Unit 2

2 Topics to be covered……
 Managing Sales information
 Developing sales forecast and forecasting market demand
 Basic terms used in forecasting
 Forecasting approaches
 Sales forecasting methods
 Factors affecting selection of forecasting method
 Sales budgets.
 Sales organization
 Management of sales territories and quota
 Defining sales territory
 Sales quota.
3 Sales Information
 Sales information in an organisation is like the
circulatory information in the human body.
 Sales information system help the organisation to use
the relevant sales data and take appropriate decisions
for the success of the organisation.
 The sales information helps to analyse the
 Current market situations
 Staff performance
 Sales forecasting and compensation planning for the sales staff.
 The important use of the sales information system in an organisation is to
forecast the market demand.
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Market forecast
A market forecast is the estimated rupee or
unit sales for a specific future time period
based on the company’s marketing plan and an
assumed marketing environment.
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For a good market forecast the following points to be

considered:
The total industry sales
The market share of the firm
The growth rate
The firm’s product line
Individual product performance
7 Market Demand Forecasting
 Market demand forecasting involves predicting future economic conditions
and evaluating their effects on the performance of the firm.
 Market demand forecasting is one of the most complex managerial function
due to the following reasons:
 The methods of forecasting will vary depending upon the nature of the
product.
 The stages of product life cycle
 The degree of innovation.
 Consumption choice of the consumers and penetration level of products in
different economies
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9 Marketing Decision Support System

 MDSS is an ongoing future oriented info structure designed to collect,

collate, categorize, edit, store, and retrieve information on demand to
aid decision making in the organisation’s sales and marketing
programme.
10 Importance of sales forecasting

1. Supply and demand for the products can easily be adjusted, by

overcoming temporary demand, in the light of the anticipated
estimate; and regular supply is facilitated.
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,
labor, plant layout, financial needs, warehousing, transport facility
etc., depend in accordance with the sales volume expected in advance.
5. Sales opportunities are searched out on the basis of forecast.
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6. It is a gear, by which all other activities are controlled as a basis of
forecasting.
7. Advertisement programs are beneficially adjusted with full advantage to
the firm.
8. 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.
9. It is a measuring rod by which the efficiency of the sales personnel or the
sales department, as a whole, can be measured.
10. Sales personnel and sales quotas are also regularized-increasing or
decreasing-by knowing the sales volume, in advance.
11. It regularizes productions through the vision of sales forecast and avoids
overtime at high premium rates. It also reduces idle time in
manufacturing.
 Types of sales
forecast

12
Geographic
Product level Time period
area

Total Sales Long term World

Industry sales Medium term Nation

Company
Short term Region
sales

Product line
Territory
sales

Product
Customer
variant sales
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The Forecasting Process

The forecasting process is defined as the series of

decisions and actions taken by a business organization
in identifying the forecasting objectives, determining
the independent and dependent variables, developing
the forecasting procedure, and using the available data
in the selected method to estimate the sales for the
future.
 Forecast
objectives

14 Evaluate Determine the

the independent
performanc and dependent
e results variable

Develop
Finalize the
forecast
forecast
procedure
The forecasting
process

Select forecast
Present all
analysis
assumptions
method

Collect, collate, Comprehend

analyse the total forecast
data methods
15 Basic Terms Used in Sales Forecast
 Market Potential/industry forecast: It is the best possible estimated sales of
a given product or service for the entire industry in a given market for a
specific period of time. It is also called as industry forecast,
 Market Forecast/ Market size: it is a core component of a market analysis. It
projects the future numbers, characteristics, and trends in the target. It is also
called as market size.
 Company sales potential: is the maximum estimated company sales of a
product or service for a company in a given geographic area for a specific
period of time. It is also defined as the maximum share (or percentage) of
market potential expected by the company.
 Company sales forecast: is the estimated company sales of a
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product or service, based on a chosen (or proposed) marketing
expenditure plan, for a specific time period, in a assumed marketing
environment
 Sales budget: It has two components:
The sales revenue budget: estimates sales volume or revenue from the product
or services.
The selling expense budget: estimated expenses of the sales force, such as
salaries, incentives, travelling, etc.
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 company management sets sales
quota on the basis of the company sales forecast
17 Approaches to Sales Forecasting

Two basic approaches of forecasting are:

Top down approach (break down approach)
Bottom up approach (build up approach)
 Steps followed in Top-down / Break-down
Approach
Forecast relevant external environmental factors
Estimate industry sales or market potential
Calculate company sales potential = market potential x
company share
Decide company sales forecast (lower than company
sales potential because sales potential is maximum
estimated sales, without any constraints)
 Steps followed in Bottom-up / Build-up
Approach
Salespersons estimate sales expected from their customers
Area / Branch managers combine sales forecasts received from
salespersons
Regional / Zonal managers combine sales forecasts received
from area / branch managers
Sales / marketing head combines sales forecasts received from
regional / zonal managers into company sales forecast, which is
presented to CEO for discussion and approval
 Sales Forecasting Methods
Qualitative Methods Quantitative Methods

