UNIT-2

Sales Forecasting Methods

Qualitative Sales Forecasting Methods

Executive Opinion Method:

o Involves collecting estimates from senior executives and averaging them to

produce a forecast.
o Pros: Quick, inexpensive, and easy to implement.
o Cons: Subject to bias and may lack systematic rigor; difficult to provide
detailed, territory-specific forecasts.
2. Delphi Method:
o Similar to the executive opinion method, but includes an expert panel both
from inside and outside the company, coordinated to achieve a consensus.
o Pros: High accuracy without influence or pressure, as forecasts are iterative
and anonymous.
o Cons: May be costly and time-consuming.
3. Salesforce Composite Method:
o Forecasts are created based on estimates from individual salespeople in the
field, which are then aggregated.
o Pros: Sales reps bring firsthand market knowledge; easy to break down by
product or region.
o Cons: Salespeople may underestimate to meet or exceed targets, introducing
potential bias.
4. Survey of Buyers’ Intentions:
o Gathers direct input from customers on their purchasing intentions through
surveys.
o Pros: Provides specific market insights, and can forecast both new and
existing products.
o Cons: Buyers may be unwilling to participate; the process can be costly and
time-intensive.
5. Test Marketing:
o Launches a product on a limited scale to gauge its market acceptance and sales
potential before a full launch.
o Types:
§ Full Test Marketing: Tests with a full promotional campaign.
§ Controlled Test Marketing: Product is selectively available in
specific stores.
§ Simulated Test Marketing: Mimics a shopping environment to see
how consumers respond.
o Pros: Provides detailed insights into customer reactions.
o Cons: Expensive, time-consuming, and may not represent broader market
behavior.
Quantitative Sales Forecasting Methods

Moving Average Method:

Calculates the average of sales over a specified number of past periods,

o
adjusting as new data replaces older data.
o Pros: Simple to calculate, low cost, effective for stable, short-term forecasts.
o Cons: Ineffective for volatile markets or long-term predictions.
2. Exponential Smoothing Method:
o Similar to the moving average but gives more weight to recent sales data. The
forecast is based on a smoothing constant (LLL) applied to the latest data.
o Pros: Simple, low-cost, accurate for short-term forecasting.
o Cons: Requires setting a smoothing constant, not suitable for long-term or
new product forecasting.

These methods offer distinct advantages depending on market conditions, data availability,
and time horizons.

Sales Budget
The sales budget provides a detailed estimate of expected sales volume and associated selling
expenditures. Key elements include:

• Expected Sales Volume: Derived from the company's sales forecast but often
adjusted slightly lower to mitigate risk.
• Breakdown of Sales: The budget is broken down by product type, territory, and
salespersons:
o Product-wise: Quantities of each product, average selling price per unit, and
total revenue.
o Territory-wise: Quantities projected for each territory along with revenue.
o Salesperson-wise: Volume targets over specific periods (yearly, quarterly,
monthly).

Selling expenditures in the sales budget typically include:

• Selling Expenses: Costs such as salaries, incentives, and travel for sales personnel.
• Administrative Expenses: Salaries for sales managers, office maintenance, and
associated costs.

Sales Budgeting Process

The sales budgeting process comprises several steps that ensure a structured approach,
aligning sales goals with broader organizational objectives.

• Step 1: Review the Situation

The sales manager should review the past budget performance
• – It helps to understand the deviations of actual performance against actual sales
budget.
 • Review of current & future marketing environment
• It helps to understand the SWOT in the external factors like competition, customers,
economy, technology, govt. policies and regulations
• This review will help to key top & middle level managers to come out with some
guidelines, assumptions, limitations for deciding the sales budgets for each
zone/region/territory
• Step 2: Communication
Clear communication is crucial for setting a well-aligned budget. The head of sales
sends written guidelines, formats, and timelines to relevant departments, ensuring all
involved understand the budget preparation process and their roles within it.
• Step 3: Preparation of Subordinate Budgets
If a bottom-up budgeting approach (composite method) is adopted, each level of
management, from regional to zonal, guides sales personnel in preparing their
respective budgets. Regional and zonal managers then review these budgets and,
along with a sales expenditure budget, send them to the national level.
• Step 4: Approval of the Sales Budget
The national sales manager collaborates with marketing to adjust the budget if
necessary before presenting it to top management. After thorough review and
discussion, top management approves the final budget.
• Step 5: Integration with Other Functional Areas
Once approved, the sales budget is shared with other departments like production,
finance, and HR, which may need to adjust their planning based on projected sales.

