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Chapter 5

The Strategic Role of Information in Sales Management

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Learning Objectives

• Discuss 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.

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Key Terms

• market potential• sales potential• sales forecast• sales quotas• subjective forecasting methods

– user expectations method– sales force composite– jury of executive opinion– Delphi technique

• objective forecasting methods– market test– time-series analysis

• moving average• exponential smoothing• decomposition• seasonality

– statistical demand analysis– scenario planning

•North American Industry Classification System (NAICS)•sales volume quotas•activity quotas•financial quotas•sales force deployment•breakdown method•workload method•incremental method•account analysis•sales analysis•80:20 principle•enterprise resource planning (ERP)•Buying Power Index (BPI)•iceberg principle•isolate and explode

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Key Terms

• Market 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.

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Key Terms

• Subjective 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.

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Key Terms

• Objective 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.6

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Key Terms

• Scenario 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 salesperson’s 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.

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Key Terms

• Financial 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.

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Key Terms

• Workload 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.

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Key Terms

• Enterprise 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 iceberg’s 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.

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Information Drives Management Decision Making and Planning

• Sales forecasts

• Territory estimates

• Quotas

• Sales force size

• Sales territory design

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Market Opportunity Analysis

• Market 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 conditions

• Sales potential – the portion of the market potential that the firm can expect to reasonably achieve

• Sales forecast – an estimate of the dollar or unit sales for a specified future period

• Sales quotas – sales goals assigned to a marketing unit for use in managing sales efforts

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McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.

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Subjective Methods of Sales Forecasting

• User expectations – buyer indicates intention to purchase

• Sales force composite – sales force opinions

• Jury of executive opinion - key experts’ opinions

• Delphi technique – each participant prepares an estimate, and these are compared anonymously and iteratively

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Objective Methods of Sales Forecasting

• Market test – place product in select areas

• Time series analysis – relies on historical data to develop predictions for the future

• Statistical demand analysis – attempts to make a comparison to determine the relationship between sales and factors that influence sales

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Forms of Time Series Analysis

• Moving average – averaging sales results over previous time periods to forecast into the future

• Exponential smoothing – a type of moving average where most recent years are given more weight

• Decomposition – applied to monthly or quarterly data where seasonal pattern is evident

• A critical adjustment is that of seasonality and cyclical factors

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Choosing a Forecasting Method

• Which 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 problem

• Scenario 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 territories– Procedures for identifying potential

customers– The establishment of sales quotas– Compensation and its subcomponents– The evaluation of salesperson

performance

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Planning Tools• North American Industry Classification

System (NAICS)– Developed by the US Bureau of the

Census, organizes the reporting of business information

– Each industry in the US is assigned a two-digit number

• Buying Power Index (BPI)– Generated and published by Sales

Marketing Management Magazine, considers income, population and retail sales

– Most useful with low-priced convenience goods

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Sales Quotas• Goals assigned to salespeople• Apply to specific periods and may be

expressed in dollars or physical units • Tool for sales managers’ planning

and controlling field selling activities and results

• Benchmark for evaluating sales effectiveness

• Motivate sales people

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Purpose of Quotas

• Quotas facilitate planning and control of the field selling effort– Provide incentives for sales

representatives– Provide measures to evaluate

salespeople’s performance.

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Characteristics of a Good Quota

• Attainable

• Easy to understand

• Complete

• Timely

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Types of Quotas

• Those that emphasize sales or some aspect of sales

• Those that focus on sales activities

• Those that examine financial criteria such as gross margin or contribution to overhead

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Sales Volume Quotas

• Often 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 Quotas

• Reflect territorial conditions

• Require a detailed analysis of the work required for effective territorial coverage

• Customers influence activity quotas through:– Account and order size– Purchasing patterns – Support required for satisfaction

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Financial Quotas

• Reflect the financial goals of the firm– Sales volume– Gross margin– Intended profit margin– Additional sales potential – Cost of support and service

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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 Volume

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Determining Sales Force Size

• Workload method uses the buildup method to estimate the work required to serve the entire market

• Incremental 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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Sales Analysis

• Simple sales analysis - facts are listed and not measured against any standard

• Bases for sales comparison– Quotas– Comparative sales forecast– Forecast vs. actual

• Reports can focus on exceptions or significant deviations from the financial norms or budget.

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Summary• We 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 manger’s 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. 34