Business Forecasting

This article explores how businesses rely on sales forecasting to grow the business as well as develop strategic plans as to what direction the organization should move. Even though there are many benefits when forecasting, many believe there are factors that make the markets difficult to forecast. For example, forecasting is difficult in real markets because of the nature of these markets; the dominant characteristic of real world markets is probably never the same twice. There are three broad schools of thought that have an influence on how forecasting is practiced. These three schools of thought are economic, statistical or operations research and judgmental.

In order for a business to be successful, it must have the ability to make timely and accurate forecasts. One could assert that all businesses forecast in some way. "Virtually every manufacturing or service company needs to generate forecasts of their short to medium term sales" (Boulton, 2003, p. 1). However, "while most business people recognize the need for effective forecasts, there is a tendency to view forecasting as either a black art or an impossible task" (Crosby, 1997, p. 3).

This article explores how businesses rely on sales forecasting to grow the business as well as develop strategic plans as to what direction the organization should move. "The objective of forecasting sales is to assist businesses (and other organizations) in planning their purchasing, personnel, production or service functions, and finances" (Sartorius & Mohn, 1976, p. 2). Boulton (2003) believed that organizations would have commercial advantages if they could forecast demand more accurately, and the forecasts could be used to:

• Plan purchasing, production and inventory.
• Serve as the basis for marketing or sales planning.
• Assist in financial planning and reporting or budgeting.

According to Crosby (1997), there are tangible and intangible benefits when a successful forecasting system is in place. Some of these benefits include:

Tangible Benefits

• Increased profits from operations
• Decrease in nonproductive cash consumption
• Increased factory utilization
• Decrease in excess and obsolete inventories
• Increased inventory turns
• Decrease in negative manufacturing variances
• Increased performance to "customer request date" (CRD)
• Decrease in number of stock-out situations
• Decrease in cost of purchased items
• Decreased time-to-market for new products

Intangible Benefits

• Improved customer relations
• Reduced level of frustration (internally and externally)
• Reduced meeting time
• Critical resources freed up from expediting tasks
• More frequent and more accurate views of the marketplace
• Increased organizational flexibility (p. 4).

Even though there are many benefits when forecasting, many believe there are factors that make the markets difficult to forecast. For example, forecasting is difficult in real markets because of the nature of these markets; the superior trait of real world markets is most likely never the same more than once. Most of the markets tend to share most of the characteristics listed below:

• Frequent promotional activity
• Fluctuating positioning at point of sale between value (i.e. low prices) and added value (i.e. quality)
• High level and variety of competitor activity
• Promotions are seldom at the same time each year
• The size of the distribution "pipeline" tends to vary
• Growing concentration in sales to biggest customers (Boulton, 2003, p. 2).

Application

Forecasting System Schools of Thought

There are three broad schools of thought that have an influence on how forecasting is practiced. These three schools of thought are economic, statistical or operations research, and judgmental.

• The economic school was a creation of the economics departments of the academic world and focuses on the use of causal or explanatory models that are developed from simple and complex regression analyses of key economic variables.
• The statistical and operations research school tends to go from the specific to the general by taking individual parts of the equation and summing them in order to produce an organizational or industry forecast.
• The judgmental school relies on practices such as the sales force estimates, the jury of executive opinion, and a group of forecasting approaches called the Delphi Technique.

Techniques for Forecasting

Chambers, Mullick, and Smith (1971) wrote an article that described 18 sales forecasting techniques that can be broken down into three categories.

CATEGORY Technique Description Typical Application Qualitative Methods Delphi Methods This technique eliminates the bandwagon effect of majority opinion. Forecasts of longrange and new product sales, forecasts of margins. Market Research The systematic, formal, and conscious procedure for evolving and testing hypotheses about real markets. Forecasts of longrange and new product sales, forecasts of margins. Panel Consensus Based on the assumption that several experts can arrive at a better forecast than one person. Forecasts of longrange and new product sales, forecasts of margins. Visionary Forecast A prophecy that uses personal insights, judgment and facts about different scenarios of the future. Forecasts of longrange and new product sales, forecasts of margins. Historical Analogy A comparative analysis of the introduction and growth of similar new products that bases the forecast on similarity patterns. Forecasts of longrange and new product sales, forecasts of margins. Time Series Analysis and Projection Moving Average Each point of a moving average of a time series is the arithmetic or weighted average of a number of consecutive points of the series, where the number of data points is chosen so that the effects of seasonals or irregularity or both are eliminated. Inventory control for low volume items.

