Chapter 5The Strategic Role of Information in Sales Management*

Learning ObjectivesDiscuss the differences between market potential, sales potential, sales forecast, and sales quota.Understand the various methods by which sales managers develop sales forecasts.Outline the process of setting a sales quota.Explain the various types of quotas used in sales management.Discuss key approaches to determining sales force size.Describe the sales territory design process.Understand the importance of sales analysis for managerial decision making.Conduct a sales analysis.*

Key Termsmarket potentialsales potentialsales forecastsales quotassubjective forecasting methodsuser expectations methodsales force compositejury of executive opinionDelphi techniqueobjective forecasting methodsmarket testtime-series analysismoving averageexponential smoothingdecompositionseasonalitystatistical demand analysisscenario planningNorth American Industry Classification System (NAICS)sales volume quotasactivity quotasfinancial quotassales force deploymentbreakdown methodworkload methodincremental methodaccount analysissales analysis80:20 principleenterprise resource planning (ERP)Buying Power Index (BPI)iceberg principleisolate and explode

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Key TermsMarket potential (pg. 141)Estimate of the possible sales of a commodity, a group of commodities, or a service for an entire industry in a market during a stated period under ideal conditions.Sales potential (pg. 141)The portion of the market potential that a particular firm can reasonably expect to achieve.Sales forecast (pg. 141)Estimate of the dollar or unit sales for a specified future period.Sales quotas (pg. 141)Sales goals assigned to a marketing unit for use in managing sales efforts.*

Key TermsSubjective forecasting methods (pg. 143)Do not rely primarily on quantitative (empirical) analytical approaches in developing the forecast.User expectations method (pg. 143)Also known as the buyers intentions method because it relies on answers from customers regarding their expected consumption or purchases of the product.Sales force composite (pg. 143)Forecasting sales using the opinion of each member of the field sales staff.Jury of executive opinion (pg. 145)Formal or informal internal poll of key executives within the selling company in order to gain their assessment of sales possibilities.Delphi technique (pg. 145)Uses an iterative approach with repeated measurement and controlled anonymous feedback, instead of direct confrontation and debate among the experts preparing the forecast.*

Key TermsObjective forecasting methods (pg. 145)Rely primarily on sophisticated quantitative (empirical) analytical approaches in developing forecasts.Market test (pg. 145)Involves placing a product in several representative geographic areas to see how well it performs and then projecting that experience to the market as a whole.Time-series analysis (pg. 146)Relies on the analysis of historical data to develop a prediction for the future, with the relationship between sales and time as the basis of the forecast for the future.Moving averages (pg. 146)Relies on the analysis of historical data to develop a prediction for the future, sometime using an average of several years.Exponential smoothing (pg. 146)Type of moving average, but instead of weighting all observation equally, exponential smoothing weights the most recent observations heaviest.Decomposition (pg. 148)Typically applied to monthly or quarterly data where a seasonal pattern is evident and the manager wishes to forecast sales not only for the year but also for each period in the year.Seasonality (pg. 148)Change in demand based on seasons of the year.Statistical demand analysis (pg. 149)Attempts to determine the relationship between sales and the important factors affecting sales to forecast the future.*

Key TermsScenario Planning (pg. 149)Involves asking those preparing the forecast a series of what-if questions, where the what-ifs reflect different environmental changes that could occur.NAICS or North American Industrial Classification System (pg. 150)A system that has replaced the former system of Standard Industrial Classification (SIC) codes.Sales volume quotas (pg. 152)These quotas emphasize dollar sales or some other aspect of sales volume.Activity quotas (pg. 153)Attempt to recognize the investment nature of a salespersons efforts in a letter to a prospect, the product demonstration, and the arrangement of a display that may not produce an immediate sale, but may influence a future sale.*

Key TermsFinancial quotas (pg. 153) Help salespeople to focus on the cost and profit implications of what they sell. Most commonly used financial measurements are gross margin, net profit, and selling expenses to determine profitability of product sales.Sales force deployment (pg. 155)Refers to the three interrelated decisions of (1) sales force size or the number of territories, (2) design of the individual territories, and (3) allocation of the total selling effort to accounts.Breakdown method (pg. 155)Sales force size is determined by the average salesperson treated as a salesperson unit, and each salesperson unit is assumed to possess the same productivity potential.*

Key TermsWorkload method (pg. 156)Sales force size is determined by assuming all sales personnel should shoulder an equal amount of work, and management estimates the work required to serve the entire market.Incremental method (pg. 158)Sales force size is determined by assuming sales representatives should be added as long as the incremental profit produced by their addition exceeds the incremental costs.Account analysis (pg. 163)Sales potential for each customer and prospect is estimated for a proposed territory.Sales analysis (pg. 166)The gathering, classifying, comparing, and studying of company sales data.80:20 principle (pg. 166)This means it is not at all unusual to find 80 percent of the customers or products accounting for only 20 percent of total sales.*

