Chapter 10 Sales Forecasting, Quotas and Territory Management-Sales and Distribution Management

Block: Basics of Sales Management
I Ch-10 Sales Forecasting, Quotas and Territory Management
Chapter
10
Sales Forecasting, Quotas
and Territory Management
Copyright © 2010, S L Gupta
10-1 Sales and Distribution Management Text & Cases (2nd Edition) S L Gupta Excel Books
Introduction
Demand forecasting is a useful tool for planning. It helps estimate and forecast
the market share of a firm. Most firms are very often confronted with the task of
projecting future sales of their product. Identifying future sales problems is no
easy task for companies, small or big. In some cases, it is very difficult to get any
information about future market sales. Sales forecasting is not just an estimation
of sales; it is also matching sales opportunities — actual and potential—with sales
planning and procedures.
Sales Forecasting
Sales forecasting, according to Cundiff and Still, is “an estimate of sales during a
specified future period which is tied to a proposed marketing plan and which
assumes a particular set of uncontrollable and competitive forces.”
Cont….
Purpose of sales forecasting

Steps in Sales Forecasting
1. Defining the objectives to be achieved.
2. Dividing various products into homogeneous groups.
3. Analysing the importance of various factors to be studied for sales
forecasting.
4. Selecting the method.
5. Collecting and analysing the related information.
6. Drawing conclusions from the analysis made.
7. Implementing the decisions taken.
8. Reviewing and revising the sales forecasting from time to time. Cont….
Types of Forecast
The term forecast is ordinarily used to refer to a prediction for a future period.
Although this usage is technically correct, it is too general for managerial value.
Best Possible Expected Results
Results for given strategy
Industry Level Market Potential Market Potential
Firm Level Sales Potential Sales Potential
A useful way for viewing what is being forecast is presented in figure above.
Four different types of forecasts emerge from this classification scheme:
1. Market Potential
2. Market Forecast
3. Sales Potential
Cont….
4. Sales Forecast Copyright © 2010, S L Gupta
Meaning of Sales Forecast

 The sales forecast is a prediction of expected sales for a specified period. It
is an estimate for sales in rupee or units for a specified future period. In other
words, it is basic tool for anticipating the nature of future sales or sales
prediction.
 According to Cundiff and Still, is “an estimate of sales during a specified
future period which period is tied to a proposed marketing plan and which
assumes a particular set of uncontrollable and competitive forces”.
 According to Stuits, “A sales forecast is an estimate of the amount or unit for
a specified future period under marketing plan or programme”.
 According to American marketing Association “forecasting is an estimate of
sales in dollars or physical units for a specified future period under a
proposed marketing plan or program and under an assumed set of economic
and other forces outside the unit for which the forecast is made. The forecast
may be for a specified item of merchandise or for an entire line.” Cont….
Objectives of Sales Forecasting
The objectives of sales forecasting may be studied under the following two major
heads
1. Short - run (range) objectives.
2. Long - run (range) objectives.
Cont….
Short - Run objectives

1. Formulation of suitable production policy so as to meet the demand as per
the sales forecast.
2. To make provision for the regular supply of raw material etc. for the
production on the basis of sales forecast.
3. To make the best utilization of machines on the basis of sales forecast.
4. To make the regular supply of labour force as per the sales forecast.
5. To determine an appropriate price policy for a given period.
6. To estimate and provide the requisite working capital on the basis of sales
forecast.
7. To establish sales quotes targets for different market segments.
8. To estimate stock requirements for unfinished semi-unfinished and finished
products for a specified period of time.
Cont…. Copyright © 2010, S L Gupta
Long Run objectives

1. Estimating cash inflows from sales.
2. Provision for capital expenditure.
3. Planning of plant capacity so as to meet the future demand.
4. Manpower planning so that production and distribution may not suffer in the
long run.
5. Planning for acquisition of raw materials so as to meet the future demand.
6. Determining the dividend policy.
7. Establishing coordination between various functions of on organization.
8. Reducing selling costs and thereby reduces the final cost of the product.
9. To estimate future profits of the business enterprise. Cont….
Factors affecting or Influencing sales forecasting
1. Business Environment
2. Conditions within the industry
3. Internal Conditions of the business Enterprise
4. Socio Economic Conditions
5. Factors Affecting Export Trade
Cont….
Steps in sales Forecasting

