Chapter Three

Forecasting Market Demand, Sales Budgets, and Sales Quotas

3.1. Estimating Market Potential/Demand Forecasting
A market potential is an estimate of the maximum possible sales opportunities present in a
particular market segment during a stated future period.
Demand forecasting is, in essence, developing the best possible understanding of future demand.
In practice, this means analyzing the impact of a range of variables that affect demand—from
historical demand patterns to internal business decisions and even external factors—to increase
the accuracy of these predictions. Accurate demand forecasts can be leveraged throughout retail
operations to improve decision-making and outcomes in areas such as store and distribution
center replenishment, capacity planning, and resource planning.
Demand forecasts can be developed on different levels of granularity—monthly, weekly, daily,
or even hourly—to support different planning processes and business decisions, but highly
granular forecasts are always extremely valuable. The benefits of a granular forecast are obvious
when thinking of fresh food products whose short shelf-lives sometimes call for intra-day
forecasts at the product-location level to prevent spoilage. Demand forecasting refers to a
scientific and creative approach for anticipating the demand of a particular commodity in the
market based on past behavior, experience, data and pattern of related events. It is not based on
mere guessing or prediction but is backed up by evidence and past trends.
3.2. Analyzing Market Potential/Process
A market potential is an estimate of the maximum possible sales opportunities present in a
particular market segment and open to all sellers of a good or service during a stated future
period.
1. Market Identification
The first step in analyzing a product’s market potential is to identify its market. Market
identification requires finding out 1. Who buys the product? 2. Who uses it? 3. Who are the
prospective buyers and/or users? Some companies find answers to these questions in their
internal records, but most companies, especially those that use long marketing channels, must
use field research to obtain meaningful answers. In consumer-goods marketing, buyers, users,
and prospects are identified and classified according to such characteristics as age, sex,
education, income, and social class. In industrial-goods marketing, buyers, users, and prospects
are identified and classified by size of firm, geographical location, type of industry, and the like.
Market identification studies reveal the characteristics that differentiate the market segments
making up the product’s market potential. Frequently they uncover unexploited market segments
whose patronage might be obtained through redirecting personal-selling effort or changing
promotional strategy. Sometimes, market identification studies provide, as a side result, customer
data on such factors as purchase frequency, searching time expended, unit of purchase, and
seasonal buying habits.
2. Market Motivation
The second step in analyzing market potential is to detect the reasons why customers buy the
product and the reasons why potential customers might buy it. Market motivation studies answer
twin questions: Why do people buy? Why don’t people buy? The answers help not only in
estimating market potential but assist the sales executive seeking to increase the effectiveness of
promotional programs. Motivation research techniques vary, but the most widely used are the
projective techniques, in which respondents project themselves, their attitudes, interests, and
opinions into interpretations of special materials presented by the researcher. Analysis of results
by trained specialists lays bare what goes on in buyer’s minds, including, importantly, the real
reasons for buying or not buying the product. Most motivation studies are directed towards
explaining the buying behavior of ultimate consumers rather than industrial users. Information
from motivation studies helps not only in estimating a product’s market potential but assists in
deciding: how best to present the product in sales talks, the relative effectiveness of different
selling appeals and the relative appropriateness of various promotional methods.
3. Analysis of Market Potential
Having identified the potential buyers and their buying behavior, the third step is to analyze the
market potential. Generally, market potential cannot be analyzed directly, so analysis makes use
of market factors (a market factor is a market feature or characteristic related to the product’s
demand). For instance, the number of males reaching shaving age each year is one market factor
influencing the demand for men’s electric shavers. But not every male reaching shaving age is a
prospective buyer of an electric shaver – some will be late in starting to shave, others will adopt
other shaving methods, some will not have the money to buy a shaver or will prefer to use that
money for something else, and still others will use borrowed shavers or, perhaps, will grow
beards. Thus, using market factors for analyzing market potential is a two-step process: 1. Select
the market factor(s) associated with the product’s demand. 2. Eliminate those market segments
that do not contain prospective buyers of the product.
3.3. Sales Potential and Sales Forecasting
Sales potentials are quantitative estimates of the maximum possible sales opportunities present in
particular market segments open to a specified company selling a good or service during a stated
future period. They are derived from market potentials after analyses of historical market share
relationships and adjustments for changes in companies’ and competitors’ selling strategies and
practices. A firm’s sales potential and its sales forecast are not usually identical – in most
instances, the sales potential is larger than the sales forecast. There are several reasons for this:
“Some companies do not have sufficient production capacity to capitalize on the full sales
potential; “Other firms have not yet developed distributive networks capable of reaching every
potential customer; “Others do not attempt to realize their total sales potentials because of
limited financial resources; and “Still others, being more profit oriented than sales oriented, seek
to maximize profitable sales and not possible sales. The estimate for sales potential indicates how
much a company could sell if it had all the necessary resources and desired to use them. The
sales forecast is a related but different estimate – it indicates how much a company with a given
amount of resources can sell if it implements a particular marketing program.
3.4. Sales Forecasting Concepts
There are 5 levels of concern in sales forecasting:
Market Potential: it is the highest possible expected industry sales of a good or service in a

