Forecasting your Sales

Introduction

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.

Creating the Sales Forecast for a Product

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.

Obtaining information on existing market demand

As a starting point for estimating market demand, a company needs to know the actual industry sales taking place in the market. This involves identifying its competitors and estimating their sales.

An industry trade association will often collect and publish (sometime only to members) total industry sales, although rarely listing individual company sales separately. By using this information, each company can evaluate its performance against the whole market.

This is an important piece of analysis. Say, for example, that Company A has sales that are rising at 10% per year. However, it finds out that overall industry sales are rising by 15% per year. This must mean that Company A is losing market share – its relative standing in the industry.

Another way to estimate sales is to buy reports from a marketing research firm such as AC Neilsen, Mintel etc. These are usually good sources of information for consumer markets – where retail sales can be tracked in great detail at the point of sale. Such sources are less useful in industrial markets which usually rely on distributors.

Estimating Future Demand

So far we have identified how a company can determine the current position:

Current Company Demand = Current Market Demand x Current Market Share

How can future market demand and company demand be forecast?

Very few products or services lend themselves to easy forecasting . These tend to involve a product whose absolute level or trend of sales is fairly constant and where competition is either non-existent (e.g. monopolies such as public utilities) or stable (pure oligopolies). In most markets, total demand and company demand are not stable – which makes good sales forecasting a critical success factor.

A common method of preparing a sales forecast has three stages:

(1) Prepare a macroeconomic forecast – what will happen to overall economic activity in the relevant economies in which a product is to be sold.
(2) Prepare an industry sales forecast – what will happen to overall sales in an industry based on the issues that influence the macroeconomic forecast;
(3) Prepare a company sales forecast – based on what management expect to happen to the company's market share

Sales forecasts can be based on three types of information:

(1) What customers say about their intentions to continue buying products in the industry
(2) What customers are actually doing in the market
(3) What customers have done in the past in the market

There are many market research businesses that undertake surveys of customer intentions – and sell this information to businesses that need the data for sales forecasting purposes. The value of a customer intention survey increases when there are a relatively small number of customers, the cost of reaching them is small, and they have clear intentions. An alternative way of measuring customer intentions is to sample the opinions of the sales force or to consult industry experts

Time Series Analysis

Many businesses prepare their sales forecast on the basis of past sales.

Time series analysis involves breaking past sales down into four components:

(1) The trend: are sales growing, "flat-lining" or in decline?
(2) Seasonal or cyclical factors. Sales are affected by swings in general economic activity (e.g. increases in the disposable income of consumers may lead to increase in sales for products in a particular industry). Seasonal and cyclical factors occur in a regular pattern;
(3) Erratic events; these include strikes, fashion fads, war scares and other disturbances to the market which need to be isolated from past sales data in order to be able to identify the more normal pattern of sales
(4) Responses: the results of particular measures that have been taken to increase sales (e.g. a major new advertising campaign)

Using time series analysis to prepare an effective sales forecast requires management to:

Smooth out the erratic factors (e.g. by using a moving average)
Adjust for seasonal variation
Identify and estimate the effect of specific marketing responses

Lets Win Together!
http://changeforgrowth.blogspot.com/


From Rajeev Kumar

New Sales Strategies for New Business Models

When strategies change, downstream tactics must change to support them. And when business models themselves change, even the downstream strategies must change.

One of those business model-change times is upon us, and requires a fundamental shift in sales strategy. In this case, it's about moving from a competitive model to what I'll call a commercial model.

The shift is dirt-simple to explain and understand. Yet it's anything but simple when it comes to executing on it. The shift from competition to commerce seems to undermine many unconscious habits and instincts we have acquired over the years.

In particular—selling based on competitive models is becoming not just passé, but positively dysfunctional. You might even call it "competitive disadvantage."

Business Models

Old approaches to selling were built to support old business models.

The old competitive business model. Most of us have been raised on the idea that business is fundamentally about competition. Sustainable competitive advantage. Winning. Gaining the competitive edge. Anti-trust legislation. The power of free markets. Be number one or number two in all your markets. Market share. Five forces of competition. These phrases and concepts are mother's milk to businesspeople of the last four decades.

They worked well, for a long time. They helped create complex corporate forms of organization which competed with each other to provide consumers with better and better solutions.

