SALES POTENTIAL IS A PART OF MARKET MEASUREMENT AND FORECSATING

The process of estimating Sales Potential for various products and services has been described in detail in this Tutorial. This process represents a part of the market measurement and forecasting procedure, and it is illustrated below.

KEY CONCEPTS IN MARKET MEASUREMENT AND FORECASTING

SALES POTENTIAL

There are several methods for determining sales potential for products or services in the specific market. Some of these methods for assessing the Current Market Demand and Sales Potential are explained in detail in Tutorial 5.

Evaluation of the company's sales potential in selected market segments helps management in preparing more accurate sales forecasts. Three of these methods are mentioned below.

THREE METHODS FOR DETERMINING SALES POTENTIAL

The Chain-Ratio Method		The Market-Buildup Method		The Buying-Power-Index Method

SALES FORECASTS

Sales Forecasts provides a quantitative estimate of the level of actual sales, expressed in monetary terms, or of units of product to be sold during a specified period of time. The sales forecast is usually prepared on an annual basis, taking into consideration several factors illustrated below.

SALES FORECASTING FACTORS

Past Sales Performance		Existing Market Conditions		Product Demand Fluctuations		Competition

IMPORTANCE OF SALES FORECASTS

Sales Forecast provides an important foundation for the financial, production, and human resources departments to plan their work and ascertain their needs for the forthcoming budgeted period. Managers, however, must be careful in using the sales forecast estimates for two reasons outlined below.

WHY SHOULD MANAGERS BE CAREFUL WITH SALES FORECASTS?

There are several Sales Forecasting Methods commonly used by managers in preparing sales forecasts. Three of these methods are illustrated below.

SALES FORECASTING METHODS

Sales Force Composite  Opinion		Jury Of Executive Opinion		Survey Of Buying Intentions

JURY OF EXECUTIVE OPINION

Jury Of Executive Opinion is another forecasting method commonly used by sales managers. This method is based on Sales Forecasts prepared by several members of the company's management team. All participating executives prepare an individual sales forecast using their own judgment. Subsequently, all individual sales projections are evaluated and finally added up.

Active participation by the company's executives has proven to be useful in preparing accurate short-term forecasts. This method, however, demands substantial experience and understanding of overall requirements in the marketplace. Several factors that are usually considered during the Jury Of Executive Opinion procedure are outlined below.

JURY OF EXECUTIVE OPINION FACTORS

Nature Of Company's Products Or Services		Customers' Requirements		Competition		Economic Conditions In The Marketplace

SURVEY OF BUYING INTENTIONS

A Survey Of Buying Intentions can be used as an alternative or an addition to the above mentioned sales forecasting methods. This method entails surveying a sample of customers to determine the types and quantities of products or services they are likely to buy in the future.

A survey of buying intentions may be conducted by using a broad range of communication media illustrated below.

COMMUNICATION MEDIA USED IN A SURVEY OF BUYING INTENTIONS

Personal Interviews		Phone		Mail Questionnaires		Internet

IMPORTANCE OF USING SEVERAL SALES FORECASTING METHODS

In a Survey Of Buying Intentions, all customer responses are subsequently evaluated and added up to determine the total demand for each product.

This method has proven to be useful in preparing sales forecasts for industrial goods in well-defined small market segments. However, it is often a time consuming and expensive method that does not guarantee that interviewed customers will always act according to their original answers and intentions.

Since most organizations offer a variety of products or services to different customers in a constantly changing market environment, it is often impractical to use only one sales forecasting method. For this reason, sales managers often use a combination of methods and utilize the input from sales people, executive managers, and customers at the same time.

SALES STRATEGIES

Once Sales Forecasts are prepared and overall Sales Objectives are established, it is necessary to develop a detailed Sales Plan which will provide guidance to the company's management in the process of achieving their objectives.

A well-defined plan must be based on a set of appropriate Sales Strategies for the forthcoming fiscal year. These strategies represent the continuation of the Marketing Strategies which are discussed in detail in Tutorial 5. Some examples of sales strategies that could be adopted by a sales manager are outlined below.

DEVELOPMENT OF SALES STRATEGIES

Marketing Strategies

Develop A Set Of Appropriate Sales Strategies

THE SALES FORCE REQUIREMENTS

The next step in the sales planning effort entails Evaluation Of Sales Force Requirements to meet the company’s sales objectives. The sales manager must assess the overall sales plan, evaluate each of the three options presented below, and select the most appropriate option.

THREE OPTIONS IN THE SALES FORCE REQUIREMENTS

Reduce The Sales Force		Maintain The Sales Force		Increase The Sales Force
Reduce the present number of sales people.		Maintain the present number of sales people.		Increase the present number of sales people.

If the number of sales people must be increased, the sales manager must make a choice between two options outlined below.

TWO OPTIONS FOR INCREASING THE SALES FORCE

SALES AGENTS OR INDEPENDENT REPRESENTATIVES

One of the options available to business owners and sales managers is to employ outside Sales Agents or Independent Sales Representatives (Sales Reps) to sell the company’s products and services in the marketplace. The use of agents or independent representatives has several advantages outlined below.

ADVANTAGES OF USING OUTSIDE AGENTS

DISADVANTAGES OF USING OUTSIDE SALES AGENTS

One of the prime disadvantages in dealing with sales agents is that their activities cannot always be effectively controlled by the sales manager. This may present a particular problem since sales agents plan their own movements in the marketplace and work according to their own time schedules.

