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Types of forecasting
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 products market share in a particular industry and considering what will happen to that market share in the future.
(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.
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 AirInclusive Package Holiday
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)
A companys 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 companys market share will depend on the size and effectiveness of its marketing spending relative to competitors.
A sales target
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.
Sales Budget
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.
For Example
You can calculate your Gross Profit Margin as a percentage using the following formula Selling Price - Direct Cost /Selling Price x 100 = GPM% If you are buying a product in at 21.30 and marking it up by 180% you will sell it at 21.30 + 180% = 59.64 Therefore your Gross Profit Margin is 59.64 - 21.30 / 59.64 x 100 = 64.28% If your Overheads are: 12,000 you divide this by 64.28% to give you a sales figure of 18,668 If your Overheads are: 18,000 you divide this by 64.28% to give you a sales figure of 28,003 This is what the business must sell to break even.
In order to be financially viable your Resource Based Sales Forecast must, again, be greater than your Value Based Sales Forecast. If your Resource Based Forecast is lower than the market Based forecast it means that you will not be able to supply the demand. if they are the other way around it means that you will be able to easily keep up with demand. The weeks / months / annual Sales Forecast then becomes a realistic balance between all three and should be something achievable, with effort.
Qualitative
Execution Opinion Method Delphi Method Salesforce Composite Method Survey of Buyers Intentions Method Test Marketing Method
Quantitative
Moving Averages: Sales forecast for the next year =
Actual sales for Past3 or 6 yrs ________________________ Number of years (3 or 6 yrs)
Quantitative
Exponential Smoothing Method: Forecaster can allow sales in certain periods to influence the sales forecast more than the sales in other periods by using a smoothing constant (L)in the equation: = (L) (actual sales this yr) + (1-L) (this yrs sales forecast) Where (L) can range from zero to something less than 1.
Example
For the year 2004:
0.2 x 956 + 0.8 x 880 = 895/- Million
Quantitative
Decomposition: In this companies previous periods of sales data are broken down into major components, such as trend, cycle, seasonal, and erratic events. These components are than recombined to forecast the sales for the future period.
Example
For 2004: Sales in 2003 was 956/ Up 3% in tend, (956 x 1.03)=985 Dn 5% coz of Erratic events (985 x 0.95)=936 Dn 10% due to Cyclic recession (936 x 0.90)=842
Annual sales forecast is 842/ Quarterly will be 842/4=210, Seasonal variation up by 15% (210 x 1.15)=242 So the consistent salesforecast for other three quarters will be 842-242 /3=200 million.
Quantitative
Nave/Ratio: It is based on the assumption that what happened in the immediate past will continue to happen in the immediate future. Sales forecast for next year = Actual sales of this yr x actual sales of this yr / actual sales of last yr.
Example
For 2004: 956 x 956/948 = 964/- million.
Quantitative
Regression Analysis: It derives an equation based on relationship between the company sales(dependent variable x) and independent variables (y1, y2) which influences the sales. Y = a + bx
Quantitative
Econometric Analysis: In this many regression equations are built to forecast Industry sales, general economic conditions, or future events with the help of computer.