HOW TO CREATE AN EFFECTIVE PROCESS FOR DEVELOPING SALES FORECASTS AND MARKETING BUDGETS (PART 2)
DO MARKET RESEARCH
There are four key factors that will affect the reliability of your company’s market research: the quality and objectivity of the survey process, the size of your market sample, the homogeneity of your sample, and the time frame for your questions.
As a rule, the larger your sample size is, the more reliable your market research will be. For example, if you poll every business in Lagos, Nigeria, you will be able to find out exactly how many of those businesses plan to purchase laptops for their sales force. If you poll just ten businesses, your result will be much less reliable.
The more closely buyers in another market’s demographics match those of your market sample, he more likely it is that those buyers will have the same purchase intent. For example, businesses in Lagos, Nigeria will very likely have similar purchase plans as businesses in Abuja, Nigeria. However, businesses in Abeokuta, Nigeria, which is a very small town, will most likely have different purchase concerns.
The shortest timeframe for a market survey, the more reliable it will be. So a market survey of businesses’ intent to purchase laptops in the next month will be more accurate than a market survey of business’ intent to purchase laptops over the next year.
A Reliable Check
Market data on sales of related products can help you identify profitable market opportunities and can provide a reliable check for your sales forecast. For example, some years ago the sales of digital cameras generated demand for photo-quality color inkjet printers. Since customers that purchased digital cameras rarely need more than one photo-quality printer, this effectively limited the market for photo-quality printers to the number of customers that have purchased digital cameras.
BUILD A FORECAST MODEL
Sophisticated mathematical models can be created to help your company forecast sales based on historical sales data. These models evaluate sales trends, sales cycles, seasonal purchase patterns, and other events, and use exponential smoothing and other mathematical procedures to calculate future sales performance. However, most companies create sales forecasts based on an analysis of key market factors.
The easiest, but rarely the most accurate, way to predict potential sales for a product is a one-factor market analysis. For example, if a PC needs a modem to transmit data, and virtually all PCs transmit data, it is reasonable to assume that the market for PC modems will be approximately equal to the number of PCs that have been sold.
A multi-factor market analysis can provide a more accurate estimate of the potential market for a product. For example, if 20 percent of PCs are manufactured with modems, 15 percent of modems are connected to local area networks, and 30 percent of PCs already have an after-market modem installed, 65 percent will not need an after-market PC modem.
- If you assume that 10 million PCs have been sold, and that the market for PC modems is equal to 35 percent of the installed base of PCs, the total market for PC modems will be equal to 3.5 million units.
You can further refine this sales forecast by considering other key market factors. For example, if your company sells high speed digital modems, or distribute modems through system integrators, you can use these factors to develop a more accurate forecast. Your market research might reveal that:
- 80 percent of modems are sold by system integrators and 20 percent of modems are sold through computer stores and mail-order.
- 30 percent of modems are external modems, and 70 percent of modems are internal modems.
- 20 percent of modems are high-speed digital modems, and 80 percent of modems are low-speed analog modems.
- Five modem manufacturers produce high-speed digital modems, which are priced between $695 and $895.
- 25 percent of high-speed digital modems sell for more than $800, 50 percent sell for between $700 and $800, and 25 percent sell for less than $700.
- The price of PC modems is declining about 30 percent per year.
- A customer “intent to purchase” study indicates that 30 per cent of PCs will be upgraded with modems over the next twelve months.
- Your company has priced its modem at $695 and supports it with a two-year unconditional warranty – besting the 90-day warranty offered by your competitors.
- Your modem has just received a “Best Buy” rating in comparative review in a leading trade publication.
- Your company has budgeted $285,000 to market it modems.
With this additional information you can calculate that the market for high-speed, external modems that are sold through system integrators is:
3.5 million PCs
x20% (high-speed)
x30% (external)
x80 (sold through system integrators)
=168,000 modems
x30% (intent to purchase this year)
=50,400 modems
At this point, you might poll your sales manager to determine how many modems he or she believes your company will sell over the next one year.
- Based on preproduction sales orders of 1,300 modems to a major Internet Service Provider and positive feedback from customers at a trade show, your company’s sales manager forecasts sales of 10,000 modems over your company’s first year of production.
Now, you will need to evaluate all of the data that you have collected to predict how successful your company will be in launching its new modem.
Based on your company’s modest marketing budget, your modem’s competitive price, exceptional warranty and favorable product review, your sales manager’s confidence, and your survey of customers’ loyalty to their current suppliers, you estimate that your company will capture 12 percent of its PC modem market during its first year of production.
50,400 x 12% (market share) = 6,084 modems
Assuming that your reseller price is 60% of your $695 retail sales price, your revenue forecast for the first year will be:
$417 (Reseller Price) x 6,048 modems = $2.5 million.
In this example, your company could have relied on its manager’s forecast and built 10,000 modems. But the price of modems is coming down 30 percent each year, and if your company became overstocked, it might be forced to sell some of its modems at a loss. Betting on a more conservative forecast may result in losing a few sales to competitors, but your company will reduce its investors’ risk, and may be able to meet additional demand for its modems by increasing its production facilities or subcontracting production to another manufacturer.
Total market for products or service | Number of modems sold worldwide | Number of modems sold by company | Number of worldwide market | Company’s sales revenue |
Last year | 35,000 | – | – | – |
This year | 50,400 | 6,048 | 12 | $2.5 million |
Next year | 59,950 | 9,592 | 16 | $3.5 million |
Two years | 75,372 | 14,389 | 19 | $5 million |
Three years | 87.205 | 19,185 | 22 | $6 million |
Where do these market estimates come from?(For example: Customer survey, industry reports, internal analysis, government statistics, etc.)Other forecast is based on user surveys and market estimates provided by the Computer Products Research Company, Our internal market data confirms these estimates | ||||
Are you confident that the information that you have about your market is accurate and up to date?Yes – we expect high speed DSL access to drive demand for our digital modems. |
Potential Pitfalls
If your market is immature, if new products are introduced during your product’s life cycle, if a major competitor goes out of business, or if other key market factors change, your sales can be impacted substantially.
Part 3 continues in the next article
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