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Sales forecasting and sales budgeting

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Sales Forecasting Methods and Sales Budgeting Methods

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Sales forecasting and sales budgeting

  1. 1. SALES FORECASTING METHODS AND SALES BUDGETING By: Dr. Sandeep Solanki, Associate Professor RNBGU, Bikaner
  2. 2. MEANING OF SALES FORECASTING Sales forecasting is a process of estimating the future sales patterns of a firm by taking the past information and opinion into account for a desired period of time. A sales forecast can be done either in rupee terms or in terms of units for a specific future period of time based on a marketing plan and assumptions related to the marketing environment. Industry sales, company sales, category-wise sales for a wider product mix, and individual product line sales can be forecasted with a certain level of probabilities and estimations. Sales manager in a typical MNC forecast customer, sales territory, regional, divisional, national and global sales. Forecasting can be done for short-range (6m to 2yrs.) and long-range (more than 2 yrs.) demand. For example HUL can forecast the shampoo sales for the country (called category forecast), and then can find the forecast for HUL (company sales forecast) and subsequently for the brand Clinic Plus Shampoo and other brands. Sales goals are generated from sales forecasts for product and product lines, individual sales people, or company divisions. Once plans have evolved into sales forecasts, the sales managers develop sales budgets for achieving the sales forecasts in the proposed time period. 1/31/2018ByDr.SandeepSolanki
  3. 3. DETERMINANTS WHILE SALES FORECASTING Some other determinants at the micro-level which affect the sales forecast of the product are: 1) Nature of the product (perishable or durable) 2) Stages of the PLC (Electric Vehicles of Suzuki), 3) Degree of Innovation (mobile phones) 4) Planned marketing expenditure to be realized 5) Consumption frequency of the customer 1/31/2018ByDr.SandeepSolanki
  4. 4. TYPES OF SALES FORECAST Firms refer to sales forecast by defining three factors: product level, geographic area and time period. Following types of sales forecast may comprise maximum of 90 different types of sales forecasting: A. Product Level a) All (total) Sales b) Industry Sales c) Company Sales d) Product Line Sales (ex:various uses of caustic soda) e) Product Variant (form) Sales f) Product Item Sales B. Time Period a) Long Term b) Medium Term c) Short Term C. Geographic Area a) World b) National (India/US) c) Regional (North/South) d) Territory (Branch/District) e) Customer 1/31/2018ByDr.SandeepSolanki
  5. 5. IMPORTANCE OF SALES FORECASTING If demands for a particular firm can be predicted with a certain level of accuracy: 1) The procurements can be channelized as per the demands. 2) Corresponding inbound logistics of the raw material to the factory and the inventory level can be regulated. 3) Final output inventory level can be modified during the production process depending on sales patterns. 4) Production Schedule can be maintained in proper line. 5) Setting up Production Capacity 6) Overall cost of production can be controlled. 7) Demand due to seasonal fluctuation can be maintained to manage supply chain more efficiently. 8) HRM for manpower planning. 9) It also help in deciding the amount of capital to be borrowed in the form of debt and the cash flow required to run the business. 10) The forecast helps the manager to decide the basis of sales quota to different segments, zones and salesman. 1/31/2018ByDr.SandeepSolanki
  6. 6. SALES FORECASTING METHODS I. QUALITATIVE METHODS: 1. Expert’s Opinion or Executive Opinion 2. Delphi Method 3. Sales Force Composite 4. Survey of Buyer’s intentions or expectations 5. Test Marketing 6. Historical Analogy II. QUANTITATIVE METHODS: 7. Moving Average 8. Exponential Smoothing 9. Ratio / Naïve Method 10. Decomposition 11. Regression 1/31/2018ByDr.SandeepSolanki
  7. 7. EXECUTIVE OPINION METHOD In this method, the services of experts in that area such as marketing professionals, important members of the distribution channel (key retailers or distributors or dealers), and top executives of the company as well as professional bodies such as industry associations and marketing consultants may be asked for. Forecasting on the basis of expert’s opinion is done in two ways: (1) by one seasoned individual (usually in a small company) (2) by a group of individuals, sometimes called a ‘jury of executive opinion’. The group approach, in turn, uses two methods: (i) key executives submit the independent estimates without discussion, and these are averaged into one forecast by the chief executive, (ii) the group meets, each person presents separate estimates, differences are resolved, and a consensus is reached. 1/31/2018ByDr.SandeepSolanki
  8. 8. EXECUTIVE OPINION METHOD The advantages of this method are: (i) forecasting can be done quickly and easily, (ii) less expensive than other methods, and (iii) very popular, particularly among SMEs. However, there are disadvantages: (a) unscientific, (b) subjective, and (c) difficult to break-down the forecast into subunits (like regions, branches) of the organization. 1/31/2018ByDr.SandeepSolanki
  9. 9. THE DELPHI METHOD This method was developed by Rand Corporation in late 1940s (R&D company of Doughlas Aircraft, USA). The procedure includes selection of panel of experts from within and outside the organization with a Delphi coordinator. The coordinator asks each expert separately to make a forecast on some matter. Each member of the expert panel submits in writing his/her forecast anonymously. Only the coordinator will know all the members of the team and only he will have access to all the responses. The coordinator summarizes these forecasts into a report that is sent to each panel members. The experts are then asked to make another prediction separately on the same matter, with the knowledge of the forecasts of the other experts on the panel. This process is repeated until the panel of experts arrive at some consensus or when explanations for deviant opinions have been given. The process aims at gradual reduction of the variability in forecasts. 1/31/2018ByDr.SandeepSolanki