The new commercial business model. But things are changing radically. The benefits group that used to report to HR? It's now outsourced to a company providing benefits services under a 5-year contract. The old IT department? Partly shared-services, partly outsourced, heavily globalized.

The dominant change in business these days is not globalization, or networking, or outsourcing, but a potent blend of all three. Business is moving from direct reporting relationships to commercially contracted relationships; from in-house to outside resources; from vertically managed to horizontally coordinated; from command and control to influence; from vertically integrated companies to interwoven supply chains; from competing to collaborating.

It is moving from a competitive model of permanent corporate competitors to a commercialmodel of entities buying from and selling to each other.

And that changes how we must think about selling.

New Sales Strategies Needed

In the new business model, selling is more important than it used to be. But the same old sales approaches won't work. There is much more selling to be done; and the nature of the buyer-seller relationship is changing fundamentally.

More selling to be done. In the competitive model, buying was done at the front end of a company's business process, and selling was done at the back end. In between—a lot of internal transfers.

Every time a company outsources a function, an internal reporting relationship is replaced by an external commercial relationship. That requires selling where it didn't exist before.

When a company re-designs a business process, it defines discrete sub-processes which are candidates for outsourcing. Technology and global communications make global scale possible, driving down costs and making outsourcing even more likely. It all adds up to more outsourcing—more supply chain configurations—and more opportunities for selling.

Old sales models, being infrequent, were built around transactions—the one-night stands of the business world. They began with introductions, and drove for "closing"—in as short a time as possible—before moving on to the next "pitch" at the next "dog and pony show."

But selling is no longer an episodic, intermittent affair. It is now an ongoing, unceasing, integral form of relationship between buyer and seller. It doesn't just involve a raw materials supplier and an end user—it deals with everyone in between, from systems suppliers to recruiters to temp agencies. Commercial buy-sell relationships are no longer one night stands—they are frequent, pervasive, and ongoing.

Changing Relationship. In the competitive business model, sales was a function—one of several—whose role was to contribute to the sustainable competitive advantage of the corporation in its never-ending fight against Competitor X. Customers were either means to a larger end—poker chips in a game between competitors—or competitors themselves. 
The dominant sales approaches stressed keeping your cards close to your vest. Don't reveal information; don't quote price until you've established value; always be closing.

The competitive view implied zero-sum selling; either the customer is going to win, or I'm going to win, and since I get paid on each transaction, I will go for a win on every deal in every quarter.

That may have worked in a world of infrequent, one night stand commercial relationships. But in a world of interdependent supply chains, where customers want fewer suppliers with longer-term dependability, one-off hustling is a detriment.

Finally, in the old world, buyers knew what they wanted and could say so clearly to sellers. In the new world, with so much outsourced, buyers depend on suppliers not just for expertise, but for perspective, judgment and wisdom.

This means (as Jeff Thull points out) that doing a great job of listening and asking probing questions—consultative selling—is not enough. Customers depend on trusted suppliers to collaboratively help determine their needs.

Six Gut-Checks for Your Existing Sales Strategy

Check your existing sales model by asking questions in these six areas:

1. Confidentiality. Do you start by presuming confidentiality of information with your clients? Unless it's illegal or unambiguously harmful to someone, start by assuming you'll share it.

2. Proposals. Invite your clients to write all future proposals together with you, in the same room, at the same time. On the same side of the desk.

3. Client Plans. Do you write 1-year client plans? Or 3-year? Why not write 5-year plans—and review them for realism with your clients?

4. Purchasing and contracts. Stop trying to go around the contracts people; they are your new clients. Your old client said so. Deal with it, and start treating them as clients.

5. Long term value. Every time you negotiate a contract or sale, discuss with the client: Is this fair to each of us? If we did this deal ten more times, would it feel right? If not, how we can we redress the balance on the next nine?

6. Relationships, not transactions. You are not seeking one night stands. Let your competitor have those. You are not seeking transactions, but relationships. The best short-term performance does not come from short-term management—it comes from long-term management practiced consistently.

The old model of competition-based, me-vs.-my-client, transactional selling is slowly but surely going to die off. It is dying off because we are moving into a world that values long-term, collaborative relationships.

The value of sales is far higher in the commercial world we are moving into, if we can only remember the new rules for selling are different from the old rules. They are the rules of commerce—not the rules of competition.