Methods of Sales Budgeting

Several methods can be used in preparing a sales budget, each offering different approaches
to estimate sales and related expenses:

• Percentage of Sales Method

Managers use this method by multiplying the sales value budget by various
percentages of each category of expenses
• Ex: Travel expenses - 0.3% of sales value of a territory
• Salaries – 2% of sales value of a territory
• Sales promotion expenditure – 5% of sales value of a territory
• The success of this method depends on the accuracy of sales forecast
• Executive Judgment Method
• The sale manger uses his judgement to decide the selling expenses for each category
based on his judgement, experience and by consulting the senior sales executives.
• Objective and Task Method
This method involves a thorough analysis of the sales objectives (volume and value)
and breaks down the tasks required to achieve them. It entails:
1. Developing sales strategies and identifying tasks.
2. Estimating the costs of implementing these tasks.
3. Summing all expenses and reviewing the costs against the expected sales
value and profit objectives.

This method ensures that the budget aligns closely with the company’s sales goals and
actionable strategies.
Sales Quota
• A sales quota is a specific sales target set by a company for its sales team over a
given time period.
• It’s a performance goal assigned to different sales units, such as regions, branches,
individual salespeople, or product lines.
• Sales quotas help companies track sales performance, motivate sales teams, and
identify areas of strength or weakness.

Types of Sales Quotas

Sales quotas come in several types, each designed to focus on different aspects of sales
performance:

• Sales Volume Quotas: These quotas focus on the number of units sold or the sales
revenue generated. They can be measured in:
o Monetary Value (e.g., dollars): Useful when salespeople handle multiple
products.
o Units Sold: Effective when sales teams sell only a few products.
o Points: Used when the company wants to incentivize sales of high-profit
items. For instance, selling one high-value item might earn more points than
multiple low-profit items.
• Financial Quotas: These focus on the financial performance rather than units sold,
including:
o Gross Margin Quotas: Calculated as sales revenue minus the cost of goods
sold. Sales managers are responsible for meeting these quotas without
necessarily managing manufacturing costs.
o Net Profit Quotas: Focus on net profit after deducting direct selling expenses
from the gross margin.
o Expense Quotas: Usually a percentage of sales, encouraging salespeople to
manage their expenses while achieving their targets.
• Activity Quotas: These are aimed at promoting specific sales activities, like meeting
with high-potential customers, collecting overdue payments, or conducting
promotional events. Activity quotas are often combined with sales volume and
financial quotas to ensure a balanced focus on both sales and strategic activities.
• Combination Quotas: A mix of the above quota types, providing a more
comprehensive target that aligns sales volume, financial goals, and important sales
activities.

Methods for Setting Sales Quotas

Several methods can be used to set sales quotas. The choice depends on the company’s sales
history, market data, and sales team structure.

• Total Market Estimates Method: Used by companies without extensive past sales
data. It involves estimating the total market demand, projecting the company’s market
share, and setting quotas based on each territory’s share of the forecasted company
sales.
 • Past Sales Method: This method uses past sales data (e.g., previous year or an
average of the last 3-5 years). Managers adjust the quota based on growth projections
for the coming year, using historical data as a baseline.
• Executive Judgment Method: Senior executives set quotas based on their experience
and knowledge. This method is common when companies or products are new and
there’s limited market data.
• Salespeople’s Estimates: Some companies ask their sales team to set their own
quotas. While this can empower the team, salespeople sometimes set goals that are
either too ambitious or too low, so it may require management oversight.
• Compensation Plan Method: Here, quotas align with the sales compensation plan to
ensure balanced earnings for the sales team. For example, a company might set a
quota that salespeople need to exceed before they start earning commissions,
balancing salary with commission potential.
• A company wants to pay a monthly salary of Rs 5000, and a commission of 3% on
monthly sales above Rs 1,00,000.
• The quota of Rs 1,00,000 is set in such a way that salesperson would find it very
difficult to cross total compensation of Rs 8000 per month (5000+3000)

Each method offers different benefits and challenges, helping managers choose the one that
best aligns with the company’s goals and market conditions.

Sales Territory
• A sales territory is a specific geographic area or customer group assigned to a
salesperson or sales team. This area includes both existing customers and potential
new customers within the assigned location.
• Sales territories are set up to ensure that each salesperson is responsible for a
particular area, helping companies manage customer interactions efficiently and reach
their sales goals.

