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Sales and Channel Management
Ramaiah Institute of Management Science
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Planning, Sales Forecasting,
and Budgeting
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LearningObjectives
To understand strategic planning, its linkageto strategic marketing and marketingmanagement
To know how sales strategy is developedfrom marketing strategy To learn basic terms used in forecasting,
different forecasting approaches, and
methods of sales forecasting To understand the purpose and the process
of sales budget
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StrategicPlanning
Strategic planning is the process of defininglong term objectives and tactics andcommitting resources to achieve them
Planning is necessary to decide at present as tohow, what, and when we propose to do
In a large organisation, planning is done atthree or four organisational levels -
CorporateDivisionProduct
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Organisation
For effective planning, operations, and control, a large multi-product / multi-business firm divides its major products /services into divisions / strategic business units ( SBUs)Each SBU has a separate business, a set of competitors andcustomers, and a manager responsible for strategicplanning, performance, and control
CorporateOffice
SBUA
SBUC
SBUB
Productx
Producty
Productz
OrganisationalLevels
Organisation Structure Type of Planning
Corporate CorporateStrategicPlanning
Division /Business Unit /
SBU
Divisional / SBUStrategicPlanning
ProductProduct /
OperationalPlanning
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Organisational Planning Type of
Planning
Role of Marketing Key Tasks Formal Name
Corporatestrategic
planning
Provide customer and competitioninformation Support customer orientation
Corporatemarketing
Divisional /SBU Strategic
planning
Provide customer and competition analysis Develop competitive advantage, targetmarkets, value proposition, positioning
Strategicmarketing
Product /functional or Operational
planning
Evolve and implement marketing planincluding marketing-mix strategy, and salesstrategy
Marketingmanagement
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Strategies Figure below shows how sales strategy is developed from
marketing strategy
MarketingStrategy
* IMC: Integrated Marketing Communication
Targetmarketstrategy (Long-term)
Marketing mixstrategy(Short-term)
Product /servicestrategy
Promotion /IMC*strategy
Pricestrategy
Distributionstrategy
Salespromotionstrategy
Advertisingstrategy
Personalselling / salesstrategy
Public relations &Publicity strategy
Direct marketingstrategy
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Classifying market segments and individualcustomers within a target segment Each firm should first decide on the target
market segments and if possible classifycustomers into high, medium and low sales &profit potential
Sales strategy is developed accordinglyRelationship strategy
Whether the firm should use transactional,value-added, or collaborative relationship Decide segments and individual customers to
whom collaborative relationship needs to beapplied
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(Continued)
Selling Methods Stimulus response
Formula
Need-satisfaction
Team selling
Consultative
Selection of appropriate selling method dependson relationship strategy
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Components of Sales Strategy(Continued)
Channel Strategy Company salesforce
Distributors
Franchisees
Agents & Brokers
Internet
Discount stores
Selection of a suitable channel depends on the exchangeprocess, products / services, and markets
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Sales Forecasting The purpose of a sales forecast is to Plan and Achievethe forecasted sales effectively
The forecast is also used by other functions: Manufacturing Plan for production and capacity Finance Plan for required investment and returns Purchase Plan for procurement at favorable terms HR manpower planning
Sales forecast is the forerunner for all planningactivities
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Basic Terms Used in SalesForecasting
Market demand for a product or service is theestimated total sales volume in a market (orindustry) for a specific time period in adefined marketing environment, under adefined marketing program or expenditure .Market demand is a function associated withvarying levels of industry marketingexpenditure.
