Factors Affecting Sales Forecasting In Sales And Marketing

The Sales Forecast cycle is a process that begins with product qualification, and many more possibilities come into play from there:

5 Sales Forecasting Scenarios:

1. Estimate Demand: Estimate current and forecasted demand for products/services, key categories, geographic regions, and customer types using historical data and industry segmentation. 

2. Qualify Demand: Do not use this step to enter a specific number of sales forecasts. You need to know if you have a reasonable approach to predict demand before you can use this step in the process. 

3. Qualify Units: Use this step to make a production forecast (e.g. volume, frequency). Entering several sales forecasts will result in a worst-case scenario for your sales, and therefore will result in a greater number of units being produced than would otherwise be produced. 

4. Production Forecast: This step combines your product sales forecast with the production forecast. Once the forecast and units forecast is in place, the next step of the sales forecasting process can begin. The sales forecast will no longer contain units. 

5. Estimate Unit Sales: This step is where you can enter your forecasted units.To forecast sales, most companies try to estimate demand by tracking past sales performance and converting that into an estimated percentage of the market. This "estimate demand" forecast is notoriously inaccurate, so one needs a higher-quality model that incorporates sales-by-volume and sales-by-value models.

Key Considerations When Forecasting Sales-by-Volume:

The ability to forecast sales volume is a result of the product-specific and product-level forecasting models, the major considerations for a forecasted sales volume estimate are as under:

1. Product Portfolio: An important factor that affects your ability to forecast sales volume is your portfolio size. You need to determine the number and size of products you plan to sell and be able to account for product-level forecast errors caused by inventory shortages. 

A more accurate forecast means you will get less production, as errors in inventory allocations will reduce your sales. If your forecast is accurate, you'll have less inventory and lower costs, leading to greater profits. 

Also, the greater the number of products you are forecasting to produce, the more difficult it is to predict unit sales, and therefore the more accurate your forecast is.

2. The Multi-Stage Process: Assuming you have a good product-level forecasting model, your first step is to identify the specific quantities of products you'll need to produce in the next few months. 

Each customer's requirements are different, so you need to use the tools available to you to develop the best estimate. You will also need to estimate the sales volume for each customer over the next few months. Some of these product sales forecasts are local, while some are global. 

An estimate of total sales volume for each region will usually be available from your supplier. If you do not receive this regional information, you will need to develop a regional production forecast. If your sales estimate is for a particular region, for a certain time frame, for a specific product, this could allow you to estimate the sales volume for each customer.

What you want to avoid is to forecast a forecast which is so large that it's impossible to meet it, or to forecast sales volumes that are so low that it will be difficult to meet your needs. An approach you could use is to break your forecast into parts. 

Key Considerations When Forecasting Sales-by-Value:

1. Cost of goods sold

2. Price per piece

3. Fulfilled sales value

4. Comparative cost of goods sold

5. Product consumption

Sometimes sales volume and sales value are combined, and some forecasting models may combine these to form a blend of both.

There are other important factors you should consider in the forecast. For example, look at the time frame in which sales will occur, whether or not there are known; unknowns surprises, and your capability to deal with such surprises.

Sales Forecasting (sales-by-value and sales-by-volume) Model:

Step 1: Determine the Number of Products: Start with estimating the number of products you are going to produce and then determine the rate at which you can produce them. In the words of Peter Drucker, "profit is the profit of capacity." 

We may sell 2,000 units, but we may only produce 300 units, but there is nothing you can do about it. To forecast sales volume, we must get as close to the minimum quantities required as possible.

Step 2: Assume a 50% Volume Error: By the time you are done estimating, you should be willing to assume that 50% of your production is going to be either a mistake or supplies that are going to be returned or that are going to be canceled. A 50% error can be hard to accept, but to do so is to prepare yourself to grow your production despite it. 

Step 3: Estimate Sales in Units: Your sales estimate will be a unit value for each product, so you will need to look up the units of a product for your region. You can find this information on your supplier's website. Use the information available to you to develop the best estimate for the units you will need for the next few days.

Step 4: Estimate the Sales Volume per Hour: Once you have the number of products you require, you can estimate the number of units you can produce each hour. We know that one unit of a product is usually produced per hour, but you can use the information on your supplier's website to find the number of units you can make for each product in an hour. 

Use the information on your supplier's website to determine the sales volume per hour, and you'll be able to see if your forecast is within your volume limits.

Step 5: Calculate the Cost per Unit: At this point, you should know how many units you will need and how much each unit will cost. These numbers will be used to develop a forecast for the total cost of each product. To calculate the cost per unit, you will need to look at your cost per unit in the other forecasting steps.

Step 6: Discount Sales Rates: If the forecast you have developed for the sales volume per hour you will use for your sales target price. The market rates in your area could be different from the market rates your supplier uses, so look up the market rates for each region and see how they differ from what you currently have. 