  10. 10. The advantages of this method are: (i) objective forecast that is accurate, (ii) useful for technology, new product and industry sales forecast, and (iii) both long- and short-term forecasting possible. However, the disadvantages are: (a) difficulty getting a panel of experts, (b) longer time for getting consensus, and (c) break-down of forecast into products or territories is not possible. 1/31/2018ByDr.SandeepSolanki THE DELPHI METHOD
  11. 11. MOVING AVERAGE METHOD This is relatively simple method that develops a company forecast by calculating the average company sales for previous years. The formula used is: Sales forecast for next year = Actual Sales for past 3 or 6 years / Number of years (3 or 6) When a forecast is developed for the next period, the sales in the oldest period is dropped from the average and is replaced by sales in the newest period, hence the name “moving averages”. If a company operates in a stable environment, a short two or three years’ average may be most useful. However, if a firm is in an industry with cyclical variations, the moving average should use data equal to the length of a cycle or a longer averaging period. 1/31/2018ByDr.SandeepSolanki
  12. 12. MOVING AVERAGE METHOD EXAMPLE: 1/31/2018ByDr.SandeepSolanki Year Actual Sales (in Millions) 3 year Moving Average 6 year Moving Average 1997 840 1998 880 1999 864 2000 832 861 2001 862 858 2002 948 852 2003 956 880 871 2004 (forecast) 922 890
  13. 13. MOVING AVERAGE METHOD The advantages of this method are: (a) relatively simple method, (b) easy to calculate and (c) widely used for short-term and medium-term sales forecasts. The disadvantages are: (a) unable to predict a downturn or upturn in the market, (b) cannot predict long-term sales forecast accurately, and (c) historical data needed. 1/31/2018ByDr.SandeepSolanki
  14. 14. EXPONENTIAL SMOOTHING METHOD This method is an extended use of moving averages forecasting method, except that in the exponential smoothing method the forecaster is allowed to vary the weights assigned to past data points. It allows consideration of all past data, but less weight is placed on data as it ages, e.g. the previous year’s data has greater weight than five years’ old data. So exponential smoothing is basically a weighted moving average of all past data. The method is used to forecast only one period in the future. Exponential smoothing techniques vary in terms of how they address trend, seasonality, cyclicality and irregular influences. 1/31/2018ByDr.SandeepSolanki
  15. 15. EXPONENTIAL SMOOTHING METHOD While using this method, a probability-weighing factor (a) or smoothing constant (a), is selected arbitrarily. This factor may be between 0.1 to something less than 1.0, depending upon the sensitivity of the forecast to past data. The larger the value, the more sensitive the forecasting values will be to recent changes in sales. If sales change consistently, the smoothing constant (a) would be small to retain the effect of earlier data. Rapid changes call for a large (a). Several values for (a) can be applied to past forecasts and actual data to help determine the most appropriate (a)for the particular situation. The value that proves to be most accurate then can be chosen for future forecasting. 1/31/2018ByDr.SandeepSolanki
  16. 16. The forecasting equation is: Next year’s sales = (a) (This year’s sales) + [1 - (a)] (This year’s forecast) Example: Given that the (a) is 0.2 and actual sales of this year 2003 was Rs.956 million and the moving average forecast for this year 2003 was Rs.880 million, then the sales of next year 2004 will be: 0.2 x 956 + (1 – 0.2) x 880 = Rs.895 million 1/31/2018ByDr.SandeepSolanki EXPONENTIAL SMOOTHING METHOD
  17. 17. The advantages of this method are: (a) simple to operate, (b) forecaster’s knowledge or intuition can be used in forecasting, (c) useful method when sales data have a trend or a seasonal pattern, (d) immediate response to an upturn or downturn in sales, and (e) used by many firms. The disadvantages are: (a) smoothing constant is somewhat arbitrary and (b) long-term and new product forecasting is not possible. 1/31/2018ByDr.SandeepSolanki EXPONENTIAL SMOOTHING METHOD
  18. 18. NAÏVE OR RATIO METHOD Naïve or ration method is a time series method of forecasting, which is based on the assumption that what happened in the immediate past will continue to happen in the immediate future. This method ignores the irregular components, and assumes that seasonality and cyclicality do not exist, and that the trend is flat. The simple formula used as follows: Sales Forecast for the Next year = Actual Sales of this year x Actual Sales of this year / Actual Sales of last year Example: Actual Sales of this year (2003) is Rs.956 million and the actual sales of last year (2002) was Rs.948 million. The next year (2004) sales forecast would be = Rs.964 million 1/31/2018ByDr.SandeepSolanki
  19. 19. SALES FORCE COMPOSITE METHOD 12/2//2018ByDr.SandeepSolanki This method involves salespeople to estimate their future sales. It is an example of bottom-up approach and is also called a “grass-roots” approach. Each sales person estimates in his/her territory how much quantity or value existing and potential customers will buy of each of the company’s products and/or services. This method is often used by industrial or business marketing companies. Sales representatives make the sales estimate in consultation with customers and sales supervisors, and/or based on their experience and intuition. The company sales forecast is made up (composite) of all the salesperson’s sales forecast.
