Forecasting allows business to see into the futre and predict outcomes. Here are my top 10 forecasting models:
1. Survey of buyers’ intentions
This involves asking the buyers their buying intentions by the use of surveys. An example is:
Do you intend to buy an automobile within the next 6 months?
0.00 0.20 0.40 0.60 0.80 1.00
No Slight Fair Good High Certain
Chance Possibility Possibility Possibility Possibility
While it is good to ask the buyers directly, things may happen between when they took the survey to the time they said they would purchase the product. They may change their minds or cannot afford it when they said they would buy it.
2. Composite of Sales Force Opinions
This involves asking your sales reps what they think about how much current and future customers will purchase. Even though sales reps are knowledgeable about the market, it is unreasonable to think each sales rep will judge future purchases accurately. Some may predict optimistically while others may predict pessimistically resulting in a wide range of opinions. Sales reps are often unaware of internal plans that may not be factored into a sale rep’s prediction.
3. Expert Opinion
This involves asking for forecasts from experts such as suppliers, dealers, consultants, and trade associations. This falls into the same category as the sales force, that is difficult for experts to forecast accurately. It is good to combine this source with another forecasting source.
4. Past-Sales Analysis
This involves forecasting future sales based on past sales. What happened last year may happen again this year. This is also good to see trends in sales so companies are able to predict future treads and better prepare themselves. Past sales can be weighted so that the most recent sales are weighted more than older sales to give a better forecast.
5. Market-Test Method
This involves putting a product out on the market in limited areas to see how well it performs. It is good to see how well it does in real life situations, but it is hard to determine how it does in other areas unless it is fully released in the market.
6. Total Market Potential
This is the maximum amount of sales that might be available to all firms in an industry during a given period, under a given level of marketing effort and environmental conditions. For example:
If 100 million people buy books each year, and on average they buy 3 books, and the average price of each book is $20 then…
100 million people x 3 x $30 = $6 billion total market potential
Calculating total market potential is good to see what kind of demand there will be for the industry, but not detailed enough to see demand for your particular product.
7. Multiple-Factor Index Method
This is useful for calculating the demand by geographic areas. It takes into account many factors to get one final demand number. For example:
If we are a drug manufacturer and want to find out the potential of Virginia, we would use many factors to calculate the demand. We will weight these factors to give an accurate view of what may happen. Suppose Virginia had 2.00 percent disposable income, 1.96 percent of US retail sales, 2.28 percent of the US Population and weighted these 0.5, 0.3, and 0.2. The following equation calculates the buying power in Virginia:
[0.5(2.00) + 0.3(1.96) + 0.2(2.28)] = 2.04 percent of the nation’s drug sales.
Good for accurate results, but may be difficult to obtain the correct weights to get a good result.
8. Company Sales Forecast
This involves calculating the expected level of company sales based on a chosen marketing plan and an assumed marketing environment. This is trying to figure out how much sales the company can produce based on a chosen marketing plan. This is good to see how well a marketing plan will do, but does not take into effect outside factors that may influence the actual results.
9. Industry Sales
This involves figuring out your competitors’ sales by evaluating your company against the entire industry. You can obtain this information from the industry trade association. It is good to see how you are doing against your competition, but that is about it. For example:
If industry sales are rising by 10% but your company sales are only increasing by 5% you are losing sales to your competitors.
10. Market Demand
This is the demand for a product that is the total volume that would be bought by a defined customer group in a defined geographical area in a defined time period in a defined marketing environment under a defined marketing program. This is good to see what the market would want, but it makes a lot of assumptions.
1. Survey of buyers’ intentions
This involves asking the buyers their buying intentions by the use of surveys. An example is:
Do you intend to buy an automobile within the next 6 months?
0.00 0.20 0.40 0.60 0.80 1.00
No Slight Fair Good High Certain
Chance Possibility Possibility Possibility Possibility
While it is good to ask the buyers directly, things may happen between when they took the survey to the time they said they would purchase the product. They may change their minds or cannot afford it when they said they would buy it.
2. Composite of Sales Force Opinions
This involves asking your sales reps what they think about how much current and future customers will purchase. Even though sales reps are knowledgeable about the market, it is unreasonable to think each sales rep will judge future purchases accurately. Some may predict optimistically while others may predict pessimistically resulting in a wide range of opinions. Sales reps are often unaware of internal plans that may not be factored into a sale rep’s prediction.
3. Expert Opinion
This involves asking for forecasts from experts such as suppliers, dealers, consultants, and trade associations. This falls into the same category as the sales force, that is difficult for experts to forecast accurately. It is good to combine this source with another forecasting source.
4. Past-Sales Analysis
This involves forecasting future sales based on past sales. What happened last year may happen again this year. This is also good to see trends in sales so companies are able to predict future treads and better prepare themselves. Past sales can be weighted so that the most recent sales are weighted more than older sales to give a better forecast.
5. Market-Test Method
This involves putting a product out on the market in limited areas to see how well it performs. It is good to see how well it does in real life situations, but it is hard to determine how it does in other areas unless it is fully released in the market.
6. Total Market Potential
This is the maximum amount of sales that might be available to all firms in an industry during a given period, under a given level of marketing effort and environmental conditions. For example:
If 100 million people buy books each year, and on average they buy 3 books, and the average price of each book is $20 then…
100 million people x 3 x $30 = $6 billion total market potential
Calculating total market potential is good to see what kind of demand there will be for the industry, but not detailed enough to see demand for your particular product.
7. Multiple-Factor Index Method
This is useful for calculating the demand by geographic areas. It takes into account many factors to get one final demand number. For example:
If we are a drug manufacturer and want to find out the potential of Virginia, we would use many factors to calculate the demand. We will weight these factors to give an accurate view of what may happen. Suppose Virginia had 2.00 percent disposable income, 1.96 percent of US retail sales, 2.28 percent of the US Population and weighted these 0.5, 0.3, and 0.2. The following equation calculates the buying power in Virginia:
[0.5(2.00) + 0.3(1.96) + 0.2(2.28)] = 2.04 percent of the nation’s drug sales.
Good for accurate results, but may be difficult to obtain the correct weights to get a good result.
8. Company Sales Forecast
This involves calculating the expected level of company sales based on a chosen marketing plan and an assumed marketing environment. This is trying to figure out how much sales the company can produce based on a chosen marketing plan. This is good to see how well a marketing plan will do, but does not take into effect outside factors that may influence the actual results.
9. Industry Sales
This involves figuring out your competitors’ sales by evaluating your company against the entire industry. You can obtain this information from the industry trade association. It is good to see how you are doing against your competition, but that is about it. For example:
If industry sales are rising by 10% but your company sales are only increasing by 5% you are losing sales to your competitors.
10. Market Demand
This is the demand for a product that is the total volume that would be bought by a defined customer group in a defined geographical area in a defined time period in a defined marketing environment under a defined marketing program. This is good to see what the market would want, but it makes a lot of assumptions.