Reasons for Establishing Sales Territories

Sales territories are created for several strategic reasons, each contributing to the overall
efficiency and effectiveness of the sales team:

1. Increase Market/Customer Coverage

With defined territories, salespeople can focus on covering their assigned areas fully.
This structured approach allows them to manage their time better and reach both
current and potential high-value customers in a cost-effective manner.
2. Control Selling Expenses and Time
Well-planned sales territories minimize travel costs and time, as salespeople cover
customers in specific, defined areas rather than moving around inefficiently. This
geographic organization reduces overlap and ensures travel is optimized.
3. Better Evaluation of Salesforce Performance
Sales quotas are often based on the potential of each territory, so the performance of
each salesperson can be evaluated in relation to their assigned area. Their results can
be tracked by account, product, and time period (weekly, monthly, quarterly, yearly),
allowing for closer management and more tailored guidance and motivation from
supervisors.
 4. Improved Customer Relationships
Regular, planned visits to customers within a territory allow salespeople to build
strong relationships. By understanding each customer’s needs over time, some
salespeople even develop partnership-like relationships, especially with high-
potential, profitable clients, which can benefit both the company and the customer.
5. Increase Salesforce Effectiveness
With well-designed territories, salespeople can focus on an optimal number of
customers, keeping their workload balanced and maximizing their productivity. The
territory boundaries help structure their efforts and ensure they can cover their area
effectively.
6. Avoid Duplication of Customer Coverage and Conflicts
Clear territory assignments reduce the risk of multiple salespeople approaching the
same customer, which can lead to customer frustration and wasted resources. It also
prevents conflicts between salespeople, as each is clear about their responsibilities and
boundaries.

In summary, sales territories help in efficiently managing resources, improving customer

satisfaction, and ensuring that the sales team performs optimally within clearly defined
areas.

Routing and Scheduling for salespeople.

1. Assigning Salespeople to Territories

When assigning salespeople to specific territories, sales managers consider two main criteria:

• Relative Ability of Salespeople: Managers evaluate salespeople based on factors

like:
o Product and market knowledge
o Past sales performance
o Communication and selling skills
• Salesperson’s Effectiveness in a Territory: Managers also assess how well a
salesperson’s background (social, cultural, and physical traits) matches the
characteristics of the assigned territory, aiming to maximize compatibility and
effectiveness in that region.

2. Managing Territorial Coverage

Sales managers are responsible for guiding salespeople on how to cover their assigned
territories effectively. This involves three main tasks:

• Planning Efficient Routes: Developing travel plans to minimize time and cost.
• Scheduling: Structuring the time salespeople spend with customers.
• Using Time-Management Tools: Ensuring salespeople have tools to manage their
time well.
3. Routing

Routing is the process of planning a salesperson’s travel path within a territory to make
customer visits as efficient as possible. Proper routing brings the following benefits:

• Reduction in Travel Time and Costs: By following an efficient route, salespeople

can reduce unnecessary travel time and expenses.
• Improved Territory Coverage: Routing helps ensure that all parts of the assigned
area are covered regularly.

The importance of routing varies based on the type of product being sold, whether fast-
moving consumer goods (FMCG), shopping goods, or capital goods, as each may require
different frequency and approaches in customer visits.

Procedure for Setting Up a Routing Plan:

1. Identify Customers on a Map: Locate both existing and potential customers on a
map.
2. Classify Customers: Group customers by their sales potential (high, medium, or
low).
3. Set Call Frequency: Determine how often each category of customers should be
visited.
4. Build a Route Plan: Focus routes around high-potential customers to maximize sales
impact

Common Routing Patterns:

Different patterns can be used depending on the territory layout:

• Base Pattern: Starting from a central location and covering the area in one consistent
loop.
• Straight Line or Hopscotch: Moving back and forth across the territory.

• Clover Leaf: A looping pattern that allows for returning to the base location
periodically.
4. Scheduling

Scheduling involves planning the timing of a salesperson’s visits and managing how their
time is allocated among customers and activities. Key steps in scheduling include:

• Setting Time Allocation: The sales manager defines major activities and allocates
time for each one.
• Recording Time Spent: Salespeople keep track of their time across activities over a
period, often two weeks.
• Reviewing and Adjusting: The sales manager and salesperson discuss how to
optimize time spent on core activities, ensuring focus on high-impact tasks.

Companies also establish call norms (standards) for sales visits, defining the frequency of
visits to both current and prospective customers based on their sales potential.

In summary, effective routing and scheduling improve sales coverage, optimize time, and
support relationship-building by helping salespeople strategically manage their territories.
These techniques aim to reduce costs, maximize customer engagement, and ensure that the
sales team spends time on high-value activities.