CATEGORY Technique Description Typical Application Exponential Smoothing This technique is similar to the moving average, except that more recent data points are given more weight. Production and inventory control, forecasts of margins and other financial data. Box-Jenkins The time series is fitted with a mathematical model that is optimal in the sense that it assigns smaller errors to history than any other model. Production and inventory control for large-volume items, forecasts of cash balances. X-11 This technique decomposes a time series into seasonal, trend cycles, and irregular elements. Tracking and warning, forecasts of company, division, or department sales. Trend Projections This technique fits a trend line to a mathematical equation and then projects it into the future by means of this equation. New product forecasts (particularly intermediate and long term). Causal Methods Regression Model This functionally relates sales to other economic, competitive, or internal variables and estimates an equation using the least squares technique. Forecasts of sales by product classes, forecasts of margins. Econometric Model A system of interdependent regression equations that describes some sector of economic sales or profit activity. Forecasts of sales by product classes, forecasts of margins. Intention-to-buy & Anticipation Surveys These approaches to forecasting are more useful for tracking and warning than forecasting. Forecasts of sales by product classes. Input-output Model A method of analysis concerned with the inter-industry or interdepartmental flow of goods or services in the economy or a company and its markets. Forecasts of company sales and division sales for industrial sectors and sub-sectors. Economic Input-output Model Model used to provide long-term trends for the econometric model. Company sales for industrial sectors. Diffusion Index The percentage of a group of economic indicators that are going up or down. This percentage then becomes the index. Forecasts of sales by product classes. Leading Indicator A time series of an economic activity whose movement in a given direction precedes the movement of some other time series in the same direction is a leading indicator. Forecasts of sales by product classes. Life-cycle Analysis This is an analysis and forecasting of new product growth rates based on S-curves. Forecasts of sales by product classes.

Viewpoints

B2B Marketing

When marketing is mentioned, many think of the function as it relates to consumers. However, there is another side that is expected to blossom during the next decade -- business-to-business marketing. According to the Business to Business' "2007 Marketing Priorities and Plans" survey, marketing efforts will grow as business-to-business marketers increase budgets, do more business online, and try new technologies (Maddox, 2006). Respondents shared some of their goals for 2007, and the top three goals were customer acquisition "(62.3% of the respondents), brand awareness (19.5%) and customer retention (11%). New market growth, product penetration, research and positioning the company as a thought leader were other goals listed in the survey" (Maddox, et. al., 2006, "Marketing priorities"). Although e-mail, search and Web casts were listed as still being important and worthy of some funding, web site development was the clear leader in getting the largest share of the online marketing budget. "The survey also found that 67.7% of advertisers plan to launch new ad campaigns in 2007" (Maddox, et. al., 2006, "Marketing priorities").

"Business-to-Business Marketing is a complex discipline that has become integral to selling products or services to business, industrial, institutional or government buyers" (Oliva, n.d., p. 1). Many forecasters have predicted that this market can expect purchases to net several trillion dollars a year, which is why many are predicting that the growth will outpace business-to-consumer marketing. However, the marketing industry will respond accordingly by providing both markets with sufficient attention even though both have different focuses.

Business Marketing Versus Consumer Marketing

There are many differences between the two forms of marketing such as business marketing using shorter and more direct channels of distribution (Dwyer & Tanner, 2006), and consumer marketing aiming at larger demographic groups by way of mass media and business owners. In addition, negotiating is more personal when it is done directing through the purchaser and seller in corporate marketing. Business marketers tend to use direct mail and trade journals as the preferred method of advertising, and they only commit a small portion of their budgets to do so (Hutt & Speh, 2001).

According to Oliva (n.d.), some of the unique features between the two methods are:

Business-to-Business (B2B) Marketing

• Transactions among and within value chains
• Value primarily determined by business economic use
• Small numbers of customers, many requiring personalized marketing, including customized products and prices
• Large customers with strong market power (a business' customers tend to be its competitors)
• Diverse and varied customer types and customer needs
• Large unit transactions
• Complex and lengthy selling processes involving many players creating a demand decision chain
• Deeper partnerships with members of the value chain, including customers
• Channel management oriented up and down the supply chain
• Sales focused on key account management, and multiple purchasing influencers

Business-to-Consumer (B2C) Marketing

• Transactions through the dealer to the end consumer
• Value determined by end-consumer perception
• Focus on brand management
• Large number of generally similar consumers
• Small transactions
• Linear selling process, usually of short duration
• Channel management oriented toward retail
• Sales activity focused on the end user (Olica, n.d.).