Market (or industry) forecast (or market size) isthe expected market (or industry) demand atone level of industry marketing expenditure
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(Continued)
Market potential is the maximum market (or
industry) demand, resulting from a very high level of industry marketing expenditure, where furtherincreases in expenditure would have little effect onincrease in demand
Company demand is the companys estimated shareof market demand for a product or service atalternative levels of the company marketing efforts(or expenditures) in a specific time period
Market Potential
Market Forecast
Market Minimum
Fig. Market Demand Functions
Industry marketing expenditure
Marketdemand
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(Continued)
Company sales potential is the maximum estimated companysales of a product or service, based on maximum share (orpercentage) of market potential expected by the company
Company sales forecast is the estimated company sales of aproduct or service, based on a chosen (or proposed)marketing expenditure plan, for a specific time period, in aassumed marketing environment
Sales budget is the estimate of expected sales volume inunits or revenues from the companys products and services,and the selling expenses. It is set slightly lower than thecompany sales forecast, to avoid excessive risks
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ForecastingApproaches
Two basic approaches: Top-down or Break-down approach
Bottom-up or Build-up approach
Some companies use both approaches to
increase their confidence in the forecast
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Steps followed in Top-down /Break-down Approach Forecast relevant external environmental factors
Estimate industry sales or market potential
Calculate company sales potential = market potentialx company share
Decide company sales forecast (lower than companysales potential because sales potential is maximumestimated sales, without any constraints)
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Steps followed in Bottom-up /Build-up Approach
Salespersons estimate sales expected fromtheir customers
Area / Branch managers combine salesforecasts received from salespersons
Regional / Zonal managers combine salesforecasts received from area / branch managers
Sales / marketing head combines salesforecasts received from regional / zonalmanagers into company sales forecast, which ispresented to CEO for discussion and approval
l
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Sales ForecastingMethods
Qualitative Methods Quantitative Methods Executive opinion Moving averages
Delphi method Exponential smoothing
Salesforce composite Decomposition
Survey of buyersintentions
Nave / Ratio method
Test marketing Regression analysis
Econometric analysis
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Executive opinion method
Most widely used
Procedure includes discussions and / or average of all executives individual opinion
Advantages: quick forecast, less expensive
Disadvantages: subjective, no breakdown intosubunits
Accuracy: fair; time required: short to medium (1 4 weeks)
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Delphi method
Process includes a coordinator getting forecastsseparately from experts, summarizing the forecasts,giving the summary report to experts, who areasked to make another prediction; the process isrepeated till some consensus is reached
Experts are company managers, consultants,intermediaries, and trade associations
Advantages: objective, good accuracy
Disadvantages: getting experts, no breakdown intosubunits, time required: medium (3/4 weeks) to long(2/3 months)
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a es orce compos emethod
An example of bottom-up or grass-roots approach
Procedure consists of each salesperson estimatingsales. Company sales forecast is made up of allsalespersons sales estimates
Advantages: Salespeople are involved, breakdown intosubunits possible
Disadvantages: Optimistic or pessimistic forecasts,medium to long time required
Accuracy: fair to good (if trained)
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Survey of Buyers Intentions Method
Process includes asking customers about their intentionsto buy the companys products and services
Questionnaire may contain other relevant questions
Advantages: gives more market information, can forecastnew and existing products, good accuracy
Disadvantages: some buyers unwilling to respond, timerequired is long (3-6 months), medium to high cost
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Test Marketing Method
Methods used for consumer market testing: fullblown, controlled, and simulated test marketing
Methods used for business market testing: alpha
and beta testing
Advantages: used for new or modified products,good accuracy, minimizes risk of national launch
Disadvantages: Competitors may disturb if somemethods are used, medium to high cost, medium tolong time required
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Moving Average Method
Procedure is to calculate the average company salesfor previous years
Moving averages name is due to dropping sales inthe oldest period and replacing it by sales in thenewest period
Advantages: simple and easy to calculate, low cost,less time, good accuracy for short term and stable
conditions
Disadvantages: cannot predict downturn / upturn,not used for unstable market conditions and long-term forecasts
