The Pros and Cons of Product Forecasting

Forecasting has always intrigued me.  Whether it is predicting the stock market’s next move, betting on a horse race or if will it rain or shine  tomorrow; all have some form of tools and information to “assist” in predicting the future.

As for business, all sales executives, managers, and field sales personnel are involved with forecasting. They too have tools and reports to help them predict.  In this posting we will look at some of the forecasting methods and their pros and cons.

But first, why do sales forecasting at all?  The first reason is to predict  the revenues for the company.  Other related factors that “fall-out” from a sales forecast are predictions on the  size and type of the sales force, what type of territory coverage will be needed, how will performance be addressed and how will the forecast support the company’s overall goals and financial targets.

Also note that there are a number of controllable and non controllable factors that impact forecasting.  Some examples are the products (or services) themselves, the product availability, pricing , quality, marketing support, and the competitive environment.  Some non controllable are items like the economy, technology disruptions, and buyers behavior.

So what are some of the more prevalent forecasting methods?  At a high level there is the internal approach (the company’s view) and the external approach (the market’s view).

Top Down Method

Internally, the first method is what is called the top down approach. This is where the company’s senior management decides on overall targets (revenues, on going business and new business) and “passes” these down to the sales department, who then divides it up by territories, then regions, then the sub regions and eventually to the account level.

              Pros                                                                                  Cons

      Unified forecast/goals                                        Not considering account situations

      Align with mission and strategy                          Not considering local situations

Bottoms up Method

The next method is just the opposite of the top down is the bottoms up method. Here each sales person forecasts what he or she can do for some specific time frame and these are passed up to the sub region, where it is rolled up with other account forecasts and the process eventually rolls up the corporate, which results in a company number(s).

                  Pros                                                                                   Cons

Insight at the local level                                                 Inconsistent methods used in the field

Considers “surround” environment                                Potential misalignment with corporate goals


Mathematical Methods

Other types of methods are base on mathematics or mathematical formulas. Basically there are qualitative (Delphi Method) and quantitative (Regression) types of methods.

These methods depend on historical data, some form of market indexing and some form of a mathematical formula.

                  Pros                                                                                   Cons

Potentially eliminates emotions                           Usually good for large numbers

Considers trends/ history                                               Considers trends/history

Combined Methods

As always, there are methods that try to take the best from other models and combine them. While there are numerous combinations, presented here is just one of them.

First, Product Management does a revenue forecast for each product or service. This should factor in items like market segmentation, revenue predictions and competitive situations.  Next, Marketing does an analysis of the served markets, trends and forecasts, corporate and competitive market shares. Third, Management does their top down, while field sales do their bottoms up forecast. Fourth, a committee or governance body “integrates” all four inputs with corporate mission and goals into a company plan.

            Pros                                                                             Cons

Considers all aspects of forecasting                               Some aspects based on emotions

Combines macro and micro factors                               Needs complete understanding of assumptions 

So, forecasting is important for many reasons and the effort and quality of the forecast has a major impact on obtaining company goals and it overall performance.  The real issue is picking a method, pick any method (Noting all have pros and cons and some methods are more effective for certain types of industries) and execute well and completely.

It is better to have some target then none, since with no target you would not know how you are doing.  Lastly, monitor and measure the forecast on a regular basis (monthly and quarterly) so you can make modifications as the period unfolds.

RHL 4/13/10

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