Introduction

Prediction of the future sales of a particular product over a specific period of time based on past performance of the product, inflation rates, unemployment, consumer spending patterns, market trends, and interest rates. In the preparation of a comprehensive marketing plan, sales forecasts help the marketer develop a marketing budget, allocate marketing resources, and monitor the competition and the product environment. Sales forecasting is very important for a company as its helps them to formulate all the functions accordingly. Qualitative techniques rely on nonstatistical methods of deriving a sales forecast. A company solicits the opinion or judgment of sales executives, a panel of experts, the sales force, the sales division supervisors, and/or outside expert consultants. Qualitative methods are judgmental composites of expected sales. These methods are often preferred in the following instances: 1) When the variables which influence consumer buying habits have changed; 2) When current data is not available 3) When none of the qualitative methods work well in a specific situation 4) When the planning horizon is too far for the standard quantitative methods. 5) When the data has not yet factored in technological breakthroughs taking place or forthcoming. Forecasting sales is inherently more difficult than the construction of the subsequent sales budget. Although management exerts some degree of control over expenditures, it has little ability to direct the buying habits of individuals. The level of sales depends of the vagaries of the marketplace. Nonetheless, a sales forecast must attain a reasonable degree of reliability to be useful. Qualitative techniques of forecasting help the managers to take better decisions and also formulate the strategies accordingly. Also it avoids cost and save the time of the management.

Advantages of Qualitative techniques of sales forecasting:

The principal, and very significant, advantage of qualitative forecasting techniques is their potential for predicting changes that can occur in sales patterns. Time series quantitative techniques cannot predict changes in sales or demand patterns. Regression cannot predict changes in the relationships between sales and the predictor variables. Predicting the occurrence and nature of these changes can be accomplished by qualitative analyses based on the knowledge and experience of people internal and/or external to the company. This is valuable by itself or as additional information to be utilized to adjust the quantitative forecasts. A second advantage of qualitative forecasting techniques is that they make use of the extremely rich data sources represented by the intuition and judgment of experienced executives, sales employees, marketing people, channel members, and/or outside experts. The more experienced these members of the organization, the more prominently qualitative forecasting should be incorporated into the forecasting process. Quantitative forecasting techniques rarely make use of all of the information contained within the databases used to generate the forecasts. Moreover, there are inherent limitations in the depth of information that can be conveyed by a quantitative data format. Below are some more advantages:

Predictive Ability The main advantage of qualitative forecasting is its ability to predict changes in sales patterns and customer behavior based on the experience and judgment of senior executives and outside experts. Management can use the qualitative inputs in conjunction with quantitative forecasts and economic data to forecast sales trends. Quantitative forecasting uses past results to predict future trends, while economic data includes short- and long-term interest rates and unemployment levels. For example, if the economy is expected to decline in the short term, a small business owner may rely on his own experience and that of his senior sales staff to estimate a small decline in sales next year.

Flexibility Qualitative forecasting gives management the flexibility necessary to use non-numerical data sources, such as the intuition and judgment of experienced managers, sales professionals and industry experts. This can improve the quality of a forecast because quantitative data cannot capture nuances that years of experience can detect. For example, if a small business is planning to open a new store, the quantitative data may show strong historical sales trends for the area. However, due diligence may indicate that recently approved zoning changes for a new shopping mall could have a significant impact on sales going forward, which would make the new location unacceptable. Management could then use its collective judgment to go ahead with the expansion, delay it or scale it back.

Ambiguity Qualitative forecasting is useful when there is ambiguous or inadequate data. For example, a start-up technology company developing a new software application will not have historical data for any kind of quantitative analysis. It can use results from comparable companies and estimates of market size to predict future sales, but it is the judgment and intuition of the founders that will guide most of the key decisions. Large companies may have the resources to conduct focus groups and field tests to design and fine-tune their new products, but their sales forecasts are still going to need qualitative inputs.

Disadvantages of Qualitative techniques of sales forecasting:

The qualitative method of forecasting has certain disadvantages, such as anchoring events and selective perception. Anchoring events mean that forecasters allow recent events to influence perceptions about future events. For example, a retailer may have received an unusually large order this year, which is unlikely to repeat next year. Selective perception means that forecasters ignore relevant information that may conflict with their view of how the future will unfold. For example, a restaurant owner may decide to ignore the entry of big-box retailers and grocery stores into his forecasts, assuming that their in-house restaurants and ready-to-cook meals will have no impact on future sales.

Part Hard Fact, Part Guesswork

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Even a good sales forecast is built on assumptions. While verifiable numbers of past performance go into the equation, there is still a lot of guesswork in coming up with the final figures. The Forecast May Be Wrong

There are a number of reasons a forecast may be wrong. The factors fed in may be faulty. Company may not have considered the capabilities of its sales crew. Or the members may be more wishful thinking than actual verifiable figures. The forecast may be overly optimistic, banking too much on whether a new sales program or product line is successful. But if the forecast is wrong, company may need to redo it and build the budget from the new numbers. Times May Change

Although basing forecast on past performance is a good way to build numbers, don't carve figures in granite just yet. The numbers may hold up well in a good economy, but in a downturn, the forecast becomes useless. Consumers may not have the same disposable income they once had. A new competitor may spring up and take a chunk of your business from the company. The customers may decide to go elsewhere or the product may reach the saturation point. In any of those situations, forecast becomes a paper number and little else.

You May Be Chained To Your Forecast

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While forecasts are vital to making an operating budget, company may be stuck with those numbers even if they're faulty. It has set aside a certain amount for payroll or office expenses under the assumption that forecast is realistic and may be left scrambling if the forecast is wrong. Then it may need to cut back and basically start with a fresh forecast.

Bottom Line-it is
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While making a profit is the reason for going into business, priorities get skewed when the forecast doesn't hold up. Company may be tempted to trim its budget blindly or cut corners on quality to recoup its perceived losses.