Business marketing's foundation is based on creating advantageous, valuable relationships between two institutions and the workforces involved. Business marketers focus on a small number of customers by using sales processes that are large, complex and technical. Due to newer and more advanced marketing and communication electronics, B2B and B2C marketing efforts cross several corporations. Business marketers must learn how the two methods work together in order to create and deliver value.

Importance of Value

Value is central to all marketing practices, especially business marketing. In business markets, the real value of a product or service can be understood by assessing the product's role in the industry and contrasting the product or service with the next best alternative for the customer. For example, Microsoft has introduced Office 2007. However, many companies are still using Office 2003. Many organizations tend not to update to the newer version until the bugs are worked out. The value concepts for both of these products can be determined in monetary terms. In consumer markets, value is based on perception. For example, the value of coffee is based on brand symbolism, loyalty, experience, and taste preference.

Some business marketers have made the mistake of pricing their products and services too low. Many believe that price and costs are directly related. However, pricing based on cost may create pricing errors, which may lead to missed profit opportunities with business-to-business efforts. In order to avoid this costly mistake, value based pricing should be used by companies. Value based pricing occurs when a company creates a marketing and sales program geared toward educating potential customers on the value of the product or service they are receiving. If this goal is successful, potential customers tend to be willing to pay more for the product or service. Oliva (n.d.) believes that "studying the impact of value on profitability is one of the most important analyses a business marketer can conduct. Value in business markets can be examined on many levels such as" (Oliva, n.d.):

• The actual economic value of the offering delivered to the typical customer.
• The value of the supplier to the customer, and the brand strength and relationship value of the supplier.
• How value differs among actual and prospective customers, and among the individuals who collectively make a buying decision.
• How specific marketing activities influence customer recognition of value.
• How value builds through the industry supply chain and how much of that value is actually captured in the prices charged by supply chain members (Oliva, n.d.).

Once the importance of value in business marketing has been established, value-based strategies should be developed. The main intent of value-based pricing is to match price with the actual received value. Some value-based pricing strategies consider the break-even point and tend to be subjective. Three of these types of strategies are:

• Price the same as competitor. This strategy is useful when offering a commodity product, when prices are well established or when there are no other means to set prices. Organizations will be challenged to develop a plan that will lower their costs so that they can receive a higher profit than their competitors.
• Establish a low price on a product in order to capture a large number of customers in that market. This strategy is useful if the organization's goal is to achieve non-financial objectives such as creating product awareness, meeting the competition or establishing an image of having a low cost. This strategy will work if the organization can maintain profitability at the low price or if it is able to maintain an acceptable level of sales in the event that it wants to raise prices at a later date.
• Charge a high price relative to cost if the product has a uniqueness that is valuable to the customers. This strategy is useful when the target market is affluent and the product is positioned as being upscale. In this type of situation, the organization may be able to mark up the price because there will be a demand. The organization charges what it believes potential customers are willing to pay.

Conclusion

In order for a business to be successful, it must have the ability to make timely and accurate forecasts. One could assert that all businesses forecast in some way. However, while most business people recognize the need for effective forecasts, there is a tendency to view forecasting as either a black art or an impossible task" (Crosby, 1997, p. 3). This article explores how businesses rely on sales forecasting to grow the business as well as develop strategic plans as to what direction the organization should move.

Marketing and sales professionals are expected to look at the future and determine how an organization will get there. Crosby (1997) provided a list of suggestions to marketing and sales professionals as they strive to develop a strategic marketing forecast as well as some questions that may assist in developing a tactical marketing forecast.

Suggestions for Developing A Strategic Marketing/ Sales Forecast

• Develop a solid data-based approach for the plans and projections.
• Place the plan in context by presenting recent history as a bridge to the future.
• Illustrate and explain how the marketing plan ties in or does not tie in with the major trends in the market.
• Briefly show how the research data were gathered and analyzed.
• List assumptions, and describe how specific conclusions were reached.
• State the criteria for selecting key customers and major accounts.
• Describe the broad application categories envisioned for each market segment.
• Identify major competitors by market segment, and briefly describe their expected response to the plans and projections.
• Define the general pricing and cost strategies considered.
• Describe the size and growth rates for each segment, together with the share-of market assumptions.
• Generate a revenue forecast (units and dollars) for each segment that supports the previous assumptions.
• Build a strong dialogue with tactical marketing through the entire process.