Key TermsEnterprise resource planning (ERP) (pg. 169)Software that links processes such as bid estimation, order entry, shipping, billing systems, and other work processes.Buying Power Index (pg. 172)A percentage denoting regional sales potential.Iceberg principle (pg. 176)So named because only about 10 percent of an icebergs mass is above the water level (analogous to the symptoms of a problem). The other 90 percent of the berg is below the surface (analogous to the real problem), and not always directly below the tip either.Isolate and explode (pg. 177)A sales analysis technique where the most significant discrepancies between actual and standard are identified, or isolated, and then examined in detail, or exploded.*

Information Drives Management Decision Making and PlanningSales forecastsTerritory estimatesQuotasSales force sizeSales territory design*

Market Opportunity AnalysisMarket potential estimate of possible sales of a commodity, a group of commodities, or a service for an entire industry in a market during a stated period under ideal conditionsSales potential the portion of the market potential that the firm can expect to reasonably achieveSales forecast an estimate of the dollar or unit sales for a specified future periodSales quotas sales goals assigned to a marketing unit for use in managing sales efforts*

McGraw-Hill/IrwinCopyright 2006 by The McGraw-Hill Companies, Inc. All rights reserved.5-**

Subjective Methods of Sales ForecastingUser expectations buyer indicates intention to purchaseSales force composite sales force opinionsJury of executive opinion - key experts opinionsDelphi technique each participant prepares an estimate, and these are compared anonymously and iteratively

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Objective Methods of Sales ForecastingMarket test place product in select areasTime series analysis relies on historical data to develop predictions for the futureStatistical demand analysis attempts to make a comparison to determine the relationship between sales and factors that influence sales*

Forms of Time Series AnalysisMoving average averaging sales results over previous time periods to forecast into the futureExponential smoothing a type of moving average where most recent years are given more weightDecomposition applied to monthly or quarterly data where seasonal pattern is evidentA critical adjustment is that of seasonality and cyclical factors*

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Choosing a Forecasting MethodWhich forecasting method should be used and how accurate is the forecast likely to be?In general, the various forecast comparisons suggest that no method remains superior under all conditions.Good forecasters apply multiple forecasting methods to the problemScenario planning prepares a series of what-if questions and produces possible outcomes

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Developing Territory Estimates Territory estimates effect:The design of sales territoriesProcedures for identifying potential customersThe establishment of sales quotasCompensation and its subcomponentsThe evaluation of salesperson performance

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Planning ToolsNorth American Industry Classification System (NAICS)Developed by the US Bureau of the Census, organizes the reporting of business informationEach industry in the US is assigned a two-digit numberBuying Power Index (BPI)Generated and published by Sales Marketing Management Magazine, considers income, population and retail salesMost useful with low-priced convenience goods

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Sales QuotasGoals assigned to salespeopleApply to specific periods and may be expressed in dollars or physical units Tool for sales managers planning and controlling field selling activities and resultsBenchmark for evaluating sales effectiveness Motivate sales people

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Purpose of QuotasQuotas facilitate planning and control of the field selling effortProvide incentives for sales representativesProvide measures to evaluate salespeoples performance.

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Characteristics of a Good QuotaAttainableEasy to understandCompleteTimely

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Types of QuotasThose that emphasize sales or some aspect of salesThose that focus on sales activitiesThose that examine financial criteria such as gross margin or contribution to overhead*

Sales Volume QuotasOften based on past sales.Related directly to market potential, thus credible and easily understood.May be expresses in dollars, physical units, or points.

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Activity QuotasReflect territorial conditionsRequire a detailed analysis of the work required for effective territorial coverageCustomers influence activity quotas through:Account and order sizePurchasing patterns Support required for satisfaction*

Financial QuotasReflect the financial goals of the firmSales volumeGross marginIntended profit marginAdditional sales potential Cost of support and service*

Determining Sales Force Size Salespeople are among the most productive assets of a company, and they are also among the most expensive!How can an optimal sales force be established?Breakdown method:

Number of salespersonnel needed=Sales VolumeProductivity*

Determining Sales Force Size Workload method uses the buildup method to estimate the work required to serve the entire marketIncremental method suggests that sales representatives should be added as long as the incremental profit produce by their addition exceeds the incremental cost

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McGraw-Hill/IrwinCopyright 2006 by The McGraw-Hill Companies, Inc. All rights reserved.5-**

Sales Analysis Simple sales analysis - facts are listed and not measured against any standardBases for sales comparisonQuotasComparative sales forecastForecast vs. actualReports can focus on exceptions or significant deviations from the financial norms or budget.

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SummaryWe have seen in the chapter that sales managers perform a vital role in the process of both using and generating information. The sales forecasts, quotas, territories, and sales analyses developed under the leadership of sales managers touch most every operational aspect of a firm. Aspects of organizational success at many levels are affected by the proficiency of sales managers by strategic marketing plans when forecast proves accurate, to satisfaction of customer when a sales territory design allows for proper coverage, to the rewards afforded a salesperson for quota attainment all these outcomes reflect on the sales mangers capability to effectively use information in the job.Because of this impact, sales managers have a vested interest in becoming as proficient as possible in the information management aspect of their job as described in this chapter. The greater their mastery of these important facets of the position, the greater will be not only their own professional success but also the success of the firm and its salespeople. *

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