  20. 20. The advantages of this method are: (i) forecasting is done by salespeople who are closest to the market and have better insight into sales trends than any other group in the company, (ii) detailed sales estimate broken down by customer, product, sales representative and territory are possible, and (iii) involvement of salespeople. The disadvantages include: (i) sales forecast are often pessimistic or optimistic, as sales people are not trained enough in forecasting, (ii) if sales forecast are used to set sales quotas, which are linked to incentive schemes, salespeople may deliberately underestimate the demand, and (iii) many salespersons are not interested in sales forecasting, and prefer to spend time in the field meeting customers. 1/31/2018ByDr.SandeepSolanki SALES FORCE COMPOSITE METHOD
  21. 21. SURVEY OF BUYER’S INTENTIONS OR EXPECTATIONS This method is sometimes called as market research (or market survey). It includes asking existing and potential customers about their likely purchases of the company’s product and services for the forecast period. For instance, if the question is asked: Do you intend to buy a refrigerator within next six months? The above is called a purchase probability scale. The customers are also asked other questions, such as product quality, features, price and service, which are all a part of the questionnaire. The information collected from buyers help the company to make effective decisions not only in sales & marketing areas, but also on production, research & development. 1/31/2018ByDr.SandeepSolanki 0.0 0.20 0.40 0.60 0.80 1.0 Not at all Slight Possibility Fair Possibility Good Possibility High Possibility Certain Buying
  22. 22. Several research organizations conduct periodic surveys of the consumer buying intentions. One such survey is done every quarterly since Dec. 2002 in India by The Economic Times, which measures the consumer optimism through consumer confidence index (CCI). The advantages of this method are: (i) useful in forecasting sales for industrial products, consumer durables, and new products, (ii) it also gives customer’s reasons for buying or not buying, (iii) relatively inexpensive and fast, when only a few customers are involved. The disadvantages are: (i) sometimes buyers are unwilling to reveal their plans, (ii) buyers are sometimes over optimistic, and (iii) expensive and time-consuming in consumer non-durable markets where consumers are very large in number. 1/31/2018ByDr.SandeepSolanki SURVEY OF BUYER’S INTENTIONS OR EXPECTATIONS
  23. 23. This method is useful for forecasting sales for a new product, which has no historical (or previous) sales figures. It can also be used for estimating sales for an established product in a new territory. Major methods used for consumer-product market testing include: 1) Full-Blown Test Markets 2) Controlled Test Marketing, and 3) Simulated Test Marketing 1/31/2018ByDr.SandeepSolanki TEST MARKETING
  24. 24. Full-Blown Test Markets: It consists of the company choosing a few (2 to 6 days) representative cities, in which full promotion campaign is introduced, similar to what would be done in national marketing. The duration of the test market varies from a few months to one year, depending on the repurchase period of the new product. Buyer surveys are carried out to get information about consumer attitude, usage and satisfaction towards the new product. If the test markets show high trial and repurchase rates, the product should be launched nationally; if they show a high trial rate and a low purchase rate, the new product should be redesigned or dropped; if they show a low trial rate and a high purchase rate, the product is acceptable but more consumers should try it; if both trial and repurchase rate are low, the new product should be left permanently. 1/31/2018ByDr.SandeepSolanki TEST MARKETING
  25. 25. Controlled Test Marketing: The company with the new product hires a research firm and gets a panel of stores at specified geographic locations. The research firm delivers the new product to the panel of stores, arranges promotions at the stores, and measures the sales of the new product. The research firm also interviews a sample of consumers to get their perceptions on the new product. Both full-blown and controlled test marketing expose the new product to the competitors. Simulated Test Marketing: In this method, about 30-40 consumers (or shoppers) are selected, based on their brand familiarity and preferences in a particular product category, such as baby-care or soft drink. These shoppers are shown commercials or print advertisements of well-known products and also the new product, without any specific mention. These consumers are given a small amount of money and asked to buy any items in a store. 1/31/2018ByDr.SandeepSolanki TEST MARKETING
  26. 26. The researcher of the company notes how many consumers buy the new product and competing products. These consumers are interviewed to find reasons for buying or not buying, and later, after usage of the new product, satisfaction levels and repurchase intentions. This method gives accurate results. The new product is not exposed to the competitors. The main advantages of these methods are: (i) their usefulness for forecasting the sales of new or modified products, and (ii) in deciding whether a company should go ahead for a national launch of a new product, without spending a huge amount. The disadvantages are: (i) for some of the methods like full-blown test market and controlled test marketing, where there are possibilities of the information on new products going to competitors, there are chances of spoilage of the test marketing, (ii) if repurchase period is ling, particularly for consumer durables, it is difficult for the company to wait to measure test results. In such cases, the company decides to introduce a new product in a small geographical area and subsequently ‘roll on’ to other areas, in a planned manner. 1/31/2018ByDr.SandeepSolanki TEST MARKETING
  27. 27. This is used for forecasting the demand for a product or service for which there is no past demand data. Sometimes the product may be new but the organization might have marketed other products earlier with features similar to those of the new product. So, the marketing personnel may use the historical analogy between the two products and derive the demand for the new product using the historical data for the earlier product. Example: introducing another new soap in the market with a different brand name by an FMCG company. 1/31/2018ByDr.SandeepSolanki HISTORICAL ANALOGY
