Forecasting is a difficult area of management. Most managers believe they are good at forecasting. However, forecasts made usually turn out to be wrong! Marketers argue about whether sales forecasting is a science or an art. The short answer is that it is a bit of both.
Reasons for undertaking sales forecasts
Businesses are forced to look well ahead in order to plan their investments, launch new products, decide when to close or withdraw products and so on. The sales forecasting process is a critical one for most businesses. Key decisions that are derived from a sales forecast include:
- Employment levels required
- Promotional mix
- Investment in production capacity
Types of forecasting
There are two major types of forecasting, which can be broadly described as macro and micro:
Macro forecasting is concerned with forecasting markets in total. This is about determining the existing level of Market Demand and considering what will happen to market demand in the future.
Micro forecasting is concerned with detailed unit sales forecasts. This is about determining a product's market share in a particular industry and considering what will happen to that market share in the future.
The selection of which type of forecasting to use depends on several factors:
(1) The degree of accuracy required - if the decisions that are to be made on the basis of the sales forecast have high risks attached to them, then it stands to reason that the forecast should be prepared as accurately as possible. However, this involves more cost
(2) The availability of data and information - in some markets there is a wealth of available sales information (e.g. Clothing retail, food retailing, holidays); in others it is hard to find reliable, up-to-date information
(3) The time horizon that the sales forecast is intended to cover. For example, are we forecasting next weeks' sales, or are we trying to forecast what will happen to the overall size of the market in the next five years?
(4) The position of the products in its life cycle. For example, for products at the "introductory" stage of the product life cycle, less sales data and information may be available than for products at the "maturity" stage when time series can be a useful forecasting method.
The first stage in creating the sales forecast is to estimate Market Demand.
Definition:
Market Demand for a product is the total volume that would be bought by a defined customer group, in a defined geographical area, in a defined time period, in a given marketing environment. This is sometimes referred to as the Market Demand Curve.
For example, consider the UK Overseas Mass Market Package Holiday Industry. What is Market Demand?
Using the definition above, market demand can be defined as:
Defined Customer Group: Customers Who Buy an Air-Inclusive Package Holiday
Defined Geographical Area: Customers in the UK
Defined Time Period: A calendar year
Defined Marketing Environment: Strong consumer spending in the UK but overseas holidays affected by concerns over international terrorism
Recent data for the UK Overseas Mass Market Package Holiday market suggests that market demand can be calculated as follows:
Number of Customers in the UK: 17.5 million per calendar year
Average Selling Price per Holiday: £450
Estimate of market demand: £7.9 billion (customers x average price)
Stage two in the forecast is to estimate Company Demand
Company demand is the company's share of market demand.
This can be expressed as a formula:
Company Demand = Market Demand v Company's Market Share
For example, taking our package holiday market example; the company demand for First Choice Holidays in this market can be calculated as follows:
First Choice Holidays Demand = £7.9 billion x 15% Market Share = £1.2 billion
A company's share of market demand depends on how its products, services, prices, brands and so on are perceived relative to the competitors. All other things being equal, the company's market share will depend on the size and effectiveness of its marketing spending relative to competitors.
Step Three is then to develop the Sales Forecast
The Sales Forecast is the expected level of company sales based on a chosen marketing plan and an assumed marketing environment.
Note that the Sales Forecast is not necessarily the same as a "sales target" or a "sales budget".
A sales target (or goal) is set for the sales force as a way of defining and encouraging sales effort. Sales targets are often set some way higher than estimated sales to "stretch" the efforts of the sales force.
A sales budget is a more conservative estimate of the expected volume of sales. It is primarily used for making current purchasing, production and cash-flow decisions. Sales budgets need to take into account the risks involved in sales forecasting. They are, therefore, generally set lower than the sales forecast.
Reasons for undertaking sales forecasts
Businesses are forced to look well ahead in order to plan their investments, launch new products, decide when to close or withdraw products and so on. The sales forecasting process is a critical one for most businesses. Key decisions that are derived from a sales forecast include:
- Employment levels required
- Promotional mix
- Investment in production capacity
Types of forecasting
There are two major types of forecasting, which can be broadly described as macro and micro:
Macro forecasting is concerned with forecasting markets in total. This is about determining the existing level of Market Demand and considering what will happen to market demand in the future.
Micro forecasting is concerned with detailed unit sales forecasts. This is about determining a product's market share in a particular industry and considering what will happen to that market share in the future.
The selection of which type of forecasting to use depends on several factors:
(1) The degree of accuracy required - if the decisions that are to be made on the basis of the sales forecast have high risks attached to them, then it stands to reason that the forecast should be prepared as accurately as possible. However, this involves more cost
(2) The availability of data and information - in some markets there is a wealth of available sales information (e.g. Clothing retail, food retailing, holidays); in others it is hard to find reliable, up-to-date information
(3) The time horizon that the sales forecast is intended to cover. For example, are we forecasting next weeks' sales, or are we trying to forecast what will happen to the overall size of the market in the next five years?
(4) The position of the products in its life cycle. For example, for products at the "introductory" stage of the product life cycle, less sales data and information may be available than for products at the "maturity" stage when time series can be a useful forecasting method.
The first stage in creating the sales forecast is to estimate Market Demand.
Definition:
Market Demand for a product is the total volume that would be bought by a defined customer group, in a defined geographical area, in a defined time period, in a given marketing environment. This is sometimes referred to as the Market Demand Curve.
For example, consider the UK Overseas Mass Market Package Holiday Industry. What is Market Demand?
Using the definition above, market demand can be defined as:
Defined Customer Group: Customers Who Buy an Air-Inclusive Package Holiday
Defined Geographical Area: Customers in the UK
Defined Time Period: A calendar year
Defined Marketing Environment: Strong consumer spending in the UK but overseas holidays affected by concerns over international terrorism
Recent data for the UK Overseas Mass Market Package Holiday market suggests that market demand can be calculated as follows:
Number of Customers in the UK: 17.5 million per calendar year
Average Selling Price per Holiday: £450
Estimate of market demand: £7.9 billion (customers x average price)
Stage two in the forecast is to estimate Company Demand
Company demand is the company's share of market demand.
This can be expressed as a formula:
Company Demand = Market Demand v Company's Market Share
For example, taking our package holiday market example; the company demand for First Choice Holidays in this market can be calculated as follows:
First Choice Holidays Demand = £7.9 billion x 15% Market Share = £1.2 billion
A company's share of market demand depends on how its products, services, prices, brands and so on are perceived relative to the competitors. All other things being equal, the company's market share will depend on the size and effectiveness of its marketing spending relative to competitors.
Step Three is then to develop the Sales Forecast
The Sales Forecast is the expected level of company sales based on a chosen marketing plan and an assumed marketing environment.
Note that the Sales Forecast is not necessarily the same as a "sales target" or a "sales budget".
A sales target (or goal) is set for the sales force as a way of defining and encouraging sales effort. Sales targets are often set some way higher than estimated sales to "stretch" the efforts of the sales force.
A sales budget is a more conservative estimate of the expected volume of sales. It is primarily used for making current purchasing, production and cash-flow decisions. Sales budgets need to take into account the risks involved in sales forecasting. They are, therefore, generally set lower than the sales forecast.