If you are using a current cost per unit, then discount the market rates by 15% (or whatever your cost per unit is). Once you have determined your cost per unit, discount the market rates by 15%.

Step 7: Create a Forecast: After you have discounted the market rates by 15%, you will use that information to create your forecast. Use this forecast to identify the sales volume in the next few days and to calculate the total cost of each product. 

The unit cost is now known, so you can calculate the cost per unit for each product and make sure your sales forecast is within your cost per unit range.

As you can see, you can create a sales forecast and see if you can meet it by using value/cost or volume instead of units. The idea is to develop forecasts for the best cost per unit and the best sales volume per unit in the past and use them as a model for predicting sales. 

By using volume instead of units, you have prepared yourself to overcome the "variability" of your cost per unit.

Sales Forecasting Factors In Sales And Marketing:

1. Industry Forecasting: This is the most objective and accurate method because it is based on data collected from experience with similar sales cycles. Data is collected from multiple companies that are similar in their product, geographic, and industry distribution. 

It is the most reliable and valid because the same company cannot have two different growth rates or a strong pattern of beating or missing their forecasts.

2. Customer Forecasting: This is based on past sales and current customer relationships that are to be forecasted for the future. This method may also be referred to as the "time history" method. 

While we can forecast the average annual sale of a customer, we cannot forecast individual sales because those sales are dependent upon the number of transactions and the customer's current customer relationship status. The customer forecasting method requires us to maintain long-term relationships with our best customers.

3. Sales Potential: This method combines the prediction of the average sales opportunity with the analysis of current customers to predict future sales. If a company has a lower sales potential than its competitors, it will have a harder time exceeding the competition in revenue. It is based on the idea that the competitor to your customer is the competitor that you will have the highest chances of selling too.

Your forecast is an estimate, so we will take every bit of information and evaluate it for accuracy. 

Using the information provided above, the best way to analyze the future potential of your customers is to calculate the average sales opportunity (ASO). This can be done by:

a. Taking the average of the estimated revenue per transaction

b. Taking the average of the number of transactions

c. Summing the contribution of each customer, representing the cumulative sales opportunity over the past twelve months

d. Calculating the revenue opportunities for the next 12 months

e. Calculating the probability of each transaction happening and identifying the opportunity cost of each channel

f. Assigning costs of channel conflict to each channel to determine the opportunity cost of each channel

Based on the above factors, you should be able to forecast an average revenue per transaction or an average revenue opportunity for each month for your customer portfolio, depending on your market segment.

While the predicted revenue is necessary to create a reliable sales forecast, it is not the only information needed to get a good measurement of sales performance, it is also very important to measure how your business can influence the forecast to make it more accurate.

Importance Of “Model Overdrive" Method Under Sales Forecasting:

The problem with trying to forecast all of your customers' sales opportunities on your own is that you will never be able to take into account all of the customer characteristics that affect your forecasts, such as their satisfaction rate, churn rate, order size, sales cycle length, margins, and seasonal trends.

These unpredictable factors will impact the likelihood of them purchasing from you and affect the sales forecast based on these factors.

An essential part of predictive sales is taking these kinds of factors into account and using them to make smarter decisions. This is what you should be able to do with the "model overdrive" method.

Model Overdrive is a simple attribution method that looks at the impact of each factor that affects a customer's sales forecast, and then applies that to the total number of transactions. This is based on how the correlation between those factors works.

This is a very common technique that every sales team uses to accurately predict customers' sales, and it works because the model overdrive method takes into account the balance between the effects of each factor.

“Method Overdrive” Importance And Working Examples:

a. You need to understand your client's primary channel preference.

b. To know what channel they prefer, look at the channel mix for your competitors and ask them. You can also ask your existing clients what channel they prefer and use the best combination of channels that you know.

c. Analyze your customer's sentiment and their ideal customer experience (ECE): The customer's preference depends on their sentiment toward your brand, the ECE, their emotional states, their interest in specific products, their channel preferences, and more. You can get sentiment scores from websites like Customer Sentiment Survey.

d. Watch what your competitors do: Competitors can also influence your forecasts by running tests with different products, pricing, pricing promotions, different product types, packaging, distribution, product features, and more.

e. Watch what's happening on the channel landscape and figure out your customer's behavior.

For example, when you watch a show about home design, the content of the program is a great predictor of the desire of viewers for their home to be remodelled. 

When you watch a show about political elections, the content is a good predictor of what type of person will vote for the candidate. If you get your customers to watch the show you are looking for, you can accurately forecast the client's desire to complete a project.

f. Look at historical trends: The more you see past behavior, the more you can predict the future. Several factors are easy to see in the historical trends of a particular channel. 

For example, new customers are more likely to be brand-loyal than returning customers, and returning customers are more likely to be using more channels than new customers.

g. Look at your historical customer behavior: Follow up with customers you have seen more than once to learn what kinds of channels they are using, what they are using, and what they are planning to use in the future.

Marketers are using historical customer behavior to predict the future behavior of customers.

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