Copyright © 2001 by Harcourt, Inc. All rights reserved.

CHAPTER 5

FORECASTING MARKET
DEMAND AND SALES BUDGETS

Copyright © 2001 by Harcourt, Inc. All rights reserved.

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:

 The importance of forecasting in a firm’s 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
Copyright © 2001 by Harcourt, Inc. All rights reserved.
 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.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

 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 organization’s marketing program.
It involves problem-solving technology composed of
people, knowledge, software, and hardware “wired” into
the sales management process.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

 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.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

A sales forecast is important for at least five reasons:
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 company’s
business and marketing plans, which are further broken
down into specific goals – marketing officer.
Copyright © 2001 by Harcourt, Inc. All rights reserved.
FIGURE 5.1 PLANNING/FORECASTING/BUDGETING SEQUENCE

M a r k e tin g P la n

S a le s F o r e c a s ts S a le s F o r c e B u d g e t

Copyright © 2001 by Harcourt, Inc. All rights reserved.

 THE FORECASTING PROCESS

The forecasting process refers to a series of

procedures used to forecast.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

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.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

FIGURE 5.2 THE FORECASTING PROCESS

F o r eca s t D e t er m i n e D e p en d e n t a n d D ev el o p F o r eca s t
O b j ect i v e I n d e p en d e n t V a r i a b l es P r o ced u r e

S el ect F o r eca s t
A n a l y s i s M et h o d
E v a l u a t e R es u l t s
v er s u s F o r eca s t
T o t a l F o r eca s t
P r o ced u r e

M a k e a n d F in a liz e P r es en t A s s u m p t i o n s G a t h er a n d A n a l y z e
F o r eca s t a b ou t D a ta D a ta

Copyright © 2001 by Harcourt, Inc. All rights reserved.

FIGURE 5.3 BASIC STEPS IN BREAKDOWN METHOD OF FORECASTING SALES

G e n e r a l E n v ir o n m e n t F o r e c a s t
I n d u str y S ales F o r ec ast
C o m p a n y S a le s P o te n tia l
C o m p a n y S a le s F o r e c a s t
P r o d u c t L in e s
I n d iv id u a l P r o d u c ts fo r
C u s t o m e r s - T e r r i t o r i e s - R e g i o n s - D i v i s i o n s - U .S .A .- W o r l d

Copyright © 2001 by Harcourt, Inc. All rights reserved.

Industry sales forecast, or market potential,
is the estimated sales for all sellers.

Company sales potential is the maximum

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

The company’s share of the estimated sales

for an entire industry is referred to as
market share.
Copyright © 2001 by Harcourt, Inc. All rights reserved.
 SALES FORECASTING
METHODS
Two categories of sales forecasting methods exist:

• Survey methods are qualitative and include

executive opinion, sales force
composite, and customer’s intention
surveys.
• Mathematical methods are test markets,
market factors, naïve models, trend analysis,
and correlation analysis.
Copyright © 2001 by Harcourt, Inc. All rights reserved.
FIGURE 5.4 THE MORE POPULAR OF MANY FORECASTING METHODS

S u r v e y M e th o d s M a th e m a tic al M e th o d s

E x e c u tiv e U s e r ’s
O p in io n E x p e c ta tio n T est M ark et R e g r e ssio n

N a iv e T ren d
S ale s F o r c e B u ild - to -
C o m p o s ite O rd er
M o v in g E x p o n e n tial
A v erag e S m o o th in g

Copyright © 2001 by Harcourt, Inc. All rights reserved.

SURVEY FORECASTING METHODS

Four basic survey methods are

• Executive Opinion
• Sales Force Composite
• User’s Expectations
• Build-to-Order

Copyright © 2001 by Harcourt, Inc. All rights reserved.

Executive Opinion

Executive forecasting is done in two ways:

1. By one seasoned individual (usually

in a small company).
2. By a group of individuals, sometimes
called a “jury of executive opinion.”

Copyright © 2001 by Harcourt, Inc. All rights reserved.

The group approach uses two methods:

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.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

Delphi Method

Administering a series of questionnaires

to panels of experts.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

Sales Force Composite

Obtaining the opinions of sales

personnel concerning future sales.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

User’s Expectations

Consumer and industrial companies

often poll their actual or potential
customers.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

Build-to-Order

Companies build final products only after

firm orders are placed.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

MATHEMATICAL FORECASTING
METHODS

Test markets are a popular method of

measuring consumer acceptance of new
products.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

FIGURE 5.5 CITIES COMMONLY USED AS TEST MARKETS – RESIDENTS ARE
MOST LIKELY TO SEE NEW PRODUCTS.