1. Forecasting of General Economic Conditions: General economic
conditions within the boundaries of the nation, do effect the purchasing
power of the individual customer. The standard yardstick for assessing
general economic conditions will be: gross national product, per capita
income, personal income, personal consumption expenditure, level of
employment and the consumer price index.
2. Forecast of Industry Sales: Though the industry forecast are available from
the trade associations and chambers of commerce, a SWOT analysis of the
competition prevailing could throw much light on the competition within the
industry.
3. Preparing Forecast of Company Sales: The sales manager, while
preparing the sales budgets of the company has to forecast the company
and product sales for the coming year. The entire planning of the
organization for production, manpower, financial arrangements, and revenue
calculations will depend upon the accuracy of the sales manager's forecast.
Choice Modeling
Discrete choice, volumetric choice, and conjoint models are analytical methods
used to understand the behaviour of consumer purchasing behaviour. Our
Advanced Analytics Consultants set up carefully controlled experiments in which
consumers are simply asked to choose how many of each product to buy, given
predetermined sets of realistic conditions.
Discrete Modeling
Discrete choice modeling is ideal for each product categories where only one
purchase is made over a longer period of time. In these carefully controlled
experiments, current and potential customers are asked which one product they
would buy, given a realistic scenario including all of the products of services that
compete with one another in the marketplace. In each scenario, the respondent is
presented with a different set of marketing stimuli and asked which brand or
product would be purchased. The type of decision that the respondents make in
each scenario is designed to mimic the real market, and again each variables'
importance is being determined implicitly. Cont…. Copyright © 2010, S L Gupta
Marketing Mix Modeling
 Marketing mix modeling measures the potential value of all marketing inputs
and identifies marketing investments that are most likely to produce long-
term revenue growth.
 Typically, Marketing Mix Modeling involves the use of multiple regression

techniques to help predict the optimal mix of marketing variables. Regression
is based on a number of inputs and how these relate to an outcome such as
sales or profits. Once the model is built and validated, the input variables can
be manipulated to determine the net effect on a company's sales or profits.
Cont….
The data that go into creating a Marketing Mix Model include:

 Economic data
 Industry data
 Category data
 Advertising data
 Promotional data
 Competitive data
 Service data
 Product Data
 Pricing Data
 Features & Performance
 Market Outcome Data
 Sales
 Revenues
 Profits Copyright © 2010, S L Gupta
Methods of Sales Forecasting

Survey Method
The survey method is based on the opinion of buyers and consumers. It is useful
with respect to industrial products but not as far as consumer goods are
concerned.
Expert Opinion
According to this method, a company invites the opinions of executives and
consultants who are acknowledged experts in studying sales trends.
Market Studies Method
This method is commonly used by marketers for consumer goods. It is also
known as the Market Test Method. A market test provides data about consumers
and the marketing mix.
Sales Force Opinion Method
This method estimates the buyers intentions from experienced personnel in the
sales force. They can easily forecast for their respective territories. Cont….
Statistical Methods
Statistical methods are considered to be superior techniques of sales forecasting
because their reliability is higher than that of other techniques. Some commonly
used statistical methods are given below:
Commonly Used Statistical Methods
Trend Method
This method provides a rough trend of the forecast on the basis of past
experience. It does not, however, take into account the changing environment. It
is a simple method for business forecasting on the basis of past performance.
Graphical Method
According to this method, sales data are plotted on graph paper and a graph is
drawn for a number of years. This is a simple and inexpensive method.
Time Series Method
This method is used for long periods duly taking into account cyclical changes,
seasonal variations and irregular fluctuations. Cont…. Copyright © 2010, S L Gupta
Time Series Method y
Sales
(Rs)
0 X
1980 1981 1982 1983 1984 1985
Years
“A time series may be defined as a collection of magnitudes belonging to different
time periods, of some variable or composite variables, such as production of
steel, per capita income, gross national product, price of tobacco, or index of
industrial production.”
Ya-uin-chou
The Time Series Method shows the future trends of sales. The various techniques
that can be used for determining these trends are:
 Freehold or Graphical Method
 Semi-average Method
 Moving Average Method
 Method of Least Squares.
Cont….
Freehold or Graphical y
Method:
This is the simplest

method for obtaining a
straight line. A trend line Sales
is fitted by freehand to (Rs)
know future sales.
0 X
1988 1989 1990 1991 1992 1993
Years
Cont….
Semi Average Method: According to this method, data are divided into two parts,
preferably with the same number of years.
For example, (3-year semi-averages)

y
Year Sale
(Rs. Lakhs)
Actual Line
1986 12
1987 13
SALES
in (Rs) Trend Line
1988 12
Lakhs
1989 14
1990 13
1991 16 0 X
1986 1987 1988 1989 1990 1991
Years Cont….
Moving Averages Method: According to this method, a trend is determined by

moving averages. Therefore, out of the averages such as 3-yearly moving, 5-
yearly moving and 7-yearly moving average, the five-yearly moving average will
be computed as follows:
A BCDE BCDEF CDEFG

