(KMBN MK02) Unit 3: Sales Forecasting

Sales forecasting

Sales forecasting is like predicting the future sales of a business based on past data, current trends, and market conditions. Think of it as a way to estimate how much of a product or service a company will sell in a given time period, like the next month, quarter, or year. By forecasting sales, businesses can make better decisions about things like inventory, staffing, and budgeting.

In short, sales forecasting helps businesses prepare for the future by estimating their sales, so they can make informed decisions about inventory, staffing, budgeting, and growth.

Example: Imagine a bakery that sells cupcakes. The bakery owner notices that, on average, they sell 100 cupcakes each day. Based on this, they predict that they will likely sell around 3,000 cupcakes in a month (30 days x 100 cupcakes). But if there’s a holiday coming up, they might adjust their forecast, expecting to sell more, say, 4,000 cupcakes that month.

This helps the bakery prepare by buying enough ingredients and scheduling enough staff to meet the anticipated demand. 

Introduction

Sales forecasting is the process of predicting future sales to help businesses prepare for what’s ahead. Just like planning a trip, where you check the weather to decide what clothes to pack, businesses use sales forecasting to figure out how much they’ll likely sell and plan accordingly.

In simple terms, it’s a tool for businesses to estimate how much money they’ll make in the coming weeks, months, or years. By looking at past sales, market trends, and even seasonal patterns, companies can make educated guesses about future sales. This way, they know how much product to stock, how many workers to hire, or how much budget to set aside.

Sales forecasting helps businesses stay organized, avoid surprises, and make smarter decisions for growth and profitability.

Simple Linear Regression model to forecast sales

A simple linear regression model is a tool used to predict or forecast something based on a pattern in past data. Imagine you want to predict your sales next month by looking at past sales numbers. A simple linear regression model helps by finding a straight line that best fits your past sales data, so you can use it to make future predictions.

Here’s an example: Suppose you notice that every month your sales increase by a certain amount as more people get to know about your business. If you plot each month’s sales on a graph, you might see a line going upward. This line shows a pattern — as time goes on, your sales go up.

The simple linear regression model finds the best-fitting line through these points. This line has two parts:

• Starting Point (y-intercept): Where the line begins on the sales scale.
• Slope: The angle or steepness of the line, showing how much sales increase (or decrease) over time.

Using this line, you can plug in a value (like next month) and the model will estimate the expected sales.

In short, a simple linear regression model uses a line to capture the trend in past data and gives you a straightforward way to predict future sales based on this trend.

Multiple Regression model to forecast sales

A multiple regression model is like a tool that helps predict something — like sales — by considering several different factors at once. Unlike simple linear regression, which looks at just one factor (like time or advertising), multiple regression combines several factors to get a more accurate prediction.

Imagine you run a coffee shop and want to predict your sales for next month. You know that many things can impact your sales, like:

• Temperature (warmer days bring more people in for cold drinks)
• Advertising (more ads usually bring more customers)
• Nearby events (events mean more foot traffic near your shop)

A multiple regression model lets you take all these factors — temperature, advertising budget, and events — and analyzes how each one affects your sales. It finds a formula that combines these factors, so you can estimate your sales more accurately.

In a multiple regression model:

• Each factor (temperature, advertising, events) gets a weight, showing how much it influences sales.
• The model finds the best combination of these factors by analyzing past data to predict future sales.

Example: If you increase advertising and know there’s an event next month, you can plug these details into the model to get an estimated sales number.

In short, multiple regression helps businesses make more precise sales predictions by considering multiple factors together, making it especially useful when sales depend on various influences.

• Simple Regression is useful for straightforward predictions when only one factor (like time) is influencing sales. It provides a clear and easy-to-understand relationship but may miss other important influences.
• Multiple Regression allows for a more comprehensive analysis by considering multiple factors, making it better for businesses where sales are affected by several variables, such as advertising, promotions, and seasonality. While it provides richer insights, it can be more complex and requires more careful handling of the data.

Forecasting in Presence of Special Events

Forecasting sales when special events are involved means predicting how much you’ll sell by considering the extra impact these events might have. Special events can be holidays, big local events, new product launches, or even one-time promotions. These events often bring more customers or boost interest, which means your usual sales forecast might not be accurate without factoring them in.