  28. 28. In this method the company’s previous periods sales data is broken down (or decomposed) into four major components such as: trend, cycle, seasonal and erratic events. These components are then recombined to produce the sales forecast. For example: Given that the sales of 2003 was Rs. 956 million and we need to forecast the sales for next year of 2004. Assume that various analysis have broken down the previous sales data into the following components; i) a growth of 3% in sales due to the development in technology (the trend component) i.e, 2004 sales would be Rs. 985 mn. (956*1.03), further; ii) increased terrorist activities are expected to reduce sales by 5% (the erratic component) i.e, 2004 sales would be affected upto Rs. 936 mn. (985*0.95), further; 1/31/2018ByDr.SandeepSolanki DECOMPOSITION METHOD
  29. 29. iii) a 10% reduction in sales is expected due to a recession in demand (the cyclic component) i.e, 2004 sales would be Rs. 842 mn. (936*0.90); hence the annual sales forecast of the year 2004 will be Rs. 842 million without considering the seasonal fluctuations. But in practice, seasonal component like festive season is also considered. So, in the third quarter of the year, sales is expected to go up by 15% due to festive season as compared to other three quarters. Thus, the average quarterly sales will be Rs. 210 (842/4). But for the third quarter it would be Rs. 242 (210*1.15) and a consistent sales forecast Rs. 200 (842-242 = 600/3) each for other three quarters. 1/31/2018ByDr.SandeepSolanki DECOMPOSITION METHOD
  30. 30. The major advantage of this method is that it is conceptually a sound method. However, the disadvantage are: (i) difficult and complex statistical methods are needed to break down sales data into various components, and (ii) historical data is needed. 1/31/2018ByDr.SandeepSolanki DECOMPOSITION METHOD
  31. 31. This is a statistical forecasting method that is used to predict sales, called as dependent variable ‘Y’ (Sales shown on Y-axis in the graph). The company then identifies causal (cause & effect) relationship between the company sales and the independent variables (or factors), which influence the sales. If there is only one independent variable (shown on X-axis in the graph), say promotional expenditure, then it is called linear (or simple) regression. But in practice, company sales are influenced by several independent variables such as price, sales calls, population etc. To forecast the effect of several independent variables on the company sales, the method used is Multiple Regression Analysis. REGRESSION
  32. 32. The advantages of regression analysis are: (i) high forecasting accuracy, if relationships between variables are stable, (ii) objective method, and (iii) can predict turning points of the company’s sales. The disadvantages are: (i) technically complex, (ii) can be expensive and time consuming, and (iii) use of computer and software packages (like SAS & SPSS) are essential. REGRESSION
  33. 33. 1. Strategic Planning & Goal Setting at Corporate Level 2. Sales Strategy at SBU Level 3. Performance Measurement, Diagnosis & Corrective Action at Functional or Operational Level: (A) Sales Analysis, (B) Marketing Cost Analysis and (C) Sales Audit (D) Sales Budgeting SALES MANAGEMENT PROCESS & CONTROL
  34. 34. 1/31/2018ByDr.SandeepSolanki STRATEGIC PLANNING & GOAL SETTING AT CORPORATE LEVEL Fig. Strategic Sales Management Programme
  35. 35. 1/31/2018ByDr.SandeepSolanki STRATEGIC PLANNING & GOAL SETTING AT CORPORATE LEVEL Fig. Strategic Sales Planning At Various Levels
  36. 36. The Sales Management Process in any organization involves three inter-related steps: 1) Formulation of Strategic Sales Management Programme: The sales planner must take into account the influences and constraints imposed by the external environment. The demands of the potential customers and the strategic moves of competitors. The other environmental factors include the legal & political, social & cultural, the technological and natural environment. Analysis of internal or organizational factors also determine the nature of sales programme. Human, financial resources, the level of capacity utilization, and the innovation cycles prevailing in the environment decides the company’s ability to pursue the market expanding goals. 1/31/2018ByDr.SandeepSolanki STRATEGIC PLANNING & GOAL SETTING AT CORPORATE LEVEL
  37. 37. There are few key decisions which a sales manager must ponder: (a) how the personal selling efforts can be dovetailed to the company’s environment and integrated with marketing strategy. b) in what way the potential customers can be approached, persuaded and serviced. (c) designing the sales force suitable to the market. (d) deciding over the sales forecasts, quota and budget-setting. (e) deployment of the firm’s sales force in the light of the account management policy. At Corporate Level, strategic planning is developed at the company’s headquarters to guide the whole organization. The planning process includes four steps: (i) developing corporate mission and objectives, (ii) defining strategic business units (SBUs), (iii) allocation of resources to SBUs, and (iv) developing corporate strategies to fill the strategic planning gap. 1/31/2018ByDr.SandeepSolanki STRATEGIC PLANNING & GOAL SETTING AT CORPORATE LEVEL
  38. 38. 2) Implementation of a Strategic Sales Management Programme: Implementation of the strategic sales management programme involves motivating people and directing their efforts and energy towards the achievement of the corporate goals. Factors that influence the job performance and behavior of salespeople are: (a) Conditions of the economy influences the organizations’ demand pattern and hence the sales performance level sales staff. (b) Elements of marketing mix such as the perceived quality of the product, the pricing policy followed in the market, and the level of promotional support influence the sales performance of the salesforce. (c) A salesperson’s job is defined by the roles and expectations of the sales manager, the marketing manager, and other employees in the organization. 1/31/2018ByDr.SandeepSolanki STRATEGIC PLANNING & GOAL SETTING AT SBU LEVEL
  39. 39. (d) The salespeople should be motivated enough to stay committed to the job through some financial rewards, job enrichment and promotions. (e) The ability of the sales people to achieve the desired level of outcome which is influenced by the environment in which they operate. Personal traits of the salesman such as personality traits, level of intelligence, and analytical ability to comprehend the selling situations will decide his success level in the sales field. (f) Adequate knowledge about the product market conditions, presentation effectiveness and competitor product performance information. (g) Training is an ongoing process to upgrade the knowledge and skill level of the sales force. (h) Sales managers need to develop effective supervision policies and procedures so that the salespeople can obtain advice and guidance from the management. A supervision policy should give enough freedom to the sales force to apply creative selling skills in realizing a sale. 1/31/2018ByDr.SandeepSolanki STRATEGIC PLANNING & GOAL SETTING AT SBU LEVEL