5 5 5
Least Squares Method: This method is most commonly used in practice. The
straight line is represented by the equation:
yc = a + bx
For example: Fit a straight line trend for the following series. Estimate the value
for 1994.
Year: 1987 1988 1989 1990 1991 1992 1993

Sales: 80 90 92 83 94 99 92 Copyright © 2010, S L Gupta
Sales Quotas
A sales quota refers to an expected routine assignment to sales units, such as
territory, districts and branches, etc. Sales quotas are also assigned to individual
salespeople over a particular time period and are used to plan, control and
evaluate the selling activities of a company. Sales control is facilitated by setting
quotas to use in appraising the performances of sales force. Sales control is
tightened by setting quotas on expenses and profitability of sales volume. They
are tactical in nature and are thus derived from the sales force strategic
objectives. Strategies stem from marketing and sales plans, sales forecasts and
budgets. Thus, quotas are guides for what needs to be done and a means of
evaluating how well they have been done.
Cont….
Importance of Sales Quotas

Sales quotas serve several purposes. The important objectives are shown in the
diagram below:
Quotas provide performance targets

Sales Quotas provide standards Sales
Quotas Quotas provide control Objectives
Quotas are motivational
Cont….
Purpose of setting sales quotas
 Provides Goals and Incentives.
 Evaluating performance.
 Controlling the sales person activities.
 Uncovering strengths and weaknesses in the selling structure.
 Improving the compensation Plan's effectiveness.
 Controlling the Selling Expenses.
 Enhancing sales Contests,
Cont….
Types of Sales Quotas

A sales organisation can set many types of quotas. The most common quotas are
shown in the following diagram:
Types of Sales Quotas
Sales Volume Profit Expense Activity Quota

Quotas Quotas Quotas Quotas Combinations
Cont….
Sales Volume Quotas

 Sales volume quotas include sales in rupees or product unit objectives for a
specific period of time.
 Sales volume quotas are first set for the entire year. The yearly total volume
quota is then set for shorter time periods, such as three months, six months
and nine months. The sales force is assigned their yearly quotas. Sales
targets are set for the year for sales force so their aim is to sell throughout
the year to achieve the total sales objective. The sales volume quotas can be
set in the following areas:
Product line
Product range
Sales Sales division
Valume Sales territories
Quotas Sales districts
Branch offices Cont….
Sales force (Individual)
Profit Quotas
Profit quotas are particularly useful in multiproduct companies where different

products contribute to varying levels of profits. It creates opportunities for the
salesperson to make optimum use of time.
Expense Quotas
Expense quotas are related to selling costs within reasonable limits. Some
companies set quotas for expenses linked to different levels of sales attained by
their sales force.
Cont….
Activity Quotas
These quotas set objectives for job-related duties useful for attaining
salespeople’s performance targets. Activity quotas are required to make the sales
force perform other activities which have long-term implications on the goodwill of
the firm. A sales organisation must set a target level of performance for
salespersons. Some common types of activity quotas prevalent in Indian
companies are as follows Common
Number of sales presentations made
Number of service calls made Types of
Number of dealers visited Activity
Number of calls made for recovery Quotas
Number of new accounts opened
Activity quotas typically should not be a basis for rewards. Rather, their
attachment helps the manager better understand why salespeople do or do not
meet their sales volume quota.
Quota Combinations
Many companies use a combination of these quotas. The two most commonly
combined are sales volume and activity quotas. These quotas influence selling
and non-selling activities. Copyright © 2010, S L Gupta
Territory Management
The following diagram outlines the activities of territory management
Trade relations/Dealer relations

Potential business
Coverage
Activities of Reports
Territory Territory size
Management Portfolio of accounts
Selling techniques
Customer satisfaction
Selling abilities
Cont….
Why Establish Sales Territories?
A company can develop and use sales territories for various reasons. Some of
the reasons are as follows:
 To obtain entire coverage of the market
 To establish a salesperson’s responsibility
 To evaluate performance
 To improve customer relations
 To reduce sales expenses
 To allow better matching of salesperson to customer

Cont….
 To benefit salespeople and the company.
Factors to be Considered when Designing Territories

