Chapter 05

Copyright 2001 by Harcourt, Inc. All rights reserved.

FORECASTING MARKET
DEMAND AND SALES BUDGETS

The importance of forecasting in a firms marketing decision
support system.
The uses and different categories of sales forecasts.
The two forecasting methods survey and mathematical and
their different uses.
That the responsibility for approving the final forecast rests at
the top management level.
The need for knowledge of computers, because they are used
in forecasting and developing sales budgets.
LEARNING OBJECTIVES
The process of forecasting helps an organization make decisions; it
is necessary for determining information about future markets. This
chapter should help you understand:
MANAGING SALES
INFORMATION
Our charge is to design, build, and implement decision
support systems that help our field and marketing
managers make business decisions.

Dan McKee
Marketing decision support systems
manager for Marion Merrell Dow, Inc.
FORECASTING MARKET
DEMAND
A marketing decision support system (MDSS) is an
ongoing, future-oriented structure designed to generate,
process, store, and later retrieve information to aid
decision making in an organizations marketing program.
It involves problem-solving technology composed of
people, knowledge, software, and hardware wired into
the sales management process.
USES OF SALES FORECASTS
A sales forecast is the estimated dollar or unit sales for a
specific future time period based on a proposed marketing
plan and an assumed market environment.
1. A sales forecast becomes a basis for setting and
maintaining a production schedule manufacturing.
2. It determines the quantity and timing of needs for labor,
equipment, tools, parts, and raw materials purchasing,
personnel.
3. It influences the amount of borrowed capital needed to
finance the production and the necessary cash flow to
operate the business controller.
4. It provides a basis for sales quota assignments to various
segments of the sales force sales management.
5. It is the overall base that determines the companys
business and marketing plans, which are further broken
down into specific goals marketing officer.
A sales forecast is important for at least five reasons:
Marketing Plan
Sales Forecasts Sales Force Budget
FIGURE 5.1 PLANNING/FORECASTING/BUDGETING SEQUENCE
THE FORECASTING PROCESS
The forecasting process refers to a series of
procedures used to forecast.
A market factor is an item or element that
(1) exists in a market, (2) may be measured
quantitatively, and (3) is related to the
demand for a product or service.

A market index is simply a market factor
expressed as a percentage relative to some
base figure.
Forecast
Objective
Determine Dependent and
Independent Variables
DevelopForecast
Procedure
Select Forecast
Analysis Method
Total Forecast
Procedure
Gather andAnalyze
Data
Present Assumptions
about Data
Make andFinalize
Forecast
Evaluate Results
versus Forecast
FIGURE 5.2 THE FORECASTING PROCESS
FIGURE 5.3 BASIC STEPS IN BREAKDOWN METHOD OF FORECASTING SALES
General Environment Forecast
Industry Sales Forecast
Company Sales Potential
Company Sales Forecast
Product Lines
Individual Products for
Customers-Territories-Regions-Divisions-U.S.A.-World

Company sales potential is the maximum
estimated or potential sales the company
may reach in a defined time period under
given conditions.

The companys share of the estimated sales
for an entire industry is referred to as
market share.
Industry sales forecast, or market potential,
is the estimated sales for all sellers.
SALES FORECASTING
METHODS
Survey methods are qualitative and include
executive opinion, sales force composite,
and customers intention surveys.
Mathematical methods are test markets,
market factors, nave models, trend analysis,
and correlation analysis.
Two categories of sales forecasting methods exist:
SurveyMethods
Executive
Opinion
Users
Expectation
Sales Force
Composite
Build-to-
Order
Mathematical Methods
Test Market Regression
Naive Trend
Moving
Average
Exponential
Smoothing
FIGURE 5.4 THE MORE POPULAR OF MANY FORECASTING METHODS
SURVEY FORECASTING METHODS
Four basic survey methods are
Executive Opinion
Sales Force Composite
Users Expectations
Build-to-Order
Executive Opinion
1. By one seasoned individual (usually
in a small company).
2. By a group of individuals, sometimes
called a jury of executive opinion.
Executive forecasting is done in two ways:
1. Key executives submit the independent
estimates without discussion, and these are
averaged into one forecast by the chief
executive.
2. The group meets, each person presents
separate estimates, differences are
resolved, and a consensus is reached.