  40. 40. At SBU level, the strategic planning process includes following eight steps: (i) Defining the business unit’s mission (ii) Scanning the external environment (for opportunities & threats analysis) (iii) Analysis of the internal environment (for assessment of strengths and weaknesses) (iv) Developing long-term objectives and goals (v) Formulating strategies for achieving the objectives and goals (vi) Preparing programme or action-plans from the strategies (vii) Implementing the strategies and action-plans (viii) Monitoring results and taking corrective actions Accordingly, sales budgeting and sales strategy is conceived. 1/31/2018ByDr.SandeepSolanki STRATEGIC PLANNING & GOAL SETTING AT SBU LEVEL
  41. 41. 3) Evaluation and Control of Sales Force Performance: Sales control is an integral part of the sales management process and necessary follow up to planning. Control is a pre-requisite to planning. It finds out where, when, how, and why things go wrong from time to time and suggests or take necessary steps to correct the wrong or deviations when appropriated. One of the most important responsibilities of a sales manager is to exercise control over the sales results and the performance of the selling activities. Ensuring that the sales targets are achieved consistently, sales need to be controlled both on continuous basis as well as periodically. Main objectives of sales control are as follows: (i) Identifying Opportunities (ii) Measurement of Sales Performance (iii) Identifying negative features and diversions 1/31/2018ByDr.SandeepSolanki STRATEGIC PLANNING & GOAL SETTING AT OPERATIONAL / FUNCTIONAL LEVEL
  42. 42. Sales Control Procedure involves following steps: (i) Setting of performance objectives: The first step in the control process is the establishment of standards against which actual performance can be compared. Establishment of performance standards is part of the sales planning and sales budgeting process. Sales planning sets sales quotas, which act as standards. Sales budgeting also sets targets cost levels and provides budgetary allowances for the various types of sales activities. The amount fixed for various sales related activities acts as standard for comparing actual expenditure levels. (ii) Comparison of actual sales objectives with the set performance objectives: In this step, actual sales and cost results are compared with the standard or budgeted figures. Significant sustained differences indicate that something is wrong either with the planning or with the operation. On the other hand, if sales is below sales quota set and the spending level is above the budgeted allocations, it is then certain, that the process is out of control. The causes of divergences may be controllable or uncontrollable. If controllable, then corrective actions may be taken or revising the standards or actions. 1/31/2018ByDr.SandeepSolanki STRATEGIC PLANNING & GOAL SETTING AT OPERATIONAL / FUNCTIONAL LEVEL
  43. 43. (iii) Taking of corrective action in case of deviation: There are two options – modify the standards or alter the results. Modify the standards in the event of uncontrollable factors and alteration of results with strict control over sales activities in the event of controllable situations. (Note: will also be covered in detail in Unit-3) Purposes of Sales Control are: (i) To implement steps for improving the productivity of sales force (ii) To increase sales profitability (iii) To revise the sales policy and the strategies followed (iv) To improve the quality of target setting, sales planning and budgeting functions (v) To initiate remedial steps 1/31/2018ByDr.SandeepSolanki STRATEGIC PLANNING & GOAL SETTING AT OPERATIONAL / FUNCTIONAL LEVEL
  44. 44. At functional or operational level, Sales Control Methods involves measuring sales performances and diagnosis through: 1) Sales Analysis 2) Marketing Cost Analysis 3) Sales Audit 4) Sales Budgeting SALES CONTROL METHODS AT OPERATIONAL / FUNCTIONAL LEVEL
  45. 45. 1. SALES ANALYSIS: Meaning: The purpose of sales analysis is to find out overall performance of sales function. It measures how effectively sales efforts have resulted in sales performance, in terms of sales by product, sales by territory, sales by customer accounts, sales by salesmen, and sales by area. Though all sales analysis explains the volume of sales, they explain different aspects of sales. They help in finding out which sales areas are good, which products are moving faster, and which salesperson in the same territory sells better or poorer by others. Though it can explain the sales response behavior but why such results have been derived, needs further analysis of sales strategy, sales forecasted, or competitor’s moves. It involves scrutiny of sales data by assimilating, classifying, comparing and drawing conclusions about overall sales performance. Sales analysis conducted at various levels inside an organization is called ‘hierarchical sales analysis’. It leads to certain degree of evaluation and control, as well as helping in identifying strengths and weaknesses of salespeople in different territories. 1/31/2018ByDr.SandeepSolanki SALES CONTROL METHODS AT OPERATIONAL / FUNCTIONAL LEVEL
  46. 46. Meaning…………… Such a diagnostic method improves managerial ability of the sales leaders, in both identifying problems, and taking corrective action. The most widely used method of sales analysis is comparison of performance with sales quota. Similarly, companies also undertake analysis between forecasted numbers with actual numbers (as a control measure). The starting point for sales analysis is invoices, cash memo, credit sales memo, etc. Management has to decide the units of measurement in which the sales data is to be analyzed. Sales data may be analyzed in rupees, units of products, cases of packaging, length in metres etc. Major Approaches or Types of Sales Analysis: 1) Geographical or Territorial Analysis or Composite Sales Analysis 2) Product Analysis 3) Sales Person’s Analysis 4) Customer Accounts’ Analysis 5) Area Analysis 1/31/2018ByDr.SandeepSolanki SALES CONTROL METHODS AT OPERATIONAL / FUNCTIONAL LEVEL
  47. 47. 1) Geographical or Territorial Analysis or Composite Sales Analysis: In this method sales managers scan the total sales on territory basis. It is the grouping & analysis of sales by geographical or territorial units. Analyze the below table and comment: 1/31/2018ByDr.SandeepSolanki SALES CONTROL METHODS AT OPERATIONAL / FUNCTIONAL LEVEL SALES NORTH EAST WEST SOUTH Sales 138 134 139 240 Sales Quota 167 129 147 268 Effectiveness% ? ? ? ? Last Year Sales 120 98 130 200 Growth in % ? ? ? ? Industry Sales 1500 1200 670 890 Market Share % ? ? ? ?
