Chapter 5
The strategic roles of
information
( sales forecast & sales
Territory )
Main references :
Sales Force Management 2017 by Gregory A. Rich &
Selling & Sales Management 2019 David Jobber, Geoffrey Lancaster and
Kenneth Le Meunier-FitzHugh
1
Objective of this chapter
• Discuss market potential, sales potential, sales forecast, and sales
quota
• Understand methods by which sales managers develop sales forecasts
• Explain types of quotas used in sales management
• Discuss approaches to determine sales force size
• Describe sales territory design process
• Understand importance of sales analysis
2
Sales Forecast Sales Forecasting Methods cont’d
• Mathematical methods
• Moving average models
1. Forecasting and Planning • Exponential smoothing models
2. Estimating Potential • Regression Models
• Operational Methods
• Customer analysis • Test markets
• Market factor derivation • “Must-do” calculations
• Survey of buyer intentions • Capacity-based calculations
• Test Markets 4. Guiding Principles of Forecasting
3. Sales Forecasting Methods 5. Methods for Determining Sales Budgets
• Survey Methods • Percentage-Of-Sales Method
• Executive opinion • Objective-and-Task Method
• Sales force composite
• Buyers’ intentions
3
Forecasting
• Sales managers are often involved
• Once the sales forecast is prepared, it becomes a key
factor in all operational planning throughout the
company
• First step is to estimate the market potential (which is
the total potential sales for the entire industry)
• …because it’s hard to estimate company sales when you don’t know size of the
entire industry
4
Key Terms Used In Forecasting Total industry
Market potential
• The total expected sales of a product for the 2017 U.S. Market Potential for beer:
entire industry in a specific market over a = $82.9 billion
stated period of time
Sales potential
• The maximum level of sales of a product that 2017 U.S. Sales Potential
an individual firm could achieve in ideal for Anheuser-Busch InBev
beer sales:
conditions
$37.3 billion
Sales forecast
• The total sales of a product that an individual
firm expects to achieve during a specified Company-specific
forthcoming time period, in a stated market,
and under a proposed marketing plan
5
Understanding the customer is key to
improving the accuracy of forecasts
The following methods of estimating
potential are all based on an analysis
of the customer:
• Customer analysis
• Market-factor derivation
• Survey of buyer intentions
• Test markets
6
Market-factor derivation
• The market-factor derivation method for determining the size of a
potential market begins with a market factor.
• A market factor is an item or element in a market that
(1) causes the demand for a good or service or
(2) is otherwise related to that demand.
To illustrate, the annual birthrate is a market factor underlying the demand for
playpens. That is, this element is related to the number of playpens that a
manufacturer can sell. Using the birthrate as a market factor, a manufacturer of
playpens would estimate the sales potential for playpens as follows
Estimated number of births per year 4,000,000
Times: Percent who buy playpens X 0.33
Market potential 1,320,000
Times: Potential market share X 0.30
Sales Potential 396,000 7
Example 2 market factor
An independent supermarket operator in Denver, Colorado, computed the store’s
sales potential by using an estimate of food and beverage sales in the Denver
metropolitan area (about $4.897 billion) as the market factor.The store did not sell
to the entire area but rather appealed only to a region in which about 15 percent of
the population resided. So the operator estimated the market potential to be about
$734.7 million. Since three other large super-markets plus some smaller stores
competed in that same area, the operator set 20 percent as the store’s probably
share of the market. Therefore, the sales potential was $146.9 million for the year
Denver Food sales $4,897,791,000
Times: Percent of market covered X 0.15
Market potential $ 734,668,650
Times: Potential market share X 0.20
Sales Potential $ 146,933,730
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Market-Factor Derivation - Advantages
• The validity of the method is high. The method is usually founded on
some valid statistics that have relatively little error.
• This technique are that it is fairly simple, requires little statistical
analysis, and is relatively inexpensive to use
• can be used as the basis of the sales forecast.