• Executive opinion • Moving averages

• Delphi method • Exponential smoothing

• Salesforce composite • Decomposition

• Survey of buyers’ • Naïve / Ratio method

intentions

• Test marketing • Regression analysis

• Econometric analysis
21 Executive opinion method
 Oldest, simplest and most widely used
 Procedure includes discussions and / or average of all
executives’ individual opinion
 Advantages:
 Quick forecast.
 Less expensive
 Very popular among small and medium sized companies
 Disadvantages:
 Subjective
 Unscientific
 No breakdown into subunits
 Less accurate
22 Delphi method
 Process includes a coordinator getting forecasts separately from experts, summarizing the
forecasts, giving the summary report to experts, who are asked to make another prediction; the
process is repeated till some consensus is reached
 Experts are company managers, consultants, intermediaries, and trade associations.
 Advantages:
 Objective forecast
 Useful for technology, new product and industry sales forecast
 Both long term and short term forecast is possible
 Disadvantages:
 Difficulty in getting a panel of experts
 Longer time for getting consensus
 Break down of forecast or territories is not possible
23 Sales force composite method
 An example of bottom-up or grass-roots approach
 Procedure consists of each salesperson estimating sales.
 Company sales forecast is made up of all salespersons’ sales estimates
 Advantages:
 Salespeople are involved
 Breakdown into subunits possible
 Better insights of the sales trend
 Disadvantages:
 Optimistic or pessimistic forecasts
 Many sales people might not be interested in sales forecasting
 If sales forecast are used to set sales quota, sales people deliberately underestimate the
demand
24 Survey of Buyers’ Intentions Method
 Process includes asking customers about their intentions to buy the company’s
products and services
 Questionnaire may contain other relevant questions like quality, features, price
etc
 Advantages:
 Gives more market information.
 Useful in forecasting new products, existing products, consumer durables
 It also gives customer’s reasons for buying and not buying
 Relatively inexpensive and fast
Disadvantages:
 Some buyers’ unwilling to respond
 Buyers are sometime optimistic
 Expensive and time consuming in consumer non durable market where consumers are
large in number.
25 Test Marketing Method
 Methods used for consumer market testing:
 Full blown
 Controlled
 Simulated test marketing
 Methods used for business market testing:
 Alpha and beta testing
 Advantages:
 Used for new or modified products
 Good accuracy
 Minimizes risk of national launch
 Disadvantages:
 Competitors may disturb if some methods are used
26 Moving Average Method
 Procedure is to calculate the average company sales for previous
years
 The sales in the oldest period is dropped from the average and
replaced by sales in the newest period
 Advantages:
 Simple and easy to calculate
 Low cost and less time
 Good accuracy for short term and stable conditions
 Disadvantages:
 Unable to predict downturn / upturn,
 Cannot be used for unstable market conditions and long-term forecasts
 Based on historical data
27 Exponential Smoothing method

The forecaster allows sales in certain periods to influence

the sales forecast more than sales in other periods
Equation used:
Sales forecast for next period=(L)(actual sales of this
year)+(1-L)(this year’s sales forecast), where (L) is a
smoothing constant, ranging greater than zero and less
than 1
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Advantages:
Simple method
Forecaster’s knowledge used
Useful when sales data have a trend or seasonal pattern
Immediate response to upturn and downturn in sales.
Low cost, less time, good accuracy for short term forecast
Disadvantages:
Smoothing constant is arbitrary
Not used for long-term and new product forecast are not possible
29 Decomposition Method
Process includes breaking down the company’s previous
periods’ sales data into components like trend, cycle, seasonal,
and erratic events. These components are recombined to
produce sales forecast
Advantages:
Conceptually sound,
Disadvantages:
Complex statistical methods are needed to break down the sales data
into various components,
Historical data is needed.
30 Naive / Ratio Method

Assumes: what happened in the immediate past will

happen in immediate future
Simple formula used:

Advantages:
Simple to calculate
Accuracy good for short-term forecasting
Disadvantages:
Less accurate if past sales fluctuate
31 Regression Analysis
 It is a statistical forecasting method that is used to predict sales, called as
dependent variable “Y”.
 The company then identifies the causal relationship between the company
sales and the independent variable, which influence the sales.
 In practice, company sales are influenced by several independent variables,
like price, population, promotional expenditure. The method used is multiple
regression analysis.
 Advantages:
 High forecasting accuracy
 Can predict the turning points.
 Objective method
 Disadvantages
 Technically complex
 Can be expensive and time consuming
 Use of compute and software packages are essential
32 Econometric Analysis Method
Procedure includes developing many regression equations
representing (i) relationships between sales and independent
variables which influence sales, and (ii) interrelationships
between variables. Forecast is prepared by solving these
equations
Computers and software packages are used
Advantages:
Good accuracy of forecasts of economic conditions and industry
sales
Disadvantages:
Need expertise & large historical data
33 Improving the forecasting accuracy
Use multiple forecasting methods
Identify suitable methods
Develop a few factors
Obtain the range of forecasts.
Use computer hardware and software tools
34 What is a Sales Budget?
It includes estimates of sales volume and selling expenses
Sales volume budget is derived from the company sales
forecast – generally slightly lower than the company sales
forecast, to avoid excessive risks
Selling expenses budget consists of personal selling expenses
budget and sales administration expenses budget
Sales budget gives a detailed break-down of estimates of sales
revenue and selling expenditure
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Purposes of the Sales Budget
Planning
Coordination
Control
Methods used in deciding sales budget
Percentage sales method
Executive judgement method
Objective and task method
36 Sales budget process

Review past, current, and future situations

Communicate information to all managers on budget
preparation – guidelines, formats, timetable
Use build-up approach, starting with first-line sales
managers
Get approval of sales budget from top management
Prepare budgets of other departments