Sales Forecasting – Chapter 6

1. Sales Forecasting – Chapter 6 The “Incremental Adjustment” Model • Future Sales = Previous Demand + Expected Incremental Sales Incremental Adjustment Forecasting Work Session

2. Incremental Adjustment Forecasting Model Future Sales = Previous Sales + Incremental Sales Incremental Sales = f(RGDP, seasonal factors, marketing factor 1 (e.g., price)…marketing factor n Process: • Previous sales are actual sales from previous quarter if you did not stock out. (see Quarterly Industry report). If you did stock out, you need to estimate what demand was. • For Incremental Sales = (see following slides). • Sum impact of all factors and add to Previous Sales to obtain Future Sales Incremental Adjustment Forecasting Work Session

3. Sales Forecasting – Chapter 6 Calculating “Incremental Sales” • Changes in RGDP – This is equivalent to an “income effect”. The “income elasticity” is approx. 2.0 • Changes in Price – Follows the “Law of Demand” with price elasticity of approx. –2. This price elasticity will change with quality/features. • Changes in Advertising – Advertising expenditures “elasticity” is approx. 0.2, e.g., a 10% increase in advertising spending will result in approx. 2% increase in unit sales. This “elasticity” is reliable for spending changes of +/- 15%. • Changes (+) in sales persons, sales salaries & commissions – each has a positive impact, but you will have to develop estimates of these impacts as the competition evolves. Incremental Adjustment Forecasting Work Session

4. Calculate expected change in RGDP • Information to calculate the expected change is shown on Quarterly History Report. For example, for Y3Q1 • In Merica: % change = (98.3-100)/100 = -1.67% • In Sereno: % change = (105.15-100)/100 = 5.15% Incremental Adjustment Forecasting Work Session

5. Sales increments due to RGDP change in Y3Q1 In Merica and Sereno • (% change in RGDP) x 2 = % change in unit sales • Assume the effect on your durable product’s sales will be twice the change in the RGDP • For your Merica home area: • (1.67%) x 2 = -3.34% change in unit sales • Incremental change = -.0334 X 112 = - 3.74 rounded to nearest whole number = -4 • For Merica non home areas: • Incremental change = -.0334 X 106 = -3.54 rounded to nearest whole number = -4 • For Sereno: • (5.15%) x 2 = 10.3% change in unit sales • Incremental change =.103 X 56 = 5.78 rounded to nearest whole number = 6 Incremental Adjustment Forecasting Work Session

6. Calculate expected impact of seasonal factor • From Chapter 6, page 105, the % change from: • Quarter 4 to Quarter 1 = -21% • Quarter 1 to Quarter 2 = +10% • Quarter 2 to Quarter 3 = -10% • Quarter 3 to Quarter 4 = +27% % change = (Present Quarter Index – Previous Quarter Index)/Previous Quarter Index Incremental Adjustment Forecasting Work Session

7. Seasonal impact calculation • For Merica home area: • (-21%) x 112 = - 23.52 rounded to - 24 • For Merica non home areas: • (-21%) x 106 = - 22.26 rounded to - 22 • For Sereno: • (-21%) x 56 = - 11.76 rounded to - 12 Incremental Adjustment Forecasting Work Session

8. Price changes • Assume price elasticity = -2.0 • For every 1% change in price, there will be a 2% change in unit sales in the opposite direction (the law of demand) • For example, if price is raised by 5%, then unit sales would decrease by 10%. Incremental Adjustment Forecasting Work Session

9. Price change impact for Y3Q1 • Example assumes a price increase of 5% • For Merica home area: • (5%) x – 2 = - 10% change in unit sales • (-.10) x 107 = - 10.7 rounded to – 11 • For Merica non home areas: • (5%) x – 2 = - 10% change in unit sales • (-.10) x 106 = - 10.6 rounded to – 11 • For Sereno area: • (5%) x – 2 = - 10% change in unit sales • (-.10) x 56 = - 5.6 rounded to – 6 Incremental Adjustment Forecasting Work Session

10. Advertising changes • Assume advertising elasticity = 0.2 • For every 1% change in advertising expenditures, there will be a .2% change in unit sales in the same direction • For example, if advertising expenditures are raised by 10%, then unit sales would increase by 2%. Incremental Adjustment Forecasting Work Session

11. Advertising change impact • Example assumes 10% increase in advertising. • For Merica home area: • (10%) x (0.5) = 5% increase in unit sales • (0.05) x 107 = 5.35 rounded to 5 • For non Merica home areas: • (10%) x (0.5) = 2% increase in unit sales • (0.05) x 106 = 5.3 rounded to 2 • For Sereno: • (10%) x (0.5) = 5% increase in unit sales • (0.05) x 56 = 2.8 rounded to 3 Incremental Adjustment Forecasting Work Session

12. Other changes to consider • Sales Salary • Sales Commission • Number of Salespersons • New Model Introduction • Competitors’ actions Incremental Adjustment Forecasting Work Session

13. For New Model Introduction &Competitors’ actions • New Model introduction results in, on average, about a 15% increase in unit sales • Competitor actions can cause either increases or decreases • If a competitor cuts prices dramatically, your unit sales will decrease. • If a competitor stocks out your unit sales will increase. Incremental Adjustment Forecasting Work Session