In this chapter three methods for sales forecasting are presented. They are top-down sales forecasting, bottom-up sales forecasting and synthetic sales forecasting, that is a combination of the former methods.
4.1. Top-down sales forecasting
Top-down sales forecasting also known as break-down sales forecasting is derived di-rectly from analyzes of market potential, from forecasts of market size or individual market segments, and the company’s estimates of market share, typically defined in the marketing plan. The calculation is simple, but the marketer needs to understand the sub-tleties and nuances of the market. The top-down sales forecast can be calculated using equation (Capon & Hulbert 2007, 166; Havaldar 2010, 121):
Sales forecast forecast market size forecast market share
In figure 16, the development of a top-down forecast is presented. The key steps in the procedure are step 2 and step 3. In step 2, examples of the methods used for forecasting industry sales are Delphi method and regression analysis. Delphi method embodies a questionnaire to which a group of experts responds. A moderator compiles results and formulates a new questionnaire that is submitted to the group. Therefore, there is a learning process for the group as it receives new information and there is no influence of group pressure of dominating individuals. In regression analysis a straight line is fit to past data generally relating the data value to time. The most common fitting tech-nique is least squares. (Chase, Jacobs & Aquilano 2007, 514; Havaldar 2010, 122.)
Figure 16 Development of a top-down forecast (Havaldar 2010, 122).
In step 3, in order to estimate the company’s share of the total industry sales, a number of factors have to be considered, including the company’s current market share, target customers and their perceptions about the company’s performance on key factors like quality, service and price in comparison with major competitors, and the company’s re-lationship with most significant competitors. With respect to step 4, the company sales forecast is usually lower than the company sales potential due to insufficient funds, in-crease in competition, or shortage of raw material. The last step of the procedure is breaking down the company sales forecast to different regions and territories is done based on market potential in different geographical areas. For this purpose, there are methods available such as market build-up method and multiple-factor index method.
(Havaldar 2010, 122.) In figure 17, an example of contents in a market share analysis in wind turbine industry is shown. In the analysis, the market share is composed according to region and also by turbine size.
In the market build-up method, the first step is to identify existing and potential busi-ness buyers in the geographical territory. The second step is to determine their potential purchases of the product under study. The final step is to add-up the business potential of all the buying companies to obtain a fairly accurate estimate of market potential for the product or service for a specific geographic territory. The approach produces accu-rate results if there is a list available of all potential buyers and good estimate of what each will buy. In practice, this information is not always easy to gather. (Havaldar 2010, 122; Kotler & Keller 2012, 110-111.)
Figure 17 Example - market share analysis (IHS Emerging Energy Research 2011).
In the multiple-factor index method, in order to estimate market potential for a geo-graphical area, a marketing company first identifies the factors that influence the sales of a product or a service instead of identifying individuals and households as they are very large in number. Generally, there is more than one sales factor that influences sales, for example, population, income and sales of related goods. These factors are giv-en certain weights, corresponding to the degree of sales opportunity. The company might adjust the market potential for additional factors, such as competitors’ presence, local promotional costs and seasonal factors. (Havaldar 2010, 122-123; Kotler & Keller 2012, 111.)
4.2. Bottom-up sales forecasting
Bottom-up sales forecasting also known as build-up sales forecasting encompasses the granularity and reality of sales by customer that is not included in the top-down fore-casts. Salespeople are in close interaction with the customers and can discuss their needs and requirements for the upcoming period. The company develops the overall forecasts by collecting forecasts from individual salespeople. (Capon & Hulbert 2007, 166;
Havaldar 2010, 123.)
In figure 18, the development of bottom-up sales forecast is described. The approach starts so that the company’s salespersons estimate or forecast the sales in their respec-tive territories. Salespersons are given guidance by their respecrespec-tive area or brands sales managers on how to get information from the existing and potential customers on the estimated purchases of the company’s products for the specified future time period.
Each area or branch manager then adds the forecasts received from the salespersons.
The manager sends the combined sales forecast figure for each product in units and val-ue to his/her supervisor, who is, regional or zonal sales manager. Each regional or zonal manager adds the sales forecast received from the area or branch managers, and sends the regional or zonal sales forecast to the sales marketing head. The head of sales or marketing repeats the process and presents the proposal of the company’s sales forecast to CEO for discussion, modification and approval. (Havaldar 2010, 123.)
Figure 18 Development of a bottom-up forecast (Havaldar 2010, 123).
4.3. Synthetic sales forecasting
The synthetic sales forecasting is a combination of the best features of top-down and bottom-up forecasting. The top-down forecast comes from the marketing planning pro-cess whereas the sales department independently prepares a bottom-up forecast. If the numbers in these forecasts are equal, the forecast is ready. Typically, the top-down sales forecast is higher, and sales managers and salespeople have to re-examine the forecasts customer by customer to see where increases are possible. These revised forecasts are the building blocks for an improved bottom-up sales forecast. Simultaneously, market-ing department revises the top-down forecast. Then the revised forecasts are compared and if they are not in agreement, a senior manager usually decides the forecast by an executive decision, and sales management apportions increases to individual salespeo-ple. (Capon & Hulbert 2007, 166.)