bud getting and forecasting

8/8/2019 Bud Getting and Forecasting

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Sales and Channel Management

Ramaiah Institute of Management Science


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Planning, Sales Forecasting,

and Budgeting


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LearningObjectives

To understand strategic planning, its linkageto strategic marketing and marketingmanagement

To know how sales strategy is developedfrom marketing strategy To learn basic terms used in forecasting,

different forecasting approaches, and

methods of sales forecasting To understand the purpose and the process

of sales budget


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StrategicPlanning

Strategic planning is the process of defininglong term objectives and tactics andcommitting resources to achieve them

Planning is necessary to decide at present as tohow, what, and when we propose to do

In a large organisation, planning is done atthree or four organisational levels -

CorporateDivisionProduct


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Organisation

For effective planning, operations, and control, a large multi-product / multi-business firm divides its major products /services into divisions / strategic business units ( SBUs)Each SBU has a separate business, a set of competitors andcustomers, and a manager responsible for strategicplanning, performance, and control

CorporateOffice

SBUA

SBUC

SBUB

Productx

Producty

Productz

OrganisationalLevels

Organisation Structure Type of Planning

Corporate CorporateStrategicPlanning

Division /Business Unit /

SBU

Divisional / SBUStrategicPlanning

ProductProduct /

OperationalPlanning


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Organisational Planning Type of

Planning

Role of Marketing Key Tasks Formal Name

Corporatestrategic

planning

Provide customer and competitioninformation Support customer orientation

Corporatemarketing

Divisional /SBU Strategic

planning

Provide customer and competition analysis Develop competitive advantage, targetmarkets, value proposition, positioning

Strategicmarketing

Product /functional or Operational

planning

Evolve and implement marketing planincluding marketing-mix strategy, and salesstrategy

Marketingmanagement


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Strategies Figure below shows how sales strategy is developed from

marketing strategy

MarketingStrategy

* IMC: Integrated Marketing Communication

Targetmarketstrategy (Long-term)

Marketing mixstrategy(Short-term)

Product /servicestrategy

Promotion /IMC*strategy

Pricestrategy

Distributionstrategy

Salespromotionstrategy

Advertisingstrategy

Personalselling / salesstrategy

Public relations &Publicity strategy

Direct marketingstrategy


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Classifying market segments and individualcustomers within a target segment Each firm should first decide on the target

market segments and if possible classifycustomers into high, medium and low sales &profit potential

Sales strategy is developed accordinglyRelationship strategy

Whether the firm should use transactional,value-added, or collaborative relationship Decide segments and individual customers to

whom collaborative relationship needs to beapplied


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(Continued)

Selling Methods Stimulus response

Formula

Need-satisfaction

Team selling

Consultative

Selection of appropriate selling method dependson relationship strategy


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Components of Sales Strategy(Continued)

Channel Strategy Company salesforce

Distributors

Franchisees

Agents & Brokers

Internet

Discount stores

Selection of a suitable channel depends on the exchangeprocess, products / services, and markets


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Sales Forecasting The purpose of a sales forecast is to Plan and Achievethe forecasted sales effectively

The forecast is also used by other functions: Manufacturing Plan for production and capacity Finance Plan for required investment and returns Purchase Plan for procurement at favorable terms HR manpower planning

Sales forecast is the forerunner for all planningactivities


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Basic Terms Used in SalesForecasting

Market demand for a product or service is theestimated total sales volume in a market (orindustry) for a specific time period in adefined marketing environment, under adefined marketing program or expenditure .Market demand is a function associated withvarying levels of industry marketingexpenditure.

