. Social Security
b. Retirement plan

9. Entertainment
10. Travel

c. Stock options
d. Hospitalization

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BUDGETS SHOULD BE FLEXIBLE

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

Copyright 2001 by Harcourt, Inc. All rights reserved.

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.
Copyright 2001 by Harcourt, Inc. All rights reserved.