Sales 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.
There is two technique of arc initiation, first TAPPING Technique and second SCRATCH Technique. TAPING Technique is generally use in GTAW and SCRATCH Technique is used for SMAW process.
Spyros G. Makridakis has written: 'Interactive forecasting' -- subject(s): Forecasting, Data processing 'Forecasting : methods and applications' -- subject(s): Forecasting
based on marketing research , feed-backs and other methods are used to get the data then any of forecasting techniques like scenarios , multi-scenarios or Delphi technique can be used
Methods to predict future data based on historical records
climatology method
There are many methods of sales forecasting. One method is to look at what has happened in the past and based on that, predict the future.
The demand for forecasting methods for new products vary from those for established product because the new products have not yet proven to have steady sales.
Some methods used for forecasting include using historical information and regression analysis. Analyzing historical information is important because future performance is a good indication of future performance. Regression analysis allows business to adjust their numbers based on differences in variables, which is beneficial if they expect to have significant changes that will make historical data invalid.
METHODS OF FORECASTING DEMANDBroadly the techniques of forecasting demand can be classified into1. Opinion polling methoda) Consumer survey method Complete enumeration surveySample survey and test marketingEnd-useb) Sales force opinion methodc) Experts' opinion method2. Statistical methodsa) Trend projection method Fitting trend by observationLeast square methodLeast square linear regressionTime series analysisMoving average and annual differenceExponential smoothingb) Barometric technique Leading; lagging and coincident indicatorsDiffusion indicesc) Regression methodd) Simultaneous equation method
Heuritic Detection: using a problem-solving technique in which the most appropriate solution of several found by alternative methods is selected at successive stages of a program for use in the next step of the program.
mean absoute
The two general approaches to forecasting are quantitative methods, which rely on historical data and mathematical models to predict future outcomes, and qualitative methods, which use expert judgment, market research, and other non-numeric factors to make forecasts.