Sales forecasting is used by businesses to estimate future sales or income. Sales-forecasting techniques, which can range from quite sophisticated to very simple, are grouped as quantitative or qualitative methods. The major qualitative methods used are jury of executive opinion, Delphi technique, sales force composite, and survey of buyer intentions. The major quantitative techniques include market tests, trend analysis, and exponential smoothing.
The jury of executive opinion technique involves, as the label suggests, gathering the opinions of executives within the organization. A simple, in-house survey asking executives what they think sales will be in the next quarter or year can yield a forecast. The technique is quick and inexpensive but assumes executives are knowledgeable about market conditions.
The Delphi technique is similar to the jury of executive opinion, except that opinions from people outside the organization may be solicited, and a series of questionnaires are used. In the Delphi technique (named after the Oracle of Delphi to whom ancient Greeks would travel and seek advice), results of each round of SURVEYS are aggregated and returned to the participants until a consensus forecast is reached. The Delphi technique is more timeconsuming and expensive to administer than a simple jury of executive opinion but is based on the considered opinions of those participating.
The sales-force-composite technique asks the sales team to forecast sales in their particular market. These forecasts are aggregated to yield an overall market forecast. The argument for sales-force-composite forecasting is that the sales team is closest to the customer and therefore most in touch with changing conditions in the marketplace. The weakness in the technique is that the sales team, particularly if the sales force compensation plan is based on exceeding a quota, will have an incentive to underestimate demand. Then, when sales exceed the forecast, the salespeople will look good and receive bonuses.
The survey of buyer intentions simply asks customers what they expect to purchase in the next time period. Similarly, a survey of purchasing managers’ intentions is a widely quoted indicator of expected changes in manufacturing output. The weakness of any buyer intentions’ survey is the difference between what people say they will do and what they actually do. For example, how often do people, both friends and in business, say, “I will call you” or “I will be in touch” but fail to follow through? Surveys of buyer intentions work well in situations where buyers and vendors have developed strong relationships, trusting and depending on each other.
Market tests are often used to forecast demand for new products. Most of the major franchise companies in the United States test new products in sample markets before rolling out the product for national distribution. Market tests give researchers quantitative data and, if representative of the overall market, can yield a predicted market demand. The disadvantages of markets tests are the time they take to implement, their costs, and the fact that they alert competitors to a company’s new product plans.
Trend analysis, or naïve forecasting, estimates future sales through analysis of historical trends. If sales have been growing by 4 percent annually in recent years, then they are likely to increase 4 percent in the next year. Trend analysis is quick, inexpensive, and usually accurate when market conditions are stable. Trend analysis assumes the future will be similar to the past and assumes there will be no changes in the marketing environment.
Exponential smoothing is similar to trend analysis, but greater consideration is given to recent data over data from the more distant past. In exponential smoothing, the last five years’ sales data might be used to forecast the next year’s sales, but instead of taking a simple average of the last five years, each year’s sales is weighted or multiplied by a factor greater or lesser than one. The benefits and weaknesses of exponential smoothing are the same as trend analysis, but exponential smoothing implicitly incorporates the impact of recent changes in market conditions.