Lets Win Together!
http://changeforgrowth.blogspot.com/


From Rajeev Kumar

Creating a Best Business Model

Determine whether your business will succeed by evaluating these six aspects. 

Great business models depend on developing three "green lights," or qualities that help the business succeed: finding high-value customers, offering significant value to customers, and delivering significant margins. Great business models also avoid three "red lights" that can derail a business: difficulties in satisfying customers, trouble maintaining market position, and problems generating funding for growth. The list below outlines key factors in determining whether your model meets each green light and avoids the red lights. Examine your own business to see if you meet the criteria for success and, more importantly, to correct any weaknesses you might have.

Green Lights
1. Acquire high-value customers.
High-value customers doesn't mean rich customers, but customers who meet the following requirements:

• Are easy to locate
• Allow you to charge a profitable price
• Are willing to try your product after minimal marketing expenses
• Can generate enough business to meet your sales and profit objectives

Customers don't necessarily need to be the end users of your product or service. They could be retailers, distributors, catalogs or whomever you sell your product or service to.  If your end users or distributors don't fit this profile, you can still meet this requirement by attracting high-value customers through partnerships or alliances with companies in the market. 

2. Offer significant value to customers.
There are a number of ways you can create significant value and competitive advantage, including the following:

• Unique advantages in features and benefits
• Better distribution through retail or distribution
• More complete customer solutions through alliances with other companies
• Lower pricing due to manufacturing efficiencies or pricing options
• Faster delivery, broader product line or more customization options

The rise of the internet, outsourcing and, most of all, the increased willingness of companies to partner in creative ways to serve customers has resulted in every industry creating innovation in business strategy. This gives you opportunities, but also makes it imperative that you stay on the creative edge to fend off competition.

3. Deliver products or services with high margins.
Better manufacturing costs due to overseas manufacturing is typically not the clear way to higher margins, as competitors will typically match your costs in the end. Higher margins come from having a product that can be made from an improved process or by having features that provide significant value and allow you to charge more. You can achieve high margins with other tactics, including the following:

• Use a more efficient distribution channel.
• Require less sales support and sales effort.
• Have an industry-leading lean manufacturing process.
• Offer more auxiliary products or other opportunities for revenue without increasing cost.

If you aren't sure of your industry's standard ratios, check out your industry reports.

Red Lights
1. Provide for customer satisfaction.
Consider whether it will be difficult--and therefore expensive--to satisfy customers once they buy. Some of the aspects of a business that create high customer satisfaction costs include:

• High warranty costs
• Extensive technical support
• Extensive installation requirement
• Extensive customer services 
• Interface problems with other equipment

Customer satisfaction costs, which occur after the sale, are red flags because the costs are typically high and don't produce revenue or profits. If your type of product might have high customer service costs, you need to configure your business to put these costs on someone else, either with partnerships or alliances or by restricting your sales to an aspect of the business that doesn't require customer satisfaction costs.

2. Maintain market position.
A good business model uses its resources to improve its market position, adding new products, features and customers or expanding into new applications. The red flags that indicate it will be difficult to maintain market position include:

• Two or three major customers buy most of your product.
• Major potential competitors control the distribution network.
• Technology changes rapidly and requires high-risk product development.
• There are alternative technologies being developed to meet the same need.
• You have well-funded potential competitors who could quickly move into your market.

Long term, your ability to hold market position is determined by the characteristics of the overall market. For example, a company involved in the semiconductor manufacturing business must adjust and guess right on constant changes in technology to hold market position. Sooner or later they will guess wrong and fail. 

3. Fund the business.
Startup costs, operating capital, personnel costs and overhead costs are just a small percentage of the funding requirements for any business. The question is whether the investments will have a high return and whether the business can grow without substantial new investments. Red flags for a business model regarding investments include:

• ROI is less than 25 percent in the first three years.
• Incremental production of products or services requires substantial additional investments.
• Fewer than 50 percent of the investment required will be used in revenue producing areas, such as sales and production.
• Investments have to be made prior to sales commitments.
• Industry as a whole has a poor ROI or poor profitability.

Money is available for the right plan and the right model. You'll find money available if your ROI is right and if you have financial leverage, which means your initial investment will allow you to double or triple sales without requiring any more funding.

Lets Win Together!
http://changeforgrowth.blogspot.com/


From Rajeev Kumar