Note by Maxwell Ranasinghe on

Sales Objectives and Sales Forecasting for Marketing Planning

Sales Objectives

You dwelled on background for the marketing plan in the situation analysis that you make in the initial stages of the marketing plan. It is always better to analyse facts found in the situation analysis and develop a SWOT before you go further in to your marketing plan. Then the next step is to set your sales objectives. It will shed light on the whole marketing plan and give you the direction to design all other activities in a marketing plan.

Understanding the importance of Sales Objectives

Sales objectives are basically how much of goods and services that you are going to sell and what kind of sales volume that you hope to achieve in the marketplace. Most of the elements in a marketing plan are designed to meet sales objectives. Confirming the size of the target market and establishing realistic marketing objectives, to determining the amount of advertising and promotion to be budgeted, to the actual hiring of marketing and sales personnel to the number and kind of distribution channel utilized and, very important, to the amount of product produced or stocked.

Sales Objectives should be SMART

Sales objectives should be Specific, Measurable, Achievable, Realistic and Time specific. Objectives such as catch a substantial market share or increase sales by a big volume etc. are not SMART objectives. “Increase Chicken Flavoured Soya Meat sales by 20 % in the Western Province of Sri Lanka within the first year of operation”, is a SMART objective. The company may be selling many soya products, but here, it specifically says “Chicken Flavoured Soya Meat” and also the area that the sale is going to increase, so it is specific. It says that the company is going to increase sales by 20%, so it is measurable. 20% increase in a year is achievable and realistic. When the period ends, the company could measure and how much of sales it has achieved and compare with the projected sales. Further it indicates the period, within first year of operation, so it is time specific.The sales objectives could be for a short term or for a longer term. Further the profit expectations also could be projected at this time. It will help to prepare the marketing plan with a view of obtaining the level of profits expected.

Factors to consider in setting sales objectives

Quantitative as well as qualitative factors should be taken into consideration when sales objectives are set.

Quantitative factors

Sales Trends

Market potential, sales forecast and market share are all important elements in the setting of sales objectives. All these elements could be measured from taking historical data and the current tends in the market. If you do not expect anything to change dramatically, historical data could be a very good predictor. If changes are taking place different to the past trends then you got to take the future trends more into consideration. In the quantitative factors, market sales, company versus market sales, market share trend, market size, purchase rates of your target market should be analysed to have a realistic Sales objectives.

Budget, Profit and Pricing Considerations

Company’s budgets in the past will provide a good understanding about the company’s operating expenses and profit expectations. Sales expected from different products in different markets, level of profits projected and achieved will provide important information. Further, sales to different expenses ratios in the past also will provide more information in setting realistic sales and pricing and profit expectations.

Qualitative FactorsAll non quantitative factors that affect setting sales objective should be considered at this stage. There could be numerous factors in this element and only more prominent factors are discussed below briefly. Economic considerations: You need take the changes in the economy into consideration when deciding your sales objectives. It depend on what kind of economy you are facing, such as a boom period or a rescission period etc. many other factors such as per capita income, income distribution, interest rates, inflation, salary levels, employment and unemployment etc have impact on economic consideration. Further global economic trends such as American and other major economic financial crisis happened in year 2009 would have an effect on the economic consideration.

Competition: It is important take the analysis done in the business review section on competition into consideration when sales objectives are set. It is not an easy task to determine the impact of competition as you will find competitors act differently in many occasions than you expect them to react. Your product’s Life cycle: Your sales objectives will vary as to when you go along the product life cycle. E.g. you may have a higher sales objective, if you have introduced a product well into a growing market. Your sales objective may be low if your product is

on the declining stage. Therefore you need to take the PLC into consideration when you are setting the sales objectives.The mission and personality of your organization: What are your company’s expectations? What is its philosophy of doing business? Are you a conservative or careful or a moderate risk taker? Are you an aggressive and we can do it type of a company? All those factors will have a bearing on your sales objectives. Therefore you need to take all of them into consideration when sales objectives are set.

Process of setting sales objectives

Recommended process to set sales objectives is based on three tasks

1. Set individual sales objectives using three different quantitative methods2. Reconcile these different quantitative goals into composite sales objectives3. Adjust the quantitatively based composite sales objectives through the

interpolation of the relevant subjective qualitative factors, such as the economy, competition, and the personality of your organization

Setting Quantitative Sales Objectives Depending on the availability of data you could use following three different quantitative methods

Outside macroInside macroExpense plus

Each method will help you develop a sales objective estimate, and each estimate will provide one of three parameters from which to make realistic judgments in arriving at your final sales objectives. Each method can be used exclusively in arriving at a sales objective: however, the final outcome will not be as reliable as when you apply all three approaches. By using three different approaches, you develop sales objectives derived from three different sets of data, a safeguard against using only one set of data that might not be totally reliable or complete.

a) Outside macro approach First look outside your immediate company environment and estimate total or category sales for each of the next three years. Then estimate your company’s current and future share of the market for next three years. Finally, multiply the total market or category projections by your market share estimate for each of the next three-year projections for both unit and value of sales. E.g. If the market category sales for next three years are estimated at 100 million, 120 million and 150 million and your

company’s future share is estimated at 30%, 40% and 50% then the sales projections for next three for your company would be 30 million, 48 million and 60 million.