  48. 48. 2) Product Analysis: It is concerned with the variations between different (sizes & varieties) products sold by the company. Analyze the below table and comment: 1/31/2018ByDr.SandeepSolanki SALES CONTROL METHODS AT OPERATIONAL / FUNCTIONAL LEVEL By Product Type Quota Actual Sales ( + / - ) % of Quota Soaps 126 108 ? ? Toothpastes 234 213 ? ? Detergents 456 467 ? ? Perfumes 700 680 ? ?
  49. 49. 3) Sales Person’s Analysis: In this method the various sales person’s performance is analyzed in a territory. Analyze the below table and comment: 1/31/2018ByDr.SandeepSolanki SALES CONTROL METHODS AT OPERATIONAL / FUNCTIONAL LEVEL Sales Persons Quota Actual Sales ( + / - ) % of Quota Rakesh 95 93 ? ? Rajeev 115 117 ? ? Amit 110 109 ? ? Rajit 106 110 ? ? Pradeep 108 107 ? ? Sharad 110 112 ? ? Manoj 130 106 ? ? Nitin 116 116 ? ?
  50. 50. 4) Customer Accounts Analysis: It is concerned with variations which occur between customers of different types or individual customers. Analyze the below table of sales of a typewriter and comment; We see that one important account i.e, government dept. is responsible for sales person’s poor performance on that product line. 1/31/2018ByDr.SandeepSolanki SALES CONTROL METHODS AT OPERATIONAL / FUNCTIONAL LEVEL Accounts Quota Actual Performance as % of quota Govt. Dept. 24 2 ? Fin. Institutions 12 12 ? Private Parties 10 10 ? Banks 20 20 ? Educational Inst. 14 14 ? Industrial Undertaking 16 16 ?
  51. 51. 5) Area Analysis: Sometimes sales analysis of select cities or areas becomes necessary. Analyze the below table and comment: 1/31/2018ByDr.SandeepSolanki SALES CONTROL METHODS AT OPERATIONAL / FUNCTIONAL LEVEL Sales Area Quota Actual Sales ( + / - ) % of quota Chennai 240 267 ? ? Madurai 168 108 ? ? Trichy 120 135 ? ? Coimbatore 134 121 ? ?
  52. 52. 2. MARKETING COST ANALYSIS: Marketing cost go beyond sales costs and include all other costs, including advertising & promotion cost, physical distribution, transportation, warehousing, sales administration, market research, loyalty programme costs etc. It helps sales managers: i) Reduce unnecessary expenses and increase operational efficiency ii) Improve competitive position of the firm iii) Pruning unprofitable products, customer segments and distribution channels and enables concentrate on most profitable market segments iv) Appraise the true cost of various services such as after-sales service, delivery and extended credit to consumers v) Measures productivity of expenses on various marketing expenses vi) Searches a way to improve profit performance through exposing relative strengths and weaknesses 1/31/2018ByDr.SandeepSolanki SALES CONTROL METHODS AT OPERATIONAL / FUNCTIONAL LEVEL
  53. 53. By relating sales, cost and financial dimension of each selling transaction and activity it can generate: (i) Average value of orders (ii) Average cost per orders (iii) Sales to Call Ratio (iv) Profit per rupee of sales (v) Turnover of Stock and Profitability (vi) Expense to Sales Ratio (vii) Profit per segment, channel & territory (viii) Total operating and functioning cost – product wise, region wise etc. Techniques of Marketing Cost Analysis: 1) Bases for allocating common expenses 2) Classifying selling expenses 3) Contribution Margin 4) Converting accounting expenses data to activity expense groups 1/31/2018ByDr.SandeepSolanki SALES CONTROL METHODS AT OPERATIONAL / FUNCTIONAL LEVEL
  54. 54. 3. SALES AUDIT: Sales Audit has been defined as, “a systematic, critical, unbiased review and appraisal of the basic objectives and policies of the marketing function and of the organization, methods, procedures and personnel employed to implement those policies and to achieve those objectives.” The sales audit is a reviewing function primarily concerned with the evaluation of overall marketing strategy. Its main purpose is to identify opportunities for improving the effectiveness of the total marketing efforts. 1/31/2018ByDr.SandeepSolanki SALES CONTROL METHODS AT OPERATIONAL / FUNCTIONAL LEVEL
  55. 55. Procedure of Sales Audit: a) Examining of sale objectives with regard to precision, appropriateness, realism & challenge b) Reviewing plans and policies (explicit & implicit both) whether they are appropriate from the standpoint of their consistency. The auditor should also review the allocation of resources to individual segments as compared with the company philosophy and priorities. c) Evaluation of the methods, programme & procedures utilized in plan implementation as measured against the stated objectives. d) Study of organizational structure and staffing to determine adequacy of structure, delegation, human relations and individual differences. He is to see whether the organization possesses the necessary capabilities for achieving the marketing objectives. Planning and control system are appropriate for the organization, organization is properly or over or under staffed or the personnel are competent. e) Prepare recommendations for improvement based on the appraisal of objectives, plans, method and organization. 1/31/2018ByDr.SandeepSolanki SALES CONTROL METHODS AT OPERATIONAL / FUNCTIONAL LEVEL