Market (or industry) forecast (or market size) isthe expected market (or industry) demand atone level of industry marketing expenditure


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(Continued)

Market potential is the maximum market (or

industry) demand, resulting from a very high level of industry marketing expenditure, where furtherincreases in expenditure would have little effect onincrease in demand

Company demand is the companys estimated shareof market demand for a product or service atalternative levels of the company marketing efforts(or expenditures) in a specific time period

Market Potential

Market Forecast

Market Minimum

Fig. Market Demand Functions

Industry marketing expenditure

Marketdemand


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(Continued)

Company sales potential is the maximum estimated companysales of a product or service, based on maximum share (orpercentage) of market potential expected by the company

Company sales forecast is the estimated company sales of aproduct or service, based on a chosen (or proposed)marketing expenditure plan, for a specific time period, in aassumed marketing environment

Sales budget is the estimate of expected sales volume inunits or revenues from the companys products and services,and the selling expenses. It is set slightly lower than thecompany sales forecast, to avoid excessive risks


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ForecastingApproaches

Two basic approaches: Top-down or Break-down approach

Bottom-up or Build-up approach

Some companies use both approaches to

increase their confidence in the forecast


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Steps followed in Top-down /Break-down Approach Forecast relevant external environmental factors

Estimate industry sales or market potential

Calculate company sales potential = market potentialx company share

Decide company sales forecast (lower than companysales potential because sales potential is maximumestimated sales, without any constraints)


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Steps followed in Bottom-up /Build-up Approach

Salespersons estimate sales expected fromtheir customers

Area / Branch managers combine salesforecasts received from salespersons

Regional / Zonal managers combine salesforecasts received from area / branch managers

Sales / marketing head combines salesforecasts received from regional / zonalmanagers into company sales forecast, which ispresented to CEO for discussion and approval

l


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Sales ForecastingMethods

Qualitative Methods Quantitative Methods Executive opinion Moving averages

Delphi method Exponential smoothing

Salesforce composite Decomposition

Survey of buyersintentions

Nave / Ratio method

Test marketing Regression analysis

Econometric analysis


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Executive opinion method

Most widely used

Procedure includes discussions and / or average of all executives individual opinion

Advantages: quick forecast, less expensive

Disadvantages: subjective, no breakdown intosubunits

Accuracy: fair; time required: short to medium (1 4 weeks)


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Delphi method

Process includes a coordinator getting forecastsseparately from experts, summarizing the forecasts,giving the summary report to experts, who areasked to make another prediction; the process isrepeated till some consensus is reached

Experts are company managers, consultants,intermediaries, and trade associations

Advantages: objective, good accuracy

Disadvantages: getting experts, no breakdown intosubunits, time required: medium (3/4 weeks) to long(2/3 months)


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a es orce compos emethod

An example of bottom-up or grass-roots approach

Procedure consists of each salesperson estimatingsales. Company sales forecast is made up of allsalespersons sales estimates

Advantages: Salespeople are involved, breakdown intosubunits possible

Disadvantages: Optimistic or pessimistic forecasts,medium to long time required

Accuracy: fair to good (if trained)


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Survey of Buyers Intentions Method

Process includes asking customers about their intentionsto buy the companys products and services

Questionnaire may contain other relevant questions

Advantages: gives more market information, can forecastnew and existing products, good accuracy

Disadvantages: some buyers unwilling to respond, timerequired is long (3-6 months), medium to high cost


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Test Marketing Method

Methods used for consumer market testing: fullblown, controlled, and simulated test marketing

Methods used for business market testing: alpha

and beta testing

Advantages: used for new or modified products,good accuracy, minimizes risk of national launch

Disadvantages: Competitors may disturb if somemethods are used, medium to high cost, medium tolong time required


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Moving Average Method

Procedure is to calculate the average company salesfor previous years

Moving averages name is due to dropping sales inthe oldest period and replacing it by sales in thenewest period

Advantages: simple and easy to calculate, low cost,less time, good accuracy for short term and stable

conditions

Disadvantages: cannot predict downturn / upturn,not used for unstable market conditions and long-term forecasts


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Method

The forecaster allows sales in certain periods to influencethe sales forecast more than sales in other periods