Market Trend Line Sale Projection

Rather than applying straight percentage increase to arrive at market volume for future years, you can statistically project a market trend line. If you need to project sales for year 2015, you can take the changes taken place during the period 2006 to 2010 and adopt the tend line to project the sales.Assume the amount of sales done in year 2006 was Rs. 800 million and the sales done in year 2010 was Rs. 900 million, you would perform the calculation as follows;

Increase in sales from 2006 to 2010 was Rs. (900 million – 800 million) Rs. 100 millionAverage per year = 100/4 = Rs. 25 millionProjected sales increase for next 5 years would be 25 million x 5 = 125 millionTherefore the projected sales for 2015 would be 900 million plus 125 million = Rs.1025 millionThis method is called the freehand and is the simplest method of determining trend lines. There are advanced trend line methods when there is a substantial fluctuations in sales, which are deal in detail in business statistics such as least squares method.

Company /product Trend Line Share Projections

To arrive at a share of market estimate, review the change in your company’s share over the past five years and project similar share change for the future. You can estimate a percentage point change or use the same freehand approach shown in the preceding example.

               

 

Market Sales Volume      

company share percent of the market    

  Value Rs.

Percentage change of value from previous years Units

Percentage change of units from previous year

Market Share Value

Percentage point change of Mkt Share value from previous year

Percentage of units of the market share

Previous 5 years              1998 952.2 13.3 449.1 5.10 5.00% 0.10% 4.00%1999 1067 12.1 484 7.77 5.10% 0.10% 4.70%

2000 1135.1 6.4 508.2 5.00 6.10% 1.00% 5.20%2001 1202.9 6.0 527.9 3.88 6.50% 0.40% 5.70%2002 1275 6.0 544 3.05 6.60% 0.10% 6.10%

               

Projections Next 3 years              

2003 1355.7 6.3 567.7 4.40 7.00% 0.40% 6.60%2004 1436.4 6.0 591.4 4.10 7.40% 0.40% 7.10%2005 1517.1 5.6 615.1 4.00 7.80% 0.40% 7.60%

               Three year sales projections for company    

would be as follows        

 Market Sales Value  

company sales percentage of value

Company sales value

Market Sales Units

Company unit share percent of market

Company unit sales

2003 1355.7   7.00% 94.9 567.7 6.60% 37.52004 1436.4   7.40% 106.3 591.4 7.10% 42.02005 1517.1   7.80% 118.3 615.1 7.60% 46.7

               

Inside Micro Approach

Review your organizations past sales records. Using the straight percentage increase or the trend line approach, arrival at projected three year sales for your company. From the top go further and using the straight percentage or trend line approach, estimate sales for each product or department, adding the projected sales of each product/department together for a three year company total. Reconcile this total with your initial sales estimate for the entire organization to determine an ultimate top projection.Next review your sales by Rupees and units from the bottom up to arrive at an estimate of a sales figure. Bottom up approach means estimating sales from where it generates, such as sales by each channel, store unit, or service office. Based on history and the current changes in the market, estimate sales for each bottom up sales generator and add them together to determine each year’s projection.

Reconcile the organizations sales estimates derived from top with those derived from the bottom to figure out a realistic value.

Expense plus approach

How mush of sales should be required to cover up the expenses. What amount of sales is required to brake even? This method is more short term in nature and is most useful in helping to arrive at your one year sales objective. However, you can develop sales objectives for each year for of a three year sales period by employing this approach. In order to prepare a sales objective by this method the budgeted expenses are required and even the expected profits also can be taken into consideration. Then you can find out how much of sales at what level gross margins should required covering the expenses and expected profits. E.g.If the total expenditure is Rs. 500,000 and the expected profit is Rs. 100,000, then the gross margin should cover at least Rs. 600,000. If the gross profit rate is 15%, then the sales target should be 4,000,000. ( 600,000 /15 * 100).

Alternative New product category approach

This method is useful for new products or product categories where there are no past records. Potential target market has to be estimated and then work backwards to figure out a value for sales objective. It could comprise of trial purchases, repeat purchases of the new product. The estimates would be highly speculative and uncertain if a good analysis of the potential market is not made.

Reconciling Sales Objectives

You can take all the estimated sales objectives obtained through different methods and make reconciliation. Then you can take an average of all or weighted average placing more emphasis on or two methods used. This reconciliation will help you to make a better decision on the sales objective than taking only a sales objective obtained by using one method.

Qualitative adjustments of quantitative sales

Once the quantitative assessment is taken about a sales objective, you could review the qualitative factors that could affect sales. Then taking them into consideration, you may increase or decrease your sales objective. E.g. A positive economic outlook may increase the sales estimate and negative outlook may decrease the sales estimates.