• In order to forecast sales, the company must estimate what portion of
its sales potential it can reasonably expect to achieve in a given
period.
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Sales Forecasting Methods
• Survey methods
• Executive opinion
• Sales force composite METHOD SOURCE OF DATA
• Buyers’ intentions Executive opinion Executives and managers
• Mathematical methods Sales force composite Salespeople
Survey of buyer intentions Customers
• Moving average models
Moving average models Historical sales data
• Exponential smoothing models
Exponential smoothing Historical sales data
• Regression models
Regression analysis Historical sales and other data
• Operational methods “Must-do” calculations Company operations
• Test markets Capacity-based approach Company operations
• “Must do” calculations Test markets Company operations
• Capacity-based calculations
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Methods Advantages Disadvantages Best Used
Executive Opinion (
Quick, easy, and simple Subjective; Lacks analytical rigor For new products
Dephi)
Salespeople are sometimes When reps are of a high caliber
Relatively simply
overly optimistic When each rep has a small number
Sales force Involves those people who
Other times they may sandbag of customers
composite are responsible for the
(estimate low) to look better When reps’ quota is not tied to
results
Time consuming to gather forecasts
Done by those who will buy Time consuming For new products
Survey of buyers
the product, so accuracy High cost When there are a small number of
intentions
should be good Customer may not cooperate customers
Trend projections: For established products with a
No consideration for major
-moving average Objective and inexpensive history of sales
product or market changes
-exponential smoothing Use historical data When market factors are
-regression analysis Require some statistical analysis
predictable
Objective Unforeseen changes in the When market factors are stable and
Market factors
Fairly accurate and simple market can lead to inaccuracy predictable
Test markets Fairly accurate Time consuming and costly For new products
Moving Average Technique
Salest+1 = 1 / n (salest + salest-1 + … + salest-n)
Forecasting December Sales Using Moving Average Method
8/2016 9/2016 10/2016 11/2016 12/2016*
Actual $ sales $80,000 $84,000 $83,000 $79,000
Two-period moving average ($79,000 + $83,000)/2 = $81,000
Three-period moving average ($79,000 + $83,000 + $84,000)/3 = $82,000
*December 2016 represents the next time period (so current time is the end of November).
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Source: Johnston & Marshall 2014 13
Graph of Actual & Forecast Sales Using Moving Average
Source: Johnston & Marshall 2014 14
Moving Average :Sample Data
Incremental values of +5
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Exponential Smoothing
Salest+1 = L * (Actual salest) + (1 – L) * (Forecasted salest)
FIGURE 12-5 Forecasting December Sales Using Exponential Smoothing
8/2016 9/2016 10/2016 11/2016 12/2016*
Actual $ sales $80,000 $84,000 $83,000 $79,000
Forecasted $ sales for November 2016 $80,000
Exponential smoothing forecast with L=0.3 =
$79,700
0.3x79,000 + 0.7x80,000
Exponential smoothing forecast with L=0.7 =
$79,300
0.7x79,000 + 0.3x80,000
*December 2016 represents the next time period (so current time is the end of November).
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• Advantage associated with the exponential smoothing model over the
moving average technique
• is that the forecaster can determine the degree to which a particular period
can affect forecasted sales.
• Disadvantage associated with the exponential smoothing model is
that the selection of the smoothing constant is somewhat arbitrary.
Despite this limitation, exponential smoothing models are used by a
large number of companies to forecast sales
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Regression Analysis
Using Years as the Predictor Variable
Year # of reps Sales
1 2 300,000
2 4 400,000
3 4 500,000
4 10 1,000,000
5 12 1,100,000
6 13 1,200,000
7 ?? ??
Year 7 Sales Forecast
= $1,460,000
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Regression Analysis
Using # of Reps as the Predictor Variable
Year # of reps Sales
1 2 300,000
2 4 400,000
3 4 500,000
4 10 1,000,000
5 12 1,100,000
6 13 1,200,000
7 ?? ??