The group approach uses two methods:
Delphi Method

Administering a series of questionnaires
to panels of experts.
Sales Force Composite

Obtaining the opinions of sales
personnel concerning future sales.
Users Expectations

Consumer and industrial companies
often poll their actual or potential
customers.
Build-to-Order

Companies build final products only after
firm orders are placed.
MATHEMATICAL FORECASTING
METHODS

Test markets are a popular method of
measuring consumer acceptance of new
products.
Charlotte, NC
Erie, PA
Syracuse, NY
Toledo, OH
Lexington, KY
Knoxville, TN
Chattanooga, TN
Portland, ME
Charleston, SC
Savannah, GA
Jacksonville, FL
Baton Rouge, LA
Little Rock, AR
Omaha, NE
Oklahoma City, OK
Corpus Christi, TX
Beaumont, TX
Spokane, WA
Eugene, OR
Bakersfield, CA
Salt Lake City, UT
Madison, WI
Tucson, AZ
Lubbock, TX
Fresno, CA
Peoria, IL
Johnstown, PA
FIGURE 5.5 CITIES COMMONLY USED AS TEST MARKETS RESIDENTS ARE
MOST LIKELY TO SEE NEW PRODUCTS.
Time Series Projections

Time series methods use chronologically
ordered raw data.
The trend component.
The seasonal component.
The cyclical component.
The erratic component.
Classical approach to time series analysis:
Nave Method

Next Years Sales = This Years Sales X
This Years Sales
Last Years Sales
Moving Average

Moving averages are used to allow for
marketplace factors changing at different
rates and at different times.

PERIOD
SALES
VOLUME
SALES FOR
THREE-YEAR PERIOD
THREE-YEAR
MOVING AVERAGE
1 200
2 250
3 300 750
4 350 900 300
5 450 1100 ( 3) = 366.6
6 ?
Period 6 Forecast = 366.6
TABLE 5.1 EXAMPLE OF MOVING-AVERAGE FORECAST
Exponential Smoothing

Exponential smoothing is similar to the moving-
average forecasting method. It allows
consideration of all past data, but less weight is
placed on data as it ages.
Next Years Sales = a (This Years Sales) + (1-a) (This Years Forecast)

Trend Projections Least Squares

Eyeball fitting is simply a plot of the data
with a line drawn through them that the
forecaster feels most accurately fits the
linear trend of the data.
600
500
400
300
200
100
0
1984
Time
1985 1986 1987 1988 1989 1990
Observed Sales Forecast Sales
S
a
l
e
s
Trend
Line
FIGURE 5.6 A TREND FORECAST OF SALES
Regression Analysis

Regression analysis is a statistical method used to
incorporate independent factors that are thought to
influence sales into the forecasting procedure.
Linear Relationship
Population
(A)
S
a
l
e
s
0
Curvilinear Relationship
Population
(B)
S
a
l
e
s
0
FIGURE 5.7 REGRESSION ANALYSIS
Have You Developed
a Good
Sales Forecasting
Process?
Market Decision Support System
Breakdown
Use Multiple
Forecasting
Methods

Buildup
FIGURE 5.8 QUESTIONS TO ANSWER TO IMPROVE CHANCES OF HITTING THE
FORECASTING BULLS-EYE
H
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90%
80%
70%
60%
140%
130%
120%
110%
F
O
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C
A
S
T
TABLE 5.2 GUIDE TO FORECASTING
FORCASTING
METHOD

TIME SPAN
MATHEMATICAL
SOPHISTICATION
COMPUTER
NEED

ACCURACY
Executive Opinion Short to medium Minimal Not essential Limited
Delphi Method Medium to long Minimal Not essential Limited; good in dynamic
conditions
Sales Force Composite Short to medium Minimal Not essential Accurate under dynamic conditions
Users Expectations Short to medium Minimal Not essential Limited
Test Markets Medium Needed Needed Accurate
Nave Method Present to medium Minimal Not essential Limited
Moving Average Short to long Minimal Helpful Accurate under stable conditions
Exponential Smoothing Short to medium Minimal Helpful Accurate under stable conditions
Least Squares Short to long Needed Desirable Varies widely
Regression Analysis Short to Medium Needed Essential Accurate if variable relationships
stable
THE SALES MANGAGERS
BUDGET
The sales force budget is the amount of money available
or assigned for a definite period, usually one year.
Planning
Coordination
Control
BUDGET PURPOSES
TABLE 5.3 SALES FORCE OPERATING COSTS
1. Base salaries 4. Special incentives
a. Management 5. Office expenses
b. Salespeople 6. Product samples
2. Commissions 7. Selling aids
3. Other compensation 8. Transportation expenses
a. Social Security 9. Entertainment
b. Retirement plan 10. Travel
c. Stock options
d. Hospitalization
BUDGETS SHOULD BE FLEXIBLE

Sales, costs, prices, or the competitions
marketing efforts are some factors that may be
higher or lower than expected.
THE BOTTOM LINE
Because of the growing trend in business to centralize data
collections, the job of forecasting has become an integral part of a
firms marketing decision support system (MDSS).
A sales forecast is the estimated dollar or unit sales for a specific
future period based on a proposed marketing plan and an
assumed market environment.
Firms know sales forecasting is never 100 percent correct.
Two categories of sales forecasting methods are survey methods
and mathematical methods.
Because the sales forecast has a major impact on the company,
the top executives give final approval.
To create a sales forecast, sales managers should know how to
use a computer.

Chapter 05

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Copyright 2001 by Harcourt, Inc. All rights reserved.

Copyright 2001 by Harcourt, Inc. All rights reserved.

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