specified market segment for a given time period

E.g.: The market potential for the sales of beverage in Ethiopia annually. Consider religion,
local, age, other alcohol = 20million (Based on buyers ability to buy and willingness to buy)
Sales Potential: refers to an individual firm’s market share of the market potential, where market
share is defined as the percentage of market controlled by a particular company or product. It is
the maximum sales a firm can hope to obtain.
E.g.: A market share of St. George beer is 5million
Sales Forecasts: is the sales estimate the company actually expects to obtain, based on the
market conditions, company resources, and the firms marketing plan. The sales forecast is less
than the sales potential since it is based on realistic set of circumstances.
E.g.: 4.5 million is what [Link] really sells
Sales Quota: is a sales goal assigned to a sales person, region or a team. They are usually
derived from the sales forecasts. Sales goals and objectives sought by management.
Sales Budgets: a management plan for the expenditures to accomplish sales goals.
3.5. Sales Territories
A sales territory is the customer group or geographical area for which an individual salesperson
or a sales team holds responsibility. Territories can be defined on the basis of geography, sales
potential, history, or a combination of factors. Companies strive to balance their territories
because this can reduce costs and increase sales. A sales territory refers to a geographical area
assigned to a salesman for the purpose of marketing the products of his concern. Generally, a
firm divides the markets into specific geographical zones or areas and assigns each salesman a
specific zone in which he has to carry out his selling operations. The specific geographical zone
or area assigned to a salesman becomes his sales territory. Each of the territory is served by one
or more salesmen.
A. Allocation of Sales Territory
Allocation of sales territories to a salesman is one of the important duties of the sales manager.
The allocation of sales territories must be given serious thought by the sales manager as it is one
of the important tools of control. It does not pose a problem for the small-organization because
their market is limited.
B. Objectives of Allocation of Sales Territory
The main objective of allocation of sales territories can be summarized as:
1. To hold the salesman responsible for sales and services.
2. Supervise and control over the sales force.
3. To meet competition easily.
4. To save time and expenses.
3.6. Sales Budget
Sales budgets and control help to monitor sales performance. They also help to maintain and
improve the efficiency of sales operations. A budget is a financial plan and tool of control. In a
sales budget, resources are allocated to achieve the sales forecast. It states what and how much
each salesperson will sell. It also spells out what and how much will be sold to the different
classes of customers.

A budget is an estimate of sales, either in units or value and the selling expenses likely to be
incurred while selling. Once the budget is accepted in terms of estimated sales, expenses and
profit figures, the actual results are measured and compared against the budgeted figures. It is an
instrument of planning that shows how to spend money to achieve the targeted sales. A budget
also anticipates a particular level of profit. Budgeting is a short-term exercise that attempts to
optimize business profits by accommodating customer-service activities and incurring expenses
to acquire new business. The expenses of appointing new customers are also included in budget.

A. Purposes of Budgeting
The budget is very important for the successful operation of the sales force. It serves several
purposes including planning, coordination, and evaluation, each of which is discussed in this
section.
Planning: Companies formulate marketing and sales objectives. The budget determines how
these objectives will be met. The budget is both a plan of action and a standard of performance
for the various departments. Once the budget is established, the department can begin organizing
to realize that plan. This is especially important to salespeople. It is through a detailed
breakdown of the sales budget among products, territories, and customers that sales reps learn
what management expects of them.
Coordination: Maintaining the desired relationship between expenditures and revenues is
important in operating a business. The objective of a business is to buy revenues at a reasonable
cost, and a budget establishes what this cost should be. Thus the budget enables sales executives
to coordinate expenses with sales and with the budgets of the other departments. The budget also
restricts the sales executives from spending more than their share of the funds available for the
purchase of revenues. Hence the budget helps to prevent expenses from getting out of control.
Evaluation: Any goal, once established, becomes a tool for evaluation of performance. If the
organization meets its goals, management can consider the performance successful. Hence the
sales department budgets become tools to evaluate the department’s performance. By meeting
the sales and cost goals set forth in the budget, a sales manager is presenting strong evidence of
his or her success as an executive. The manager who is unable to meet budgetary requirements is
usually less well regarded.