In setting up or designing sales territories, these four steps must be followed:
1. Selecting a basic geographical control unit
2. Determining sales potentials in control unit
3. Combining control units into tentative territories
4. Adjusting for coverage difficulty and reallocating tentative territories.
The two basic approaches commonly used for designing sales territories are
discussed below.
 Market Build-up Approach
In this approach, an estimation of the present and potential products/services
demand is made by looking at how the market is built up, who are its
present/potential users, how much do they consume and at what frequency.
 The Workload Approach
This approach is designed by WJ Talley on the basis of the workload
performed by salespersons. Cont…. Copyright © 2010, S L Gupta
Assigning to Territories
 Some salespeople can handle large territories and the travel associated with
them, some territories require experienced salespeople, and some are best
suited to new people. There are a few factors a manager needs to consider
when assigning both new and experienced people to territories.
 In today’s complex selling situation, the presence of a well-thought-out daily
and weekly route plan is required for effective management. The following
may be considered basic route patterns of a territory.
Straight Line Pattern Base First Call
C
C Cont….
C Copyright © 2010, S L Gupta
Clover Leaf Pattern Major City Pattern
C
C
Base
2 3
C 1
C C
C 4 5
C
C
Sales Forecasting and Global Factors

 With globalization of trade, it has became difficult to forecast accurately,
more particularly for the long-term. Technological changes, sudden
appearance of a competitor from any part of the world, selling the goods at
competitive prices or even resorting to dumping, are some of the problems
faced in accurate forecasting. It requires a well planned effort to take into
consideration the factors influencing the sales strategy, so that sales
forecasting may be a realistic one, as far as possible. This situation has been
drafted by Warren J Keegan as follows:
 In terms of cultural sensitivity, consumer products are more sensitive than
industrial products. Another rule of thumb is that food products, especially
those served at home, frequently exhibit the highest degree of cultural
sensitivity. What this means to managers is that some products of daily life
use are likely to demand significant adaptation. Others require only partial
adaptation and still others are best left unchanged. Cont…. Copyright © 2010, S L Gupta
Companies differ in both their willingness and capability to identify and produce
profitable product adaptations. Unfortunately, too many stage one and stage two
companies are oblivious to the foregoing issues. One new-product expert has
described three stages that a company must go through as follows
1. Cave dweller. The primary motivation behind launching new products
internationally is to dispose of excess production or increase plant-capacity
utilization.
2. Naive nationalist. The company recognizes growth opportunities outside the
domestic market. It realizes that cultures and markets differ from country to
country and, as a result, it sees product adaptation as the only solution.
3. Globally sensitive. This company views regions or the entire world as a
competitive marketplace. New-product opportunities are evaluated across
countries, with some standardization planned as well as some differentiation
to accommodate cultural variances. New-product planning processes and
control systems are reasonably standardized. Copyright © 2010, S L Gupta

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Block: Basics of Sales Management

I Ch-10 Sales Forecasting, Quotas and Territory Management

Copyright © 2010, S L Gupta

Copyright © 2010, S L Gupta

Copyright © 2010, S L Gupta

Purpose of sales forecasting

Copyright © 2010, S L Gupta

Industry Level Market Potential Market Potential

Firm Level Sales Potential Sales Potential

Meaning of Sales Forecast

Copyright © 2010, S L Gupta

Objectives of Sales Forecasting

1. Short - run (range) objectives.

2. Long - run (range) objectives.

Copyright © 2010, S L Gupta

Short - Run objectives

Long Run objectives

Copyright © 2010, S L Gupta

Factors affecting or Influencing sales forecasting

2. Conditions within the industry

3. Internal Conditions of the business Enterprise

4. Socio Economic Conditions

5. Factors Affecting Export Trade

Copyright © 2010, S L Gupta

Steps in sales Forecasting

Marketing Mix Modeling

 Typically, Marketing Mix Modeling involves the use of multiple regression

Copyright © 2010, S L Gupta

The data that go into creating a Marketing Mix Model include:

Methods of Sales Forecasting

Copyright © 2010, S L Gupta

Time Series Method y

 Freehold or Graphical Method

 Moving Average Method

 Method of Least Squares.

Copyright © 2010, S L Gupta

This is the simplest

know future sales.

Copyright © 2010, S L Gupta

For example, (3-year semi-averages)

Copyright © 2010, S L Gupta

Moving Averages Method: According to this method, a trend is determined by

A BCDE BCDEF CDEFG

Year: 1987 1988 1989 1990 1991 1992 1993

Copyright © 2010, S L Gupta

Importance of Sales Quotas

Quotas provide performance targets

Copyright © 2010, S L Gupta

Purpose of setting sales quotas

 Provides Goals and Incentives.

 Controlling the sales person activities.

 Uncovering strengths and weaknesses in the selling structure.

 Improving the compensation Plan's effectiveness.

 Controlling the Selling Expenses.

 Enhancing sales Contests,

Copyright © 2010, S L Gupta

Types of Sales Quotas

Types of Sales Quotas

Sales Volume Profit Expense Activity Quota

Copyright © 2010, S L Gupta

Sales Volume Quotas

Profit quotas are particularly useful in multiproduct companies where different

Copyright © 2010, S L Gupta