Strategy and Sales Program Planning

Topic 2 Cont.

Estimating Potentials & Forecasting Sales

Key to success in sales is knowing where customers are located & being able to predict how much they will buy. Market potential is an estimate of maximum demand in a time period based on the number of potential users & the purchase rate. Some of the methods of sales forecasting (qualitative & quantitative) are sales force composite, jury of executive opinion, intention to buy survey, moving average, exponential smoothing, simple & multiple regression.

Qualitative: 1. Sales Force Composite

Sales people project volume for customers in their own territory & estimates are aggregated & reviewed at higher mgt level. Mostly practiced by industrial companies due to limited number of customers sales people are in a good position to assess customers needs.

2. Jury of Executive Opinion

Soliciting judgment of a group of experienced managers to give sales estimates for new & current products. It is fast & allows inclusion of subjective factors such as competition, economic climate, weather & union activity.

Quantitative: 1.Seasonal Adjustments

Sales forecasts are often prepared monthly or quarterly. Collect sales figures for past several years need to be used. Sales for months/quarters are averaged across years to build a seasonal index. Then index are developed. Next computer programs are used to do sales forecasting for the companies.

2. Moving Averages
The average revenue achieved over several periods is used as a prediction of sales in the next period. Assumes the future will be an average of the past achievements.

Sales for Tom Investments

Year
1994 1995 1996 1997 1998 1999 2000 2001

Sales ($)
5540 5439 4290 5502 4871 4708 4627 4110

Year
2002 2003 2004 2005 2006 2007 2008 2009

Sales ($)
4122 4842 5740 5094 5383 4888 4033 4941

Year 1994 1995 1996 1997 1998 1999 2000

Sales ($) 5540 5439 4290 5502 4871 4708 4627

3 Yr MA

Year 2002

Sales ($) 4122 4842 5740 5094 5383 4888 4033

3 Yr MA

16481/3 =5493.67 15231/3= 5077 14763/3 = 4921

2003 2004 2005 2006 2007 2008

2001

4110

2009

4941

In the earlier example you need to take 3 values at a time average it, First 3 years, Then take yr 2, 3, 4 average and write answer. And so on till you complete the rest. Plot the graph of 1) year on x-axis, sales Y-axis. On the same graph plot year on axis, moving average on Y axis. Compare the two graphs Moving average is more smoother. This is because the fluctuations have been adjusted.

3. Exponential Smoothing

Ability to emphasize recent information & systematically discounts old information.

F t+1 = (At-1) + (1 - ) Ft-1

Sales for Tom Investments

Year 1994 1995 Sales ($) 5540 5439

1996
1997 1998 1999 2000

4290
5502 4871 4708 4627

2001

4110

The first (yr 1) forecast is not calculated. This is when business is starting up. ~ (alpha) is always given, in this case use 0.3 2nd yr forecast, use 1st yr actual data - 5540 3rd yr: F t+1 = ~ (At-1) + (1 - ~) Ft-1 0.3(5439) + (1 0.3) 5540 = 5509.70 4thyr = F t+1 = ~ (At-1) + (1 - ~) Ft-1 = 0.3(4290) + (1-0.3) (5509.7) = 5143.79 And so on all the calculation needs to be completed. Therefore can forecast 2002.

Year

Sales ($) 1994 5540

Forecast: -

1995 5439
1996 4290 1997 5502

5540
5509.70 5143.79

1998 4871
1999 4708 2000 4627 2001 4110

4. Time Series Regression

Relationship between sales (Y) & a period of time (X) can be represented by a straight line. Quantitative forecasting should be used when you have access to historical data.
First determine b, then a, place the two values in the formula this will give you forecast for anytime period Y = a + bt b = n(xt) (x) (t) n(x2) (x)2 a = Y - b (x) n n

Year 1994

t 1

Sales (x) xt 5540 5540

x2 30691600

1995
1996 1997

2
3 4

5439
4290 5502

10878
12870 22008

29582721
18404100 30272004

1998
1999 2000 2001 Total:

5
6 7 8 t = 36

4871
4708 4627 4110 Y= 39087

24355
28248

23726641
22165264

32389 21409129 32880 19448100 169168 193143559

Y = a + bt b = n(xt) (x) (t) n(x2) (x)2 = 8 (169168) (39087) (36) = -53788 8 (193143559) (39087)2 17354903 = -3.099

a = t - b (x) = 36 - -3.099 (39087) n n 8 8 = 15145.8

Y = a + bt = 15145.8 + 3.099t Forecast for year 2005 (remember that 2001 = t8, so 2005 = t12:

Y = a + bt = 15145.8 + 3.099t = 15145.8 + 3.099 (12) = 15182.99 You can do the same for any other year.