Year 7 Sales Forecast
(assuming 14 reps)
= $1,289,238
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• A key advantage of regression is that it allows forecasters to
experiment with “what-if scenarios.”
• Like with the example above, one could ask: What
• will sales be if we hire 15 reps? What if we hire 17 reps? And so on.
• To make these what-if scenarios especially helpful toward strategic
planning, multiple predictor variables are used and typically based on
elements of the marketing mix (e.g., advertising expenditures,
number of retail outlets, etc.).
• Note that when more than one predictor variable is used within the
same regression analysis—this is called multiple regression.
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Fit the
Guiding Method to
Product/
Market
Principles for Understand
Math and
Use More
than One
Forecasting Statistics Method
Forecasting
Principles
Use Minimize
Minimum / the Number
Maximum of Market
Technique Factors
Recognize
limitations
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Must-Do” Forecasts
• Often management forecasts what volume of sales it needs to accomplish
certain goals.
• For example, sales forecasts for new products are difficult to develop
because historical sales data do not exist. Hence, Firms often decide that a
reasonable forecast is the sales that must be achieved for a firm to reach
its break-even point.
In other words, a must-do forecast is based on the sales volume needed to
generate sufficient cash to cover fixed and variable costs or some profit
level.
• For example, one new consulting service enterprise budgeted its total over-
head costs at $165,000 for the first year. The entrepreneur desired a profit
of $60,000, which would represent her salary.
• Given that the product was a service, there were no costs of goods sold.
Thus, she projected sales at $225,000 for the year and proceeded to plan
on that basis.
22
Capacity Based-Forecasts
Sometimes a firm’s market is such that it can sell everything it can
make or buy.
• Thus, its capacity becomes its sales forecast. For example, the owner
of a highly acclaimed restaurant developed a capacity-based forecast
of sales according to how many seats the restaurant had: 120 seats at
30 tables.
• The restaurant had a dinner-only format in which only two seatings
per evening were planned. Thus, a total of 240 people could be
served in each of the 300 nights a year the restaurant was open.
There was a waiting list to eat at the restaurant during each night, so
empty seats would not be encountered. The average ticket withdrinks
was forecast at $30. Hence, sales for the year were projected at
$2,160,000($30 times 240 people times 300 nights)
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Methods for Determining
Sales Budgets
• Percentage-of-Sales Method
• Manager multiplies the sales forecast by various
percentages for each category of expense.
• Objective-and-Task Method
• Manager determines the task that must be accomplished
in order to achieve specific objectives, and then estimates
the costs of performing the tasks.
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Sales Territories 3. GIS Technology
• Software
1. Nature Of Territories • Hardware
• Benefits And Problems • Data
• Trained People
2. Designing Territories
• Balancing Sales Potential 4. Assigning Salespeople
And Workload 5. Revising Territories
• Control Units • Claim Jumping
• Buildup Vs. Breakdown • Territorial Coverage by Routing
Methods
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Sales Territory
• Comprises a number of present and potential
customers, located within a given geographical area
and assigned to a salesperson, branch, or
intermediary (retailer or wholesaling intermediary).
• Key word: customers
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Enhances
customer
Benefits Increases
coverage
Reduces
of Good morale for
the
salespeople
travel time
and selling
costs
Territory Good
territory
design...