Questions To Ask When Developing A Strategic Marketing / Sales Forecast

• What are the product development assumptions?
• Is there sufficient capacity installed to support revenue forecasts?
• What is the current status of the organization's major competitors?
• Are the company's products performing as planned? Can secondary development activities be exploited?
• Are the organization's product prices and cost targets still valid?
• What is the organization's share of market for each product line? How do they compare with the plan?
• Are selling cycles defined for each product line, and are they accurate?
• What is the feedback from account reviews? Are the engagement strategies working? Are the sales kits working? Is the organization winning and penetrating accounts as planned?
• What is the price elasticity for each product line?
• Are the product applications and sales opportunities developing as planned? (p. 38-39)

"Business-to-Business Marketing is a complex discipline that has become integral to selling products or services to business, industrial, institutional or government buyers" (Oliva, n.d., p. 1). Many forecasters have predicted that this market can expect purchases to net several trillion dollars a year, which is why many are predicting that the growth will outpace Business-to-Consumer marketing. However, the marketing industry will respond accordingly by providing both markets with sufficient attention even though both have different focuses.

Terms & Concepts

Business-to-Business Marketing: A form of market strategy that involves the interchanging of goods and services from one company to another, rather than between a business and another group.

Business-to-Consumer Marketing: Defines the selling of goods and services from corporations to consumers.

Business Forecasting: Concept that allows one to forecast business needs.

Business Marketing: The facilitation of selling goods and services to other businesses that will resell the services as additions to other products already provided.

Price Elasticity: An elasticity that evaluates the nature and relationship between differences in the amount demanded of a product and differences with the price associated with it.

Product Line: A collection of products, offered by a firm, that satisfy similar needs for different target audiences.

Sales Forecasting: Numeric estimates by date of future sales of products or services of a company or industry.

Share of Market: The percentage of the total sales of a certain item, good, or service that is derived from a certain business.

Targeting: The selection of customers a business wishes to service.

Time Series Analysis: The methods used to comprehend time series in order to understand the theories behind the data points such as their original location, their method of creation, as well as the possible forecasts for future time series behavior.

Bibliography

Boulton, P. (2003, March). Approaches to sales forecasting. Retrieved on September 27, 2007, from http://jobfunctions.bnet.com/whitepaper.aspx?docid=56208

Crosby, J. (1997). Cycles, trends and turning points: Practical marketing and sales forecasting techniques. Lincolnwood, IL: NTC Business Books.

Dwyer, F., & Tanner, J. (2006). Business marketing: Connecting strategy, relationships, and learning, (3rd ed.). New York: McGraw-Hill/Irwin.

Gilliland, M. (2013). FVA: A reality check on forecasting practices. Foresight: The International Journal of Applied Forecasting, (29), 14-18. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=87717668&site=ehost-live

Gilliland, M. (2012). Worst practices in new product forecasting. Journal of Business Forecasting, 31(4), 31-34. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebsco-host.com/login.aspx?direct=true&db=bth&AN=85221150&site=ehost-live

Hutt, M., & Speh, T. (2001). Business marketing management: A strategic view of industrial and organizational markets,(7th ed.). Dryden, TX:Harcourt, Inc.

Maddox, K., Krol, C. & Schwartz, M. (2006). Outlook 2007: The future looks bright, with marketing expanding and online exploding. B to B, 91(17), 28-30. Retrieved May 3, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=23601887&site=ehost-live

Morris, M. (2013). forecasting challenges of the spare parts industry. Journal Of Business Forecasting, 32(3), 22-27. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebsco-host.com/login.aspx?direct=true&db=bth&AN=91720800&site=ehost-live

Oliva, R. (n.d.). Business-to-Business marketing overview. Retrieved on May 3, 2007, from http://www.marketing-power.com/content1488.php

Sartorius, L., & Mohn, N. (1976). Sales forecasting models: A diagnostic approach. Atlanta, GA: Georgia State University.

Suggested Reading

Landon Jr., E. (1978). Forecasting methods for management/interactive forecasting: Univariate and multivariate methods/business forecasting/the management of sales forecasting. Journal of Marketing Research (JMR), 15(4), 656-657. Retrieved September 27, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=500 4136&site=ehost-live

Lowe, K., & Shaw, R. (1970). The accuracy of short-term business forecasting: An analysis of a firm's sales budgeting. Journal of Industrial Economics, 18(3), 275-290. Retrieved September 27, 2007, from EBSCO Online Database Business Source Complete. http://search.ebsco-host.com/login.aspx?direct=true&db=bth&AN=5004136&site=bsi-live

Wu, L., Ravishanker, N., & Hosking, J. (1991). Forecasting for business planning: A case study of IBM product sales. Journal of Forecasting, 10(6), 579-595. Retrieved September 27, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4987474&site=bsi-live