3.7. Quotas
A quota refers to an expected performance objective routinely assigned to sales units, such as
individuals, regions, or districts. It is individual sales target figure assigned to each sales unit
such a sales person, dealer, distributor, region, or territory, as a required minimum for a specified
period (month, quarter, and year). Sales quotas may be expressed either in dollar figures
(monetary terms) or in number of goods or services sold (volume terms).

Sales quota is a minimum sales volume goal established by the seller. Sales quota may be
expressed in terms of dollars or units sold. Quotas may also be set for sales activity (number of
calls per day), sales costs and profitability in addition to sales volume. A sales quota may be
required of a salaried or commissioned salesperson or may be a goal set for a brand, a product
line, or a company division. Sales quotas are used to ensure that company sales goals are met
even though they may exceed an individual salesperson's personal goals or abilities. Sales quotas
also ensure that the volume sold will cover the fixed costs of producing the product or service.
Sales quotas should be high enough to encourage excellence but not so high as to be
unachievable, thereby discouraging the sales force. Failure to meet sales quotas is an immediate
call for action on the part of the seller. If a salesperson fails to meet quota, the salesperson may
be given a smaller or less desirable prospect territory or may be terminated. A salesperson may
receive a bonus for exceeding the sales quota.

It is also a sales goal or objective that is assigned to a marketing unit. The marketing unit in
question might be an individual salesperson, a sales territory, a branch office, a region, a dealer
or distributor, or a district. Sales Quota is a sales assignment, goal or target set for a salesperson
in a given accounting period; commonly used types of sales quotas are dollar volume quotas, unit
volume quotas, gross margin quotas, net profit quotas and activity quotas. Sales quotas are a way
of life for the sales force. All activities of the sales force revolve around the fulfillment of sales
quotas. Sales quotas are targets assigned to sales personnel. They signify the performance
expected from them by the organization.
Sales quotas help in directing, evaluating and controlling the sales force. They form an
indispensable tool for sales managers to carry out sales management activities. Sales quotas are
prepared on the basis of sales forecasts and budgets. Sales quotas serve various purposes in
organizations. They provide targets for sales personnel to achieve act as standards to measure
sales force performance and help motivate the sales force. Compensation plans are invariably
linked to quotas. The commission and bonuses given to sales persons are based on their meeting
quotas set for them. The four categories of sales quotas widely used are-- sales volume quotas,
expense quotas, activity quotas and profit quotas. A sales quota should be fair, challenging yet
attainable, rewarding, easy to understand, flexible and must satisfy management objectives.

A. The Importance of Quotas

 To provide performance targets
 To provide standards
 To provide control
 To provide change of direction
 Quotas are motivational
B. Types Of Quotas
1. Sales Volume Quotas
Sales Volume Quotas: a performance objective that includes dollar or product unit objectives for
a specific period.
Breakdown total sales volume:
 To do this, ask these questions: To whom are we going to sell? Where are they located
geographically? Which products will be sold? Which products will sell the best? During
what time period will the sales occur?
 While answering these five questions, salespeople will establish sales volume quotas for the
following: Product lines; Individual established and new products; Geographic areas based
on how the sales organization is designed, which would include sales regions, sales districts,
and individual sales territories.
2. Profit Quotas: The two types of profit quotas
Gross Margin Quota: a quota determined by subtracting cost of goods sold from sales volume.
Net Profit Quota: a quota determined by subtracting costs of goods sold and salespeople's direct
selling expenses from sales volume.
3. Expense Quotas: a target aimed at controlling costs of sales units.
4. Activity Quotas: objectives set for job-related duties useful toward reaching salespeople's
performance targets.
5. Customer Satisfaction: a customer's feelings about any differences between what is expected
and actual experiences with a purchase. Customer Satisfaction Index – an index usually compiled
of all customer satisfaction data rated into one number or percentage.
6. Quota Combinations: Combines many in one
C. Methods for Setting Sales Quotas
 Quotas based on forecasts and potentials
 Quotas based on forecasts only
 Quotas based on past experience
 Quotas based on executive judgments
 Quotas salespeople set
 Quotas related to compensation