module 3- forecasting
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Forecasting
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Agenda
Sales Potential and Sales Forecasting
Different Methods for the above
Converting industry forecast into company sales forecast
Evaluation of forecasts
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Sales Potential
A sales potential is an estimate of the maximum possible sales
opportunities present in a particular market segment open to a
specified company selling a good or service during a stated future
period
To illustrate, an estimate of the number of low- priced pocket
cameras that might be sold in San Mateo County, California, during
the calendar year 1987 by the Eastman Kodak Company would be
the 1987 San Mateo County sales potential for Eastman Kodak low-price pocket cameras
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Sales Potential
In other words, Sales potentials are quantitative estimates of the
maximum possible sales opportunities present in particular
market segments open to a specified company selling a good or
service during a stated future period
They are derived from market potentials after analyses of
historical market share relationships and adjustments for changes
in companies and competitors selling strategies and practices
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Sales Potential V/s Market Potential
A Sales potential indicates sales opportunities available to aparticular manufacturer, such as to Eastman Kodak Company,
while Market potential indicates sales opportunities available to
an entire industry, say steel industry
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Sales Forecast
A Sales Forecast is an estimate of sales, in dollars or physical
units, in a future period under a particular marketing program and
an assumed set of economic and other factors outside the unit for
which the forecast is made
A sales forecast may be for a single product or for an entire
product line
It may be for a manufacturers entire marketing area, or for any
sub- division of it
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Sales Forecasting Methods
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Jury of Executive Opinion
The Delphi Technique
Poll of Sales Force Opinion
Projection of Past Sales
Time- series Analysis
Exponential Smoothing
Evaluation of past sales projection methods
Survey of Customers Buying Plans
Regression Analysis Econometric Model Building and Simulation
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Jury of Executive Opinion
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There are two steps in this method:
i. High- ranking executives estimate probable sales, and,
ii. An average estimate is calculated
The assumption is that the executives are well informed about the
industry outlook and the companys market position, capabilities and
marketing program
All should support their estimates with factual material and explaintheir rationales
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Jury of Executive Opinion Method
Companies using the jury of executive opinion method do so becauseof the following reasons:
1. This is a quick and easy way to turn out a forecast
2. This is a way to pool the experience and judgment of well-informed people
3. This may be the only feasible approach if the company is so young
that it has not yet accumulated the experience to use otherforecasting methods
4. This method may be used when adequate sales and market
statistics are missing, or when these figures have not yet been put
into the form required for more sophisticated forecasting methods
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The Delphi Technique
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Several years ago, researchers at the Rand Corporation developed atechnique for predicting the future that is called the Delphi Technique
This is a version of the Jury of Executive Opinion Method in which
those giving opinions are selected for their expertise
The panel of experts responds to a sequence of questionnaires in
which the responses to one questionnaire are used to produce the next
questionnaire
Thus information available to some and not to other experts is
disseminated to all, enabling all to base their final forecasts on all
available information
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Poll of Sales Force Opinion Method
In the Poll of Sales Force Opinion Method, often tagged the
grass- roots approach, individual sales personnel forecast salesfor their territories; then individual forecasts are combined and
modified, as management thinks necessary, to form the company
sales forecast
This approach appeal to practical sales managers because
forecasting responsibility is assigned to those who produce the
results
Refer Page No. 44 of Cundifff and Still Text for strengths and
weaknesses of Poll of Sales Force Opinion Method
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Projection of Past Sales Method
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Next years sale= this years sales* this years sales/ last years
sales
Time- series analysis: A statistical procedure for studying
historical sales data
Exponential smoothing: A statistical technique for short- range
sales forecasting
Next years sale= a(this years sale)+ (1-a) (this years forecast)
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Survey of Customers Buying Plans
Here, customers are asked about their future buying plans
Industrial marketers use this approach more than consumer goods
marketers, because it is easiest to use where the potential market
consists of small numbers of customers and prospects, substantial
sales are made to individual accounts, the manufacturer sells directto users, and customers are concentrated in a few geographical
areas( all the more typical of industrial than consumer marketing)
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Regression Analysis
Regression Analysis is a statistical process and, as used in salesforecasting, determines and measures the association between
company sales and other variables
It involves fitting an equation to explain sales fluctuations in
terms of related and presumably causal variables, substituting
for these variables values considered likely during the period to
be forecasted, and solving for sales
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Regression Analysis
There are three major steps in forecasting sales through regression
analysis:
1. Identify variables causally related to company sales
2. Determine or estimate the values of these variables related to sales
3. Derive the sales forecast from these estimates
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Econometric Model Building and
Simulation
Econometric model building and simulation is attractive as a sales
forecasting method for companies marketing durable goodsThis approach uses an equation or system of equations to represent a
set of relationships among sales and different demand- determining
independent variables
Then, by plugging in values (or estimates) for each independent
variable (that is, by simulating the total situation), sales are forecast
An econometric model (unlike a regression model) is based upon an
underlying theory about relationships among a set of variables, and
parameters are estimated by statistical analysis of past data
An econometric sales forecasting model is an abstraction of a real-world situation, expressed in equation form and used to predict sales
For example, the sales equation for a durable good can be written :
S= R + N
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Converting Industry Forecast to Company Sales Forecast
Deriving a company sales forecast from an industry sales forecast
requires an appraisal of company strengths and weaknesses (as wellas marketing programs) against those of competitors
The result is an estimate of expected market share that (when applied
to the industry sales forecast) results in forecast of company sales
Forecasting a companys market share varies in complexity from one
industry to another
In the steel industry, the number of competitors is small and market
share is stable, so determining a given companys market share is a
simple task- a matter of projecting a past trends and adjusting for
anticipated changes in the companys relative strengths andweaknesses
But in the womens clothing industry, the number of competitors is
large and market shares fluctuate widely, so determination of market
share is difficult
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Evaluation of Sales Forecasts
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Before submitting forecasts to higher management, sales executives
evaluate them carefully, regardless of the extent of their personalinvolvement in the preparation
Every forecast contains elements of uncertainty
All are based on assumptions
So a first step in evaluating a sales forecast is to examine the
assumptions (including any hidden ones) on which it is based
Sales executives should view each assumption critically
Sales executives should evaluate the accuracy and economic value of
the forecast as the forecast period advances
Forecasts should be checked against actual results, differencesexplained, and indicated adjustments made for the remainder of the
period
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