Other considerations

Include a rationale with the sales objectives. - It should summarise the process used and assumptions madeInvolve upper management in setting sales objectives.- Make sure that upper management of the company has an understanding of the sales objectivesPlan to revise the sales objectives – regularly the sales objectives should be reviewed and necessary adjustments should be made to make it current. It is better to have set periods in advance to review the sales objectives, so that it would become and integral part of the marketing control mechanism.

Sales Forecasting Guidelines

Steps in developing sales forecasts 1. Ascertain the sales forecast problem2. Identify, evaluate and select Forecasting Techniques.3. Implementing the forecasting system

1) Ascertaining the forecasting problem

What is the output requiredWhat is the time period the forecasting needed?Uses to be made of the forecastLevel of accuracyWhat kind of details required such as national, regional and local level sales, units, volumes etc

2. Identify, evaluate and select Forecasting Techniques.

There are several forecasting methods one could use. Each will have certain features and limitations, the user’s needs, resources and available data should be matched with the appropriate techniques. A forecaster can use one or more techniques into the forecasting process depending on the accuracy needed. One technique may be used for primary basis of forecast and the other technique may be used to check the validity of the primary forecasting method.

3. Implementation

Many forecasters begin with very formal forecasting approaches based on projections of past experience would with a subjective assessment of the future market environment.As the forecasting needs increase, more formalized methods are developed. Factors that often affect the choice of a forecasting system

include type of corporate planning process used, the complexity of the market, the number of products etc.

Forecasting techniques

The macro approaches used in forecasting are briefly described. Forecasting techniques generally follow two basic ways. The first involves direct estimates of brand sales. The second forecast brand sales as a product of several components such as industry sales and market share.

Delphi method

Delphi is a systematic, interactive forecasting method which relies on a panel of experts is based on the principle that forecasts from a structured group of experts are more accurate than those from unstructured groups or individuals.

The experts answer questionnaires in two or more rounds. After each round, a facilitator provides an anonymous summary of the experts’ forecasts from the previous round as well as the reasons they provided for their judgments. Thus, experts are encouraged to revise their earlier answers in light of the replies of other members of their panel. It is believed that during this process the range of the answers will decrease and the group will converge towards the "correct" answer. Finally, the process is stopped after a pre-defined stop criterion (e.g. number of rounds, achievement of consensus, and stability of results) and the mean or median scores of the final rounds determine the results.

The advantages of the method are that the forecast is based on opinion of experts in the field. This method would be very effective if the products a high tech as the experts may have a better idea of the future sales of such products.

The disadvantages are that the forecast needs great deal of time and some money to implement. Accuracy depends on participant’s knowledge and level of initial and continued participation. Further, the forecast needs and able and experienced coordinator.

Judgmental forecasting (Jury of executive Opinion)

This is one of the simplest and oldest methods. Top executives of the company are asked to forecast the company’s future sales. By averaging their views, a broad-base forecast is obtained. This is usually accurate than taking one single executives estimate. The estimates are taken from executives in functional areas such as marketing, finance, production and purchasing. The more factual information that these

executives have at their disposal, the more accurate their sales estimates will be. The advantage is that the forecast is made by people of different specializations and their view points, experience will affect their judgments. It will lead to make an estimate taking overall viewpoints of top executives. Further the method is easy and can be implemented quickly. In addition, the forecast are made by people within the company who would actually get involved in the process of achieving targets based on such forecast. It would make everybody commit to achieve what they have predicted. The major disadvantage is the forecast depends on the quality of the contribution made by the top executives, how much of data and information they have and how they have interpreted them to forecast the future. The outside view point of the market may not be considered much as much of the decision making would be based on primary research and data collection within the given time frame and cost constraints.

Sales Force Composite Method

This method compiles the estimates done by the sales force of the company. Sales people frequently make these estimates on their own on a specially designed form. Some times it could be in consultation with another sales person or the sales manager. The reports of sales people are analysed and totaled for the district or region. The district or regional mangers then evaluate the estimates by comparing it with the accuracy of past estimates of the sales. The resulting deviation factor and their own experience is involved in developing the final district estimate, which is forwarded to the head office, where a total sales estimates of all districts or markets that they operate are complied.The advantages of the method are that the forecast is based on specialiased knowledge of individuals who are in the front line where the sales occur. Further forecast is easily broken down to customer, product, brand or territory basis as it generates from the bottom of the sales force.The disadvantages of the method are that the forecasts is based on estimates of sales persons, who are often unaware of broad macro elements such PESTEEL factors and also of future plans of a company in detail. Forecast is based on sales person rough estimates and it may not be very systematic. Further, sales person tend to estimate lower than what is possible to achieve in the market place as they would be given targets based on the forecasts.

Other methods

There are many other techniques of sales forecasting which is beyond the context of this text. If one is really interested in sales forecasts, he or she must get acquainted with methods such as scenario technique, Cross impact analysis, relevant tree techniques and Correlation and regression analysis. Most of the methods that are based on mathematical equations are now converted to easy to use computer based application programs and all what one needs is the data to feed them.