Equation used: Sales forecast for next period=(L)(actual sales of this

year)+(1-L)(this years sales forecast), where (L) is a

smoothing constant, ranging greater than zero and lessthan 1 Advantages: simple method, forecasters knowledge

used, low cost, less time, good accuracy for short termforecast

Disadvantages: smoothing constant is arbitrary, not usedfor long-term and new product forecast


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Decomposition Method Process includes breaking down the companys previous periods

sales data into components like trend, cycle, seasonal, and erraticevents. These components are recombined to produce sales

forecast Advantages: Conceptually sound, fair to good accuracy, low cost,

less time Disadvantages: complex statistical method, historical data

needed, used for short-term forecasting only

Naive / Ratio Method Assumes: what happened in the immediate past will happen in

immediate future Simple formula used:

Advantages: simple to calculate, low cost, less time, accuracygood for short-term forecasting

Disadvantages: less accurate if past sales fluctuate

year last of sales Actual

year thisof sales Actual year thisof sales Actual year next for forecast Sales =


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Method

It is a statistical forecasting method Process consists of identifying causal relationship

between company sales (dependent variable, y) andindependent variable (x), which influences sales If one independent variable is used, it is called linear

(or simple) regression, using formula; y=a+bx, wherea is the intercept and b is the slope of the trend line

In practice, company sales are influenced by severalindependent variables, like price, population,promotional expenditure. The method used is multipleregression analysis

Advantages: Objective, good accuracy, predictsupturn / downturn, short to medium time, low tomedium cost

Disadvantages: technically complex, large historicaldata needed, software packages essential


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Method

Procedure includes developing many regressionequations representing (i) relationships betweensales and independent variables which influencesales, and (ii) interrelationships between variables.Forecast is prepared by solving these equations

Computers and software packages are used

Advantages: Good accuracy of forecasts of economicconditions and industry sales

Disadvantages: need expertise & large historicaldata, medium to long time, medium to high cost


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Accuracy?

Sales forecasting is an important & difficult

task Following guidelines may help in improving its

accuracy Use multiple (2/3) forecasting methods Select suitable forecasting methods, based on

application, cost, and available time Use few independent variables / factors, based on

discussions with salespeople & customers Establish a range of sales forecasts minimum,

intermediate, and maximum Use computer software forecasting packages


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What is a Sales Budget? It includes estimates of sales volume and selling expenses

Sales volume budget is derived from the company salesforecast generally slightly lower than the company salesforecast, to avoid excessive risks

Selling expenses budget consists of personal selling expensesbudget and sales administration expenses budget

Sales budget gives a detailed break-down of estimates of sales revenue and selling expenditure

Purposes of the Sales Budget Planning

Coordination Control


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Process

Many firms follow a process for preparationof annual sales and company budgets. Itgenerally includes: Review past, current, and future situations

Communicate information to all managers onbudget preparation guidelines, formats,timetable

Use build-up approach, starting with first-linesales managers

Get approval of sales budget from topmanagement

Prepare budgets of other departments

Key


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KeyLearnings

Strategic planning is deciding about the organizationslong-term objectives and strategiesStrategic marketing has a role at divisional or strategicbusiness unit (SBU) level of strategic planning by providingmarket information and developing competitive advantage,target markets, value propositionSales strategy is developed from marketing strategythrough marketing-mix and promotional strategiesComponents of sales strategy includes classification of market segments / customers, relationship strategy, sellingmethods, & channel strategy

ey earn ngs


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ey earn ngs(Continued)

Two basic approaches of forecasting are: top-down(or breakdown), and bottom-up (or build-up)Sales forecasting methods are broadly classified as:qualitative and quantitativeQualitative methods include executive opinion,delphi method, salesforce composite, survey of buyers intentions, test marketingQuantitative methods consist of moving averages,exponential smoothing, decomposition, nave/ratio,regression analysis, econometric analysis

Sales budget gives a detailed estimates of salesvolume and selling expenses. Its purposes areplanning, coordination, and control

bud getting and forecasting

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