SALES PEOPLE

Another option that can be exercised by the business owner and the sales manager is to hire Sales People. This option may also present certain advantages and disadvantages which are summarized below.

ADVANTAGES OF USING SALES PEOPLE

COST OF USING SALES PEOPLE

The employment of sales people may represent a costly exercise. It is essential, therefore, to assess the need for additional sales employees and to estimate the total cost of their employment. Estimating the Sales Force size entails a number of considerations and may be carried out in several ways.

Two Methods For Estimating The Sales Force Requirements commonly used by business owners and sales managers are illustrated below.

METHODS FOR ESTIMATING THE SALES FORCE REQUIREMENTS

The "How Much Can The Company Afford" Method		The "Number Of Sales Calls" Method

THE "HOW MUCH CAN THE COMPANY AFFORD" METHOD

The "How Much Can The Company Afford" Method is based on matching two basic variables outlined below. This method has an advantage since all sales costs will remain in line with the company's projected revenues. The main disadvantage, however, is that this method does not account for the real needs of customers in the marketplace.

TWO VARIABLES OF THE
"HOW MUCH CAN THE COMPANY AFFORD" METHOD

THE "HOW MUCH CAN A COMPANY AFFORD" METHOD

Consider, for example, a medium-sized company that:

Assume that:

THE "NUMBER OF CALLS" METHOD

The "Number Of Sales Calls" Method, on the other hand, is designed to develop a sales force in accordance with specific customer needs. This method takes into account four variables outlined below. (47)

The size of the sales force can be determined as follows:

FOUR VARIABLES IN THE "NUMBER OF CALLS" METHOD

FORMULA KEY:

ADVANTAGES OF THE "NUMBER OF CALLS" METHOD

The "Number Of Sales Calls" Method enables the sales manager to determine the required size of the company's sales force well in advance in accordance with specific customer needs.

One of the drawbacks of this method, however, is its failure to account for income and expenditures associated with different aspects of customer service. Thus, it becomes difficult to establish whether the current frequency of sales calls enables the company to maximize its profits through servicing customers.

THE "NUMBER OF SALES CALLS" METHOD

Consider, for example, a medium-sized company that:

Assume that:

The size of the sales force can be determined as follows:

In reality, however, the company's customers usually vary in size and subsequently will have different needs. These needs, in turn, should be translated into:

An ideal frequency of sales calls per year for each customer.

Consider, for example, that the company has:

Assuming that the average length of each sales call and the selling time per sales person remain unchanged, the size of the sales force can be determined as follows:

HIRING OF SALES PEOPLE

Once the size of the sales force is determined, it becomes necessary to decide between hiring experienced or inexperienced Sales People, as illustrated below. Thus, the final decision regarding the choice of suitable sales people remains with the business owner or the sales manager.

TWO OPTIONS FOR HIRING SALES PEOPLE

Hiring Experienced Sales People		Hiring Inexperienced Sales People
Hiring experienced sales people will enable the company to respond to immediate market demands and to provide better service to customers. However, the high compensation package often required by experienced sales people may be a deterrent.		Hiring inexperienced sales people may be less costly in terms of the compensation package, but it will require additional investment in sales training. In the long run this may not be the most cost-effective option.

SALES BUDGET

The ultimate task of the sales planning process is development of a sound Sales Budget. All components of the sales budget must be prepared on an annual basis and thereafter divided into monthly targets in accordance with relevant sales projections.

The sales budget summarizes all details related to several important elements outlined below.

ELEMENTS OF A SALES BUDGET

THE SALES BUDGETING PROCESS

The main purpose of the Sales Budgeting Process is to enable the management team to lead its organization toward a predetermined goal and to achieve the desired level of the company's profitability. A typical sales budgeting process entails a number of steps outlined below.

STEPS IN THE SALES BUDGETING PROCESS

Step 1: Become Familiar With The Company's Marketing Plan.

Step 2: Formulate The Company's Sales Objectives In Accordance With The Company's Marketing Plan.

Step 3: Prepare Annual Sales Forecasts Per Product, Or Service, Or Customer, Or Sales Territory, Or A Combination Thereof.

Step 4: Identify Personal Selling And Promotional Requirements Needed To Meet The Company's Sales Objectives.

Step 5: Summarize Estimated Values Of Annual Sales Forecasts And Selling Costs And Prepare A Budget.

Step 6: Compare Actual Sales Revenues And Selling Costs With The Budgeted Values On A Monthly Basis And Identify Budget Variances.

Step 7: Evaluate All Budget Variances And Use Them For Controlling Purposes And For Further Budget Revisions (Refer back to Step 5).

SALES BUDGETING

The Sales Budget must be prepared by the sales manager in accordance with realistic estimates of sales volume likely to be achieved during the forthcoming fiscal period.

Main factors that usually influence the Sales Budgeting Process, discussed in Tutorial 3, are outlined below. As a result of detailed evaluation of these factors, the sales manager is expected to prepare accurate sales budgets pertaining to all products or services offered by the company.

SALES BUDGETING FACTORS

Sales budgets provide quantitative estimates of the level of sales, expressed in various terms, as illustrated below.

TERMS OR UNITS USED IN THE SALES BUDGET

Monetary Terms		Units Of Product To Be Sold		Units Of Service To Be Rendered

A simplified Sales Budget for a company is presented below.

SALES BUDGET