Sales forecasting

Key terms in forecasting• Market• Market refers to the set of existing and potential

buyers of a product or services.• Potential market• Potential market is a set of consumer who evince

interest in the marketer’s offer. • Eg:- the potential market of luxury homes are all

consumers in the high income and rich segment, who have the resources to buy them.

• Target Market• Refers to a market segment which a firm chooses to

serve.• Eg:- Builder may choose to target young professionals

in major cities, who have the resources or access to resources to buy them

Terms in forecasting

• Market penetration

• Refers to the set of consumers. Who are already the firms customers, to the total numbers of consumers in the target market.

• Eg:- The set of consumers in the target market who have brought luxury homes.

Market potential – TV Set• The forecasting exercise involves understanding

market potential 1. To know the number of households2. Assume each h/h has TV set3. Market potential = No. h/h in the country4. Assume 6 people constitute a h/h,we have 142 mn

h/h.• 25% of people are below poverty line (no)• 40% in low income group (cannot afford)• 35% of total pop’n which is real market can be

targeted • Market potential refers to the upper limit of market

demand

Sales forecasting

• The goals & strategies outlined in marketing plan determines sales forecasting

• Marketing goals can be:-

1. To liquidate inventory

2. Expand market share thru aggressive advertising

• The sales forecast will differ in each case

• Once established it becomes the key factor of all –operational planning

Forecasting is the basis of sound budgeting

1. Financial planning for working capital requirements

2. Plant utilization

3. Scheduling of production facilities

4. Manpower needs

5. Raw material purchases

• All the above depend on sales forecasting

Market potential

• Is the total expected sales of a given product or service for the ENTIRE INDUSTRY in a specific market over a stated period.

• Eg:- the market potential for beer in India for 2006 is expected to be 4 million barrels

Sales potential

• Refers to the maximum share (or percentage) of market potential that an individual firm can reasonably EXPECT to achieve

• Eg:- kingfisher beer accounted for 20% of the approximate 3.5 million barrels of beer consumed in India

Sales forecast• Is an estimate of sales (in rupees / units) that

an individual firm expect to achieve

1. During a specified forth coming time frame / period,

2. In a stated market

3. Under a proposed marketing plan

• The sales forecast is typically LESS than the sales potential due to:-

1. Constraint on production facility

2. Financial resources

Methods of sales estimation• Three fundamental technique are:-

1. Market factor derivation

2. Surveys of buyers intention

3. Test markets

1) Market factor derivation• Is an item or element in a market that:-1. Causes the demand for the product or services2. Related to demand for it• Example:-• The number of births in a town is a market - factor underlying the DEMAND

for BABY FOOD• Using the market-factor method:-

Estimated numbers of birth, 2007 in Town x……… 40,00,000

Times, % who buy baby-food (50%) X 0.50

-----------------------------

Hence the Total market potential for baby food 20,00,000

Times , potential market share (10%) X 0.10

Firm can forecast (units) 2,00,000

2) Survey of buyer’s intention• Contacting potential customers & questioning them

about their likely intention of purchasing the product at the price asked

• Example:-• We may survey 240 mothers (probing their intention to

buy product)• 170 out of them (71%) liked the product• BUT at Rs. 60/- instead of paying Rs.90.00• The new product will only give ( or 4%) if we keep

price at Rs.90/-• Intention to buy survey may be misleading• Intention may not result into actual purchase

3) Tests markets

• Companies sometime test-market a product in cities & towns that are similar to the co’s other market.

• If the market inputs are almost identical to the national launch , test market is reliable method

• Because the results are not mere guess estimates as in other method

Territory potential• Enables the sales manager to allocate selling

efforts properly & evaluate the relative performance of each district

• Normally a marketing index based on two or more marketing Factors is used.

• Eg:- the sale & mktg mgmt uses the “Buying power index” based on 3 factors:-

1. Population2. Effective buying income 3. Retail sales• These estimates can be used for allocating adv,

pro & selling inputs to each territory

Sales forecasting• Is an essential step in sales planning

• If overly optimistic the firm will suffer losses

• If sales forecast is too low:-

1. May not be able to supply adequately

2. Miss on market opportunities

• Valid sales forecast plays a major role in firms success

Difficulty in forecasting are two fold:-

1. In case of new product . No past data is available

2. Change in marketing plans, industry market or general market

• Eg:-• Changes in price structure• Changes in existing competitor’s strengths , new

entrant in a industry• Market demand, if affected by innovative

technology• Recession, political instability, natural calamity

etc…

forecast• When a forecast is developed for the next

period, sales in the oldest period is dropped fm the average & is replaced by the actual sales in the latest period, HENCE the name “MOVING AVERGE”

• Example:-

1. Determining seasonality of Toy sales (Rs.1000)

2. De- Seasonalized toy sales

3. Forecasting toy sale using moving average method

a) Determining seasonality of toy sales (Rs.1000)

Qtrly 2001 2002 2003 2004 2005 Qtrly

Average

Seasonal

Index

1 26 30 23 40 45 33 0.54

2 40 31 31 36 50 40 0.66

3 38 50 50 49 60 47 0.77

4 110 124 124 135 150 125 2.05

Qtrly Avg = 61

Seasonal Index = Quartely average / overall averageThus 33/61 = 0.54 40/61 = 0.66

B) Decentralized toy sales DTSQTLY 2001 2002 2003 2004 2005

1 48 56 43 74 83

2 61 47 64 55 76

3 49 65 52 64 78

4 54 60 52 66 73

Actual qtrly / seasonal Index – 26/0.54 = 48

C) Forecasting toy sale using moving average method

Qtrly /yr 3/01 4/01 1/02 2/02 3/02 4/02 1/03 2/03 3/03 4/03

Actual sales

(Rs’000)

52 52 74 55 64 66 83 76 78

2-period moving avg.

52

*

63 65 60 65 75 80 77

3-period moving avg.

59

**

60 64 62 71 75 79

• (52 + 52 / 2 = 52) ; (52+74 / 2 = 63)

** (52+52+74 / 3 = 59.3); (52+74+55 / 3 = 60.1)

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