Common sales forecasting techniques

BASED OK:

METHODS

What, people say

Surveys of buyers' intentions Composite sales force opinions Expert opinion Test markets Time-series analysis Leading indicators Statistical demand analysis

What people do What people have done anticipating what buyers are likely to do under a given set of Conditions, Very few products or servioes lend themselves to easy forecasting. Those that do generally involve a product with steady sales, or sales growth in a stable competitive situation. But most markets do not have stable total and company demand, so good forecasting becomes a key factor in company success. Poor forecasting can lead to excessively large inventories, costly price mark-downs, or lost sales due to being out of stock. The more unstable the demand, the more the company needs accurate forecasts and elaborate forecasting procedures.

Companies commonly use a three-stage procedure to arrive at a sales forecast. First they make an environmental forecast, followed by an industry forvwist, followed by a company salesforecast. The environmental forecast calls for projecting inflation, unemployment, interest rates, consumer spending and saving, business investment, government expenditures, net exports and other environmental events important to the company. The result is a forecast of gross national product, which is used along with other indicators to forecast industry sales. Then the company prepares its sales forecast assuming a certain share of industry sales.

Companies use several specific techniques to forecast their sales. Table 8.8 lists some of these techniques.'1' All forecasts build on one of three information bases: what people say, what people do, or what people have done. The first basis -what people say - involves surveying the opinions of buyers or those close to them, such as salespeople or outside experts. It includes three methods: surveys of buyer intentions, composites of sales force opinions and expert opinion. Building a forecast on what peopfe do involves another method, that of putting the product into a test market to assess buyer response. The final basis —'what people have done — involves analyzing records of past buying behaviour or using time-series analysis or statistical demand analysis.

Survey of Buyers' Intentions

One way to forecast what buyers will do is to ask them directly. This suggests that [lie forecaster should survey buyers. Surveys are especially valuable if the buyers have clearly formed intentions, will carry them out and can describe them to interviewers.

Several research organizations conduct periodic surveys of consumer buying intentions. These organizations ask questions like the following:

DO YOU INTEND TO BUY A GAR WITHIN THE NEXT SIX MONTHS?

No Slight Fair Good Strong For chance chance chance chance chance certain

This is a purchase probability .scu/e. In addition, the various surveys ask aboul: the consumer's present and future persona! finances and their expectations about the economy. Consumer durable goods companies subscribe to these indices to help them anticipate significant shifts in consumer buying intentions, so that they can adjust their production and marketing plans accordingly. For business buying, various agencies carry out intention surveys about plant, equipment :ind materials purchases. These measures need adjusting when conducted across nations and cultures. Overestimation of intention to buy is higher in southern Europe than it is in northern Europe and the United States, in Asia, the Japanese tend to make fewer overstatements than the Chinese.32

Composite of Sales Force Opinions

When buyer interviewing is impractical, the company may base its sales forecasts on information provided by the sales force. The company typically asks its salespeople to estimate sales by product for their individual territories. It then adds up the individual estimates to arrive at an overall sales forecast.

Few companies use their sales force's estimates without some adjustments. Salespeople are biased observers. They may be naturally pessimistic or optimistic, or they may go to one extreme or another because of recent sales setbacks or successes. Furthermore, they are often unaware of larger economic developments and do not always know how their company's marketing plans will affect future sales in their territories. They may understate demand so that the company will set a low sales quota. They may not have the time to prepare careful estimates or may not consider it worthwhile.

Accepting these biases, a number of benefits can be gained by involving the sales force in forecasting. Salespeople may have better insights into developing trends than any other group. After participating in the forecasting process, the salespeople may have greater confidence in their quotas and more incentive to achieve them. Also, such grass-roots' forecasting provides estimates broken down by product, territory, customer and salesperson.33

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