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Method
The forecaster allows sales in certain periods to influencethe sales forecast more than sales in other periods
Equation used: Sales forecast for next period=(L)(actual sales of this
year)+(1-L)(this years sales forecast), where (L) is a
smoothing constant, ranging greater than zero and lessthan 1 Advantages: simple method, forecasters knowledge
used, low cost, less time, good accuracy for short termforecast
Disadvantages: smoothing constant is arbitrary, not usedfor long-term and new product forecast
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Decomposition Method Process includes breaking down the companys previous periods
sales data into components like trend, cycle, seasonal, and erraticevents. These components are recombined to produce sales
forecast Advantages: Conceptually sound, fair to good accuracy, low cost,
less time Disadvantages: complex statistical method, historical data
needed, used for short-term forecasting only
Naive / Ratio Method Assumes: what happened in the immediate past will happen in
immediate future Simple formula used:
Advantages: simple to calculate, low cost, less time, accuracygood for short-term forecasting
Disadvantages: less accurate if past sales fluctuate
year last of sales Actual
year thisof sales Actual year thisof sales Actual year next for forecast Sales =
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Method
It is a statistical forecasting method Process consists of identifying causal relationship
between company sales (dependent variable, y) andindependent variable (x), which influences sales If one independent variable is used, it is called linear
(or simple) regression, using formula; y=a+bx, wherea is the intercept and b is the slope of the trend line
In practice, company sales are influenced by severalindependent variables, like price, population,promotional expenditure. The method used is multipleregression analysis
Advantages: Objective, good accuracy, predictsupturn / downturn, short to medium time, low tomedium cost
Disadvantages: technically complex, large historicaldata needed, software packages essential
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Method
Procedure includes developing many regressionequations representing (i) relationships betweensales and independent variables which influencesales, and (ii) interrelationships between variables.Forecast is prepared by solving these equations
Computers and software packages are used
Advantages: Good accuracy of forecasts of economicconditions and industry sales
Disadvantages: need expertise & large historicaldata, medium to long time, medium to high cost
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Accuracy?
Sales forecasting is an important & difficult
task Following guidelines may help in improving its
accuracy Use multiple (2/3) forecasting methods Select suitable forecasting methods, based on
application, cost, and available time Use few independent variables / factors, based on
discussions with salespeople & customers Establish a range of sales forecasts minimum,
intermediate, and maximum Use computer software forecasting packages
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What is a Sales Budget? It includes estimates of sales volume and selling expenses
Sales volume budget is derived from the company salesforecast generally slightly lower than the company salesforecast, to avoid excessive risks
Selling expenses budget consists of personal selling expensesbudget and sales administration expenses budget
Sales budget gives a detailed break-down of estimates of sales revenue and selling expenditure
Purposes of the Sales Budget Planning
Coordination Control
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Process
Many firms follow a process for preparationof annual sales and company budgets. Itgenerally includes: Review past, current, and future situations
Communicate information to all managers onbudget preparation guidelines, formats,timetable
Use build-up approach, starting with first-linesales managers
Get approval of sales budget from topmanagement
Prepare budgets of other departments
Key
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KeyLearnings
Strategic planning is deciding about the organizationslong-term objectives and strategiesStrategic marketing has a role at divisional or strategicbusiness unit (SBU) level of strategic planning by providingmarket information and developing competitive advantage,target markets, value propositionSales strategy is developed from marketing strategythrough marketing-mix and promotional strategiesComponents of sales strategy includes classification of market segments / customers, relationship strategy, sellingmethods, & channel strategy
ey earn ngs
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ey earn ngs(Continued)
Two basic approaches of forecasting are: top-down(or breakdown), and bottom-up (or build-up)Sales forecasting methods are broadly classified as:qualitative and quantitativeQualitative methods include executive opinion,delphi method, salesforce composite, survey of buyers intentions, test marketingQuantitative methods consist of moving averages,exponential smoothing, decomposition, nave/ratio,regression analysis, econometric analysis
Sales budget gives a detailed estimates of salesvolume and selling expenses. Its purposes areplanning, coordination, and control
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