Design Increases
sales for
Provides
more
equitable
the firm
rewards
Aids
evaluation
of sales
force
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Procedure for Designing Sales
Territories
2. Determine 5. Set up
3. Determine 4. Assign 6. Evaluate
1. Select a location and territorial
basic salespeople effectiveness
control unit potential of coverage
territories to territories of design
customers plans
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Designing Territories
• Typically, territories are designed so that they are all equal with
respect to both sales potential and workload – or at least as close as
possible
• Sales potential
• The expected level of sales in the territory for a given period of time
• Corresponds to the size and the number of customers in the territory
• Workload
• The amount of traveling (total square miles) and the required number of calls
associated with a territory
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Territorial Control Units
•States
•Counties
•Cities
•Zip-code areas
•MSAs (Metropolitan Statistical Areas)
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For Buildup Method, For Breakdown Method,
Buildup Method vs. management must determine: management must determine:
Breakdown Method
1. Desirable calls patterns for each 1. Company sales potential of entire
account market
2. Total calls needed in each control
2. Sales potential in each control unit
group
3. Workload capacity of reps
3. Sales volume expected from each
Total calls possible per rep per year = salesperson
number of daily calls x days selling
4. Tentatively set territorial boundary 4. Tentative territorial boundary lines by
lines by combining control units until combining control units until total sales
total calls needed = total calls possible potential = expected sales volume
5. Modify territories as needed. 5. Modify territories as needed.
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Computers in Territory Design
• Geographic Information System (GIS)
• Combines multiple layers of information to provide in-depth
understanding of a sales territory.
• Elements of a complete GIS:
• Software
• Hardware
• Data
• Trained people
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Factors Influencing Workloads and Territory Size
As Workload for a Salesperson Increases, Territory Size Decreases…
• Nature of the job • Intensity of market coverage
• Smaller territory needed as • Smaller territory needed for mass
amount of necessary pre-sale and distribution
post-sale activity increases
• Nature of the product
• Competition • Smaller territory needed with
• Smaller territory needed if complex products
company makes an all-out effort
to meet fierce competition
• Stage of market development
• Larger territory needed as
company enters new market
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Sales Territories For Pharmaceutical Sales Reps
Divide…
•The 48 states into 5-10
regions
•Map shows 7 regions
•Each region into several
districts
•Each district into 8-12
territories
•Typically 1 sales rep per
territory
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Assigning Salespeople to Territories
• The often stated ideal goal in territory design is to make
them all equal with respect to both workload and sales
potential
• However, some companies intentionally design some sales
territories to be “smaller” than others
• Rookie salespeople are then placed in the smaller territories
• And top performers get the bigger, more desirable territories
35
Revising
Territories
• Studies indicate that over half of all
sales territories need to be realigned
because they are either too large or too
small
• See how realignment increases
sales by almost 50%
[(680-460)/460 = 220/460 = 47.8%]
• Sales executives should review
territories at least once a year to see if
they need to be realigned
The relationship between sales potential and actual sales
is positive, but with diminishing returns…
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Indications of Need for Adjustment
• sales potential outgrows a territory, and as a result the
salesperson skims the territory rather than covering it intensively
• selling task changes: customers need more value added services:
salespeople with less time to sell. So the company made the
territories smaller and hired new salespeople, giving each one more
time to sell.
• Sales persoanl left and have to serve more customers for the sales
force
• Need to update with market changing forces etc
37
Indications of Need for Adjustment
• The sales professionals left behind must service more customers in larger
territories. They are overworked and stressed because they cannot adequately
cover their territory. In these cases, the need for adjustment is clear, but the
executives believe they lack the resources to x the situation. This is often short-
sighted.
• At the other end of the scale, territories may need revising because they are too
small. They may have been set up that way, or changing market conditions may
have caused the situation. The territories should be realigned, which might
involve moving control units away from a territory that is too large
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Claim jumping
• When a salesperson calls on customers in a
territory assigned to another salesperson (i.e., a
coworker…)
• Sales managers should never allow this
• Creates bad feelings, leads to inefficiencies, hurts
morale
• Claim jumping is sometimes a sign that territories
need to be revised
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Routing the Sales Force
• The managerial activity that establishes a formal
pattern for sales reps to follow as they go
through their territories
• Best for routine sales jobs with regular call
frequencies
• Reduces travel expenses as it ensures a more
efficient territory coverage, but some reps
resent it
• Common problem when salespeople route
themselves: Area B (on right) gets neglected
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Examples Of Two Routing Patterns
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Tutorial 5
Q1: USe slide 19, to predict no. Of sales rep needed for 7th year.
Q2 : Do the MCQ
42
