3.3.1 Quantitative sales forecasting

Question 1

What are moving averages?

Answer 1

A time-series technique used for identifying an underlying trend by smoothing out fluctuations in data.

Question 2

What are the positives and negatives of using moving averages?

Answer 2

+ easier to predict future sales,

- fluctuations may be useful in the future to understand possible fluctuations in the market.

Question 3

What are the methods of time-series analysis?

Answer 3

3-period

4-period

Question 4

How do businesses calculate a 3-period moving average?

Answer 4

by adding up 3 months and dividing by 3.
(then plot the number in the middle month)
e.g. (Jan+Feb+Mar)/3
–> Then plotting the number in February

Question 5

How do businesses calculate a 4-period moving average?

Answer 5

by adding 1/2 of the first month and last month to the 3 months in between and then dividing by 4
(then plot the number in the middle month
e.g. (1/2Jan + Feb + Mar + Apr + 1/2May)/4
–> Then plotting the number in March

Question 6

What are the methods of sales forecasting?

Answer 6

1) Extrapolation
2) Correlation
3) Test market

Question 7

How do business use extrapolation to forecast sales?

Answer 7

• Businesses forecast the future based on historical sales data.
• This happens when the sales line is extended
• This is used in conjunction with moving averages

Question 8

What are the positives and negatives of extrapolation?

Answer 8

+ used for your business and based on historical data, simple and easy, fluctuations may be useful
- doesn’t account for external factors, reduces accuracy as its only a prediction, subjective, historical fluctuations may not be useful, only quantitative data

Question 9

How do businesses use correlation to forecast sales?

Answer 9

• When a business looks at two variables and compares the relationship between them.
• after comparing them, a regression line is used to indicate the relationship.

Question 10

What variable goes on the x-axis?

Answer 10

the independent variable

Question 11

What variable goes on the y-axis?

Answer 11

the dependent variable

Question 12

What are the types of relationships for a relationship?

Answer 12

positive
weak
none

Question 13

What are the positives and negatives of using correlation to forecast sales?

Answer 13

+ understand inventory levels, understand supply + demand, support decision-making, can include both qualitative and quantitative
- variables may have a casual relationship (both change but they aren’t related), doesn’t work for all factors

Question 14

How do businesses use test marketing to forecast sales?

Answer 14

• When a business launches products in small parts of the target market

Question 15

Why do business use test marketing to forecast sales?

Answer 15

• Businesses do test marketing to gauge the viability of a product or service

Question 16

What businesses gain information on when they use test marketing to forecast sales?

Answer 16

1) The product itself
2) Promotional message and media coverage
3) Distribution channels
4) Price

Question 17

What are the positives and negatives of using test marketing?

Answer 17

+ accurate and proportional of real customers spending, reduces risk, creates a promotional buzz
- competition gain info on new products, not representative of the entire target market, costly and time-consuming

Question 18

What are the limitations of sales forecasting?

Answer 18

Doesn’t take into account:
- external factors (economic variables e.g. GDP, Tax)
- competitors actions
- consumer trends
Only a prediction
Tough for small businesses as they have no historical data
Might be subjective

Question 19

When is sales forecasting inaccurate?

Answer 19

If the business is new
Technology advancements
Demand highly sensitive to price and income change
Poor management