  56. 56. Types / Kinds of Sales Audit: 1) Sales Productivity Audit: It calls for examining data on the profitability of different marketing entities and on the cost-effectiveness of different types of marketing expenditure. 2) Sales Function Audit: It involves carrying out an in-depth evaluation of major marketing mix components namely product, price, distribution, sales force, advertising, sales promotion and public relations. 3) Sales Environment Audit: It calls for analyzing the major macro-environment forces that might have an impact on the company and major trends in the key components of the company’s task environment i.e, markets, customers, competitors, distributors, dealers, suppliers etc. 4) Sales Organization Audit: it calls for evaluating the marketing organization’s capability for developing and carrying out the necessary strategy for the forecasted environment. 5) Sales System Audit: It involves examining the adequacy of the company’s systems for analysis, planning and control in the marketing area as for innovation. 6) Sales Strategy Audit: It calls for reviewing the company’s marketing objectives and marketing strategy to see how will these are adopted to the current and forecasted marketing environment. 1/31/2018ByDr.SandeepSolanki SALES CONTROL METHODS AT OPERATIONAL / FUNCTIONAL LEVEL
  57. 57. 4. SALES STRATEGY (FOR ACCOUNTS OR SPECIFIC CUSTOMER LEVEL) The strategic decisions are typically made by arranging individual customers (or accounts) into similar categories or groups. There are four parts of a sales strategy: 1. Classification of Accounts 2. Relationship Strategy 3. Selling Methods 4. Channel Strategy 1/31/2018ByDr.SandeepSolanki
  58. 58. 1. Classification of Accounts: Within a target market segment, the accounts or specific customers, are classified into different customer groups. All customers within a target segment are not same. Some customers may have a good relationship with competitors, a few customers may have large sales potential and other customers may require medium or low value of the company’s products or services. Let us consider an example of a business marketing company: A precision steel tube manufacturing and marketing company had targeted automotive segment as one of the target segments. Within an auto segment, it classified the customers into three different customer groups: 1) Class A: High Sales and Profit Potential 2) Class B: Medium Sales and Profit Potential 3) Class C: Low Sales and Profit Potential, including prospective customers and customers who have good relationship with competitors. Sales Strategy for each segment class will be different. 1/31/2018ByDr.SandeepSolanki SALES STRATEGY
  59. 59. 2. Relationship Strategy: Buyers and salespeople, who do business together have some type of business (or working) relationships. Their relationships have a range or spectrum, as follows: 1) Transactional Relationship Selling 2) Value Added Relationship Selling 3) Collaborative or Partnering Relationship Selling Every relationship is an exchange, which is the process of obtaining a desired product or service from someone by offering something in return. Relationship marketing is basically the creation of customer loyalty. It means important or major customers need continuous attention through partnering or collaborative relationships. For ex: company’s best salespeople are assigned to sell and service ‘A’ class or major customers. 1/31/2018ByDr.SandeepSolanki SALES STRATEGY
  60. 60. Customers who have low sales and profit potentials and businesses that have low-priced and low-profit products or services, the focus is on single transaction with each customer. This is called transactions relationship oriented selling, where after the product or service is sold, the customer is not contacted again and hence the relationship is not extended. In the case of value-added relationship or exchange, the focus is on the salesperson understanding the current and future needs of the customer correctly and meeting those needs better than the competitor. After the purchase is made, the salesperson contacts the customer to find out if the customer is satisfied and has any future needs. Such customers have medium sales and profit potential. For ex; Maruti Udyog’s sales and service centre contacts each customer to find out the customer’s satisfaction with the car’s purchase or maintenance service. 1/31/2018ByDr.SandeepSolanki SALES STRATEGY
  61. 61. 3. Selling Methods: Sales people should use different selling methods to suit different relationship strategies. The different selling methods are: 1) Stimulus Response Method 2) Formula Method 3) Need-Satisfaction Method 4) Team Selling Method 5) Consultative Selling Method 1/31/2018ByDr.SandeepSolanki SALES STRATEGY
  62. 62. The selection of selling method for a specific type of relationship is an important part of strategic sales. For ex; considering the precision steel tube manufacturing company; the suitable selling method for Class ‘A’ (major customers), with whom the company wants to have collaborative relationships, is team selling method or consultative selling. For Class ‘B’ (medium sales potential), with value-added relationships, the proper selling method would be need- satisfaction, consultative or problem solving method. For Class ‘C’ (with low sales potential but large in number), with transactional relationship strategy, should have typically stimulus response or formula method of selling. 1/31/2018ByDr.SandeepSolanki SALES STRATEGY