Sp ok an e, W A
E u gen e, O R
P o r tl a n d , M E

M a d is o n , W I S y ra c u se , N Y
E rie , P A
S a lt L a k e C ity, U T O m ah a, N E
T o le d o , O H J o h n s to w n , P A
F re s n o , C A
P e o ria , I L
B a k e r s fie ld , C A L e x in g to n , K Y
K n o x v ille , T N
C h a r lo tte , N C
O k l a h o m a C i ty , O K C h a tt a n o o g a , T N
C h a r l e s to n , S C
T u cson , A Z L ubbock, T X L i tt l e R o c k , A R S avan n ah , G A

B a to n R o u g e , L A J a c k s o n v ille , F L
B e a u m o n t, T X

C o r p u s C h risti, T X

Copyright © 2001 by Harcourt, Inc. All rights reserved.

Time Series Projections

Time series methods use chronologically

ordered raw data.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

Classical approach to time series analysis:

• The trend component.

• The seasonal component.
• The cyclical component.
• The erratic component.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

Naïve Method

This Year’s Sales

Last Year’s Sales
Next Year’s Sales = This Year’s Sales X

Copyright © 2001 by Harcourt, Inc. All rights reserved.

Moving Average

Moving averages are used to allow for

marketplace factors changing at different
rates and at different times.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

TABLE 5.1 EXAMPLE OF MOVING-AVERAGE FORECAST

SALES SALES FOR THREE-YEAR

PERIOD VOLUME THREE-YEAR PERIOD 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

Copyright © 2001 by Harcourt, Inc. All rights reserved.

 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 Year’s Sales = a (This Year’s Sales) + (1-a) (This Year’s Forecast)

Copyright © 2001 by Harcourt, Inc. All rights reserved.

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.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

FIGURE 5.6 A TREND FORECAST OF SALES

O b s e r v e d S a le s F o re c a s t S a le s
600

500

400 T ren d
L in e
300
S a le s

200

10 0

0
19 8 4 19 8 5 19 8 6 19 8 7 19 8 8 19 8 9 19 9 0
T im e

Copyright © 2001 by Harcourt, Inc. All rights reserved.

Regression Analysis

Regression analysis is a statistical method used to

incorporate independent factors that are thought to
influence sales into the forecasting procedure.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

FIGURE 5.7 REGRESSION ANALYSIS

L in e a r R e la tio n s h ip C u r v i l i n e a r R e l a ti o n s h i p
S a le s

0 S a le s
0
P o p u la tio n P o p u la tio n
(A ) (B )

Copyright © 2001 by Harcourt, Inc. All rights reserved.

FIGURE 5.8 QUESTIONS TO ANSWER TO IMPROVE CHANCES OF HITTING THE
FORECASTING BULL’S-EYE

d
re
in n c c id e
et u r c y
s
c a le g to n

M o ra
re S e sin c s C o

ld (s )
g gY u

d?

? ou st
F o d ea si u

ho
s t c ti A
an ncr B a Y o

se S h rec a
I e e
th a v

u od F o
H

Y o e th c h
14 0 %

M hi
13 0 %

U
12 0 %
110 %
F
B rea k d o w n O
H a v e Y o u D e v e lo p e d R
U s e M u ltip le
a G ood E
M a r k e t D e c i s i o n S u p p o r t S y s te m F o re c a stin g
S a le s F o r e c a s ti n g C
M e th o d s
P ro c e ss? A
B u i ld u p
S
T 90%
C o our

C o nd

80%
a
ul ce
S

ul So

70%
d sH

d ftw
O

th a

60%
u t elp

e re
Co H
sid ?

m el
e

pu p?
te
r

Copyright © 2001 by Harcourt, Inc. All rights reserved.

 TABLE 5.2 GUIDE TO FORECASTING

FORCASTING MATHEMATICAL COMPUTER

METHOD TIME SPAN SOPHISTICATION 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

User’s Expectations Short to medium Minimal Not essential Limited

Test Markets Medium Needed Needed Accurate

Naïve 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

Copyright © 2001 by Harcourt, Inc. All rights reserved.

 THE SALES MANGAGER’S
BUDGET

The sales force budget is the amount of money available

or assigned for a definite period, usually one year.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

BUDGET PURPOSES

• Planning
• Coordination
• Control

Copyright © 2001 by Harcourt, Inc. All rights reserved.

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

Copyright © 2001 by Harcourt, Inc. All rights reserved.

BUDGETS SHOULD BE FLEXIBLE

Sales, costs, prices, or the competition’s

marketing efforts are some factors that may be
higher or lower than expected.

Copyright © 2001 by Harcourt, Inc. All rights reserved.

 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 firm’s 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.
Copyright © 2001 by Harcourt, Inc. All rights reserved.