Part Two: Types of Sales Forecasting Series
#Past #Sales (Historical Method)
Personal judgment of sales forecasting can be beneficially supplemented with statistical and quantitative methods. Past sales are a reasonable basis; on this basis, future sales can be formulated and forecasted.
According to Kirkpatrick, today's sales activity flows into tomorrow's sales activities; last year's sales extend into this year's sales. This approach is adding or deducting a set of percentages to the sales of the previous year(s). For new industries and new products, this method is not suitable.
(a) Simple Sales Percentage:
Under this method, a sales forecast is made by adding simply a flat percentage of sales to forecast sales as given below:
Next year's sales = Present year sales + This year's sales/Last year's sales or = Present year sales + 10 or 5% of the present sale.
(b) Time Series Analysis:
Time-series analysis is a statistical method of studying historical data. It involves isolating long-time trends, cyclical changes, seasonal variations, and irregular fluctuations. Past sales figures are taken as a base, analyzed, and adjusted to future trends. The records and reports enable us to interpret the information and forecast future trends and trade cycles.
Pros:
(a) No guesswork creeps in.
(b) The Method is simple and inexpensive.
(c) This is an objective method.
Cons:
(a) 'Market is dynamic' is not considered.
(b) No provision for upswings and downswings in sales activities is made.
#Statistical #Methods
Statistical methods are superior techniques for sales forecasting because their reliability is higher than other techniques.
Trend Method, Graphical Method, Time-series Method, Freehand Method, Semi-average Method, Moving average Method, Method of least square, Correlation method, & Regression method.
The above statistical methods can easily be studied with the help of any statistics book. Apart from the above, the following factors may also be considered:
1. Availability of raw materials
2. Plant capacity
3. Government policies
4. Buying habits of consumers
5. Fashion changes
6. Distribution system
7. Financial capacity
8. Market competition
9. National income movement
10. Sales promotions.
Analytical and Statistical Methods
The Delphi method
The method relies on the critical assumption that forecasts from a group are generally more accurate than those from individuals. Therefore, the Delphi method aims to construct consensus forecasts from a group of experts in a structured, iterative manner. A facilitator is appointed to implement and manage the process.
A panel of experts is assembled, and forecasting tasks/challenges are set and distributed to the experts. Experts return initial forecasts and justifications. These are compiled and summarized to provide feedback. Feedback is provided to the experts, who now review their projections from the input. This step may be iterated until a satisfactory level of consensus is reached. Final forecasts are constructed by aggregating the experts' predictions. Each stage of the Delphi method comes with its challenges.
#End #Use #Method Sales Forecasting
Under the End Use Method, also called the User Expectation Method, the list of several product users under forecasting is prepared first, who are then asked about their purchasing patterns. Then from such information, the complete product demand forecast is ascertained.
The End-Use method is particularly suitable for Industrial Products such as raw materials or intermediary products because, unlike consumer goods, these are limited in number and can be surveyed exhaustively.
Also, the buyers are substantial in the case of industrial goods. In contrast, in the case of consumer goods, several thousands of buyers contribute to the total sales, where each account for an exceedingly small quantity.
#Market #Share #Method
The sales forecast begins with an estimate of market size. This is the total number of consumers or businesses in your trading area interested in purchasing your product or service. It's your target market, with a number attached to it. How many are there?
Once you have your market size, you need to estimate their consumption. How much are they currently buying? You can get information on past consumption through primary or secondary market research.
When you estimate the number of buyers and how much they buy each year, you can calculate total market demand by multiplying the two numbers together.
Total Market Demand = 10,000 manufacturers × $140 spent per year = $1,400,000
Estimated Market Share = 14%
Estimated Sales for one product = $1,400,000 × .14 = $196,000 in sales.
#Substitution #Method
In the Substitution Method, management first works on the existing product's sales forecast, using many forecasting methods, and then uses this data to forecast the sales of a new product that will be launched as a substitute for the old product.
This method is based on the premise that the new product often displaces the old product or old use patterns. Hence, the buying patterns of the senior development can be studied thoroughly to estimate the demand for its substitute product.
The marketing team works on the sales forecast of the existing products and then prepares the list of products and markets that are open for substitution by the new product.
#Market #Test
The Market Test is an experiment conducted before the commercialization (launch) of a new product to find out the facts about the product, such as Is the product the right one? Is the product reasonably priced? Etc. On the data of such findings, the MFG may either accept or drop the product idea.
Test marketing is the most reliable method of sales forecasting wherein the product is launched in a few selected companies to check the response of customers towards the product. On the data of such response, the MFG decides whether to continue the product on a large scale or not. The test marketing must be performed with utmost care; the marketers must select those areas for testing that depicts the true image of the overall market.
#Methods of #Demand #Forecasting
Demand forecasting allows MFG companies to gain insight into what their consumer needs through a variety of forecasting methods. These methods include predictive analysis, conjoint analysis, and the Delphi Method of forecasting.
Predictive analytics is the branch of advanced analytics which is used to make predictions about unknown future sales. Predictive analytics uses techniques from data mining, statistics, modeling, machine learning, and artificial intelligence to analyze current data to make predictions.
Conjoint analysis works by asking users to directly compare different features to determine how they value each one. When an mfg. Understands how its customers value its products or services' features, it can use the information to develop its pricing strategy.
These are tools you can use in your small business sales forecast business.
Smalladvisor
Recent Comments
5
These methods remind me of when I was studying economics and business at Kansas State University in the 90s--as relevant now as then!
jeff
I'm an MBA from Northwest Missouri State University, Maryville, MO, GO Bearcats. The world is a very small place. Thanks for the comment.
Smalladvisor
Wow, we aren't that far apart, although with my current vehicle situation, it might as well be a million miles! Good to know, my friend!
Jeff
I'm in a Ram 3500, 6.4L so I am parked...
Smalladvisor
I know what you mean, my friend!