The Challenge of Developing Accurate Sales Forecasts

Probably the most important task of a sales manager is the development of meaningful and accurate sales forecasts.  Amazingly, many sales managers simply look at historical numbers and don’t even bother to try to predict the future.

The sales forecast is crucially important for the following decisions:

1. Determining the size of the sales force
2. Designing territories
3. Establishing sales quotas and budgets
4. Determining compensation levels including commissions and bonuses
5. Evaluating salesperson performance
6. Evaluating prospective accounts

Sales forecasts can be either qualitative or quantitative, or a combination of the two.  Here are some popular techniques and the pros and cons of each.

Qualitative Methods

Perhaps the most popular starting point for a sales forecast is the jury of executive opinion.  This is the “ivory tower” approach.  Here, all the top executives, who presumably know the business and know the market, provide input as to where they see the market and business going in the next year.  The problem with this approach is that it is based on the internal perception of the market, which may not directly match reality.

A second popular approach is the sales force composite.  Here the salespeople who are slugging it out in the trenches are asked to predict the future.  The problem here is that the salespeople have a personal interest in the numbers given that their own bonuses and quotas are based on those numbers.  A salesperson who gives a conservative prediction knowing that the prediction is on the low side might exceed these numbers and enjoy a huge bonus.  Thus, the numbers the salespeople predict may be totally inaccurate.

When possible, a company might go to its customers and prospective customers and do a survey of buyer intentions.  The issue with this data is the intention to buy and the actual act of buying may not be one and the same.  I may have the intention to buy a new car but may lose my job and therefore won’t make the purchase.

Another technique is to bring in an expert from outside the company.  This is called the Delphi Approach and is based on the ancient Greek oracle at Delphi where heros and protagonists of Greek drama and mythology consulted the oracles before embarking on a course of action.

Quantitative Methods

The quantitative approaches are based mainly on a comparison of results from one year to the next and making a prediction of the future based on the past.  If the firm shows steady increases in sales from one year to the next, and all things are relatively equal, it might be fairly easy to make a sales prediction on this basis.

However, often sales do not show those steady patterns and can be up and down.  When this is the case, a least squares regression analysis can be a valuable tool.  A refinement of this technique is exponential smoothing where greater weight is given to more recent outcomes.

Optimal Approaches

While it is nearly impossible to find the sales forecasting tool that always works, successful companies will combine these methods realizing that each method has its strengths and weaknesses.  While the jury of executive opinion is limited by the “ivory tower” constraint, the sales force composite encourages sales people to be too conservative in their predictions.   Customer surveys might be very valuable if the economy does go through any tumultuous ups and downs.  Predicting the future on past results also has merit but uncertainty.