  63. 63. 4. Channel Strategy: A strategic issue in the sales strategy is to select an appropriate channel (also called marketing channel, distribution channel, or trade channel) and for covering selling efforts, it is called sales channel. Sales managers should ensure that accounts (or specific customers) and group of customers receive effective and efficient sales coverage. The various sales channels available to firms for covering selling efforts to individual customers are: (i) the company sales force, (ii) industrial distributors or dealers, (iii) manufacturer’s representatives, independent representatives, or agents, (iv) telemarketing, (v) internet, (vi) brokers and commission merchants. For Ex: Dell Computers uses the telephone and internet mode to access the prospective customers, however in India, employing sales force is more suitable for customers demanding live demonstrations while buying computers. 1/31/2018ByDr.SandeepSolanki SALES STRATEGY
  64. 64. 1. Meaning of Sales Budgeting 2. Advantages of Sales Budgeting 3. Methods of Sales Budgeting: 1) Rule of Thumb Method 2) Zero Based Budgeting Method 3) Competitive Parity Method 4) Percentage of Sales Method 5) Objective & Task Method 1/31/2018ByDr.SandeepSolanki 5. SALES BUDGETING
  65. 65. 1. What is a Sales Budget? A sales budget consists of estimates of expected volume of sales and selling expenses. The Sales Volume part of the sales budget is based on the sales forecast. The sales volume budget, which is derived from the sales forecast, is broken down into – product-wise quantities, the average selling price per unit, territory- wise quantities to be sold, customer-wise and sales person-wise sales volume quota yearly or monthly. The Selling Expenditure budget consists of the selling expense budget and the sales department administrative budget. The selling expense budget includes expenditure for personal selling activities, such as the salaries, commissions or incentives, and other expenses for the salesforce. Any plans for increase in numbers of sales people must also be included in this budget. The Administrative Budget of the sales department should include the salaries of territory sales managers, sales supervisors, their secretaries and the office staff. The budget should also include the operating expenses like rent, power, supplies, office equipment and general overhead. 1/31/2018ByDr.SandeepSolanki SALES BUDGETING
  66. 66. 2. Advantages of Budgeting: 1) Budgeting coordinates the activities of various departments and functions of the business. 2) Budgeting creates cost consciousness and an attitude of mind. 3) Budgetary control system creates necessary conditions for the introduction of standard costing technique. 4) It provides yardstick against which actual results can be compared. 5) It ensures that working capital is available for the efficient operations of the business. 6) A budget motivates executives to attain the given goals. 7) It increases production efficiency, eliminate waste and controls the costs. 8) It shows management where action is needed to remedy a situation. 9) A budgetary control system assists in delegation of authority and assignment of responsibility. 10) Budgeting compels managers to think ahead and prepare for changing conditions. 1/31/2018ByDr.SandeepSolanki SALES BUDGETING
  67. 67. 3. Methods of Sales Budgeting: 1) Rule of Thumb Method: It is an arbitrary method. Budget is decided based on the will, whims a& fancies of the finance manager/sales manager. Mass selling goods and companies dominated by finance function are major uses of this method. 2) Zero Based Budgeting Method: It involves a process in which the sales budget for each year is initiated from zero bas thus justifying all expenditure and discarding the continuation of conventions and rule of thumb. It is a very elaborate and time-consuming process. 3) Competitive Parity Method: Large sized companies whose products face tough competition and need effective marketing to maintain profits make use of this method. The use of this method presumes knowledge of the competitors’ activities and resource allocation. 1/31/2018ByDr.SandeepSolanki SALES BUDGETING
  68. 68. 4) Percentage of Sales Method: Sales and marketing managers use this method by multiplying the sales volume budget by various percentages of each category of expenses. For example, the sales manager may decide travel expenses for salespeople to be 0.3 percent of the budgeted sales revenue, advertising expenses to be one per cent and sales promotion to be 0.8 percent of the budgeted sales volume. The sales manager may decide these percentages based on the past experience or the on the basis of marketing & sales plans. The percentages are used during the monthly or quarterly evaluation of performance on sales volume and selling expenses for each sales territory and sales person. 5) Objective and task method: The first step is to look at the sales volume objective to be achieved during the budget period of say one year. Then based on the marketing and sales strategies, the tasks or actions are decided that are required to be carried out in order to achieve the earlier stated objective. The third step is to estimate the costs of carrying out the tasks. The costs are then added up to find out whether the profit objective can be achieved. Review of sales revenue, cost and profit figures continues until the managers are satisfied with the sales and profit objective, the tasks, and the budgeted cost/expenditure of various items of selling expenses. 1/31/2018ByDr.SandeepSolanki SALES BUDGETING
  69. 69. Referred Books: Source:  Tapan K. Panda & Sunil Sahadev, Oxford Higher Education, 2/e  Krishna K Havaldar & Vasant M Cavale, McGraw Hill, 2/e  Still, Cundiff & Govoni, Pearson, 5/e  P.K. Agarwal, Pragati Prakashan, 2/e 1/31/2018ByDr.SandeepSolanki