Imagine you own an ice cream shop, and you know that sales usually go up during a holiday weekend or during a summer festival nearby. A regular forecast might just look at past months’ sales and suggest an average sales number. But because of the festival, you’re likely to get a bigger crowd.

To forecast in the presence of special events, you adjust your sales prediction by looking at:

• Past Special Event Data: If you have data from similar past events, you can see how much sales increased. For example, if sales doubled during last year’s festival, you can expect a similar increase.
• Type and Scale of Event: Different events have different impacts. A small community event might bring a 20% boost, while a city-wide festival could double sales.
• Other Related Factors: Weather, season, and location can also affect sales during an event, so you might consider those too.

In short, forecasting sales with special events means adjusting your estimates to include the extra traffic or interest that the event could bring. This way, you’re prepared with enough stock, staff, or resources to make the most of the opportunity without running out or over-preparing.

Modeling trend and seasonality

Modeling trend and seasonality in sales forecasting means identifying and understanding patterns in sales over time, so you can make better predictions. This is especially useful for market analysis, where businesses want to understand the "big picture" of their sales data and what factors are influencing it.

1. Trend: The trend is the overall direction in which sales are moving over a long period of time. It shows whether sales are generally increasing, decreasing, or staying the same. Trends help you understand the basic movement of your business performance, without focusing on small fluctuations. Example: Imagine you sell sports equipment, and you notice that, overall, sales have been going up each year. This could be due to an increasing interest in fitness or your expanding customer base. Recognizing this trend helps you see that your business is growing and might keep growing in the long run.

2. Seasonality: Seasonality refers to predictable changes in sales that happen at regular times each year, often due to seasonal or holiday factors. Unlike trends, seasonality captures the "ups and downs" that happen during certain months, weeks, or even days. This pattern is very valuable because it shows specific times when sales are likely to peak or drop. Example: For a clothing store, seasonality could mean higher sales in winter (for jackets) and summer (for swimwear), while sales may dip in other months. Or, if you sell chocolate, sales might spike around Valentine’s Day, Easter, and Christmas.

Using Trend and Seasonality in Market Analysis

In market analytics, understanding both trend and seasonality helps you make smart decisions about stock, marketing, and budgeting:

• Stocking: Knowing your trend and seasonality can help ensure you have enough products at peak times (like holidays) without overstocking during slow periods.
• Marketing: You can plan promotions around seasonal highs or work to boost sales during traditionally slow times.
• Budgeting and Planning: Understanding sales patterns allows you to allocate resources better, planning for seasonal needs and long-term growth based on trends.

By modeling these patterns, you can predict future sales more accurately, preparing your business to meet demand efficiently and take advantage of peak periods.

Ratio to moving average forecasting method

The Ratio to Moving Average forecasting method is a way to predict sales by understanding seasonal patterns and removing the effects of long-term trends. This method is especially useful when sales go up and down in a consistent pattern over seasons, like monthly or quarterly.

• Calculate the Moving Average: First, we take a moving average of sales to smooth out short-term ups and downs. The moving average represents the general trend and helps us see the bigger picture, ignoring small fluctuations. For example, if you’re looking at monthly data, you might take the average of three or four months at a time to get this trend.
• Find the Seasonal Ratio: Next, we compare each period’s actual sales to the moving average, calculating a “ratio” (also called a seasonal index). This ratio shows how much higher or lower sales are compared to the average for that season.

For example, if January sales are usually 20% above the trend, the ratio for January would be 1.2 (or 120%). If February is typically 10% below the trend, the ratio would be 0.9 (or 90%).

Apply the Ratios to Forecast: To make a forecast, you apply these ratios to the future trend. If you know the general trend (moving average) for the next period, you multiply it by the seasonal ratio to predict that period’s sales.

Let’s say you sell cold drinks, and you have monthly data showing that sales are always higher in summer (due to seasonality). After calculating a moving average and finding seasonal ratios, you discover that:

• Summer months usually have a seasonal ratio of 1.3 (sales are 30% above the trend).
• Winter months have a seasonal ratio of 0.8 (sales are 20% below the trend).

If the moving average (trend) for July shows that the expected sales are 1,000 units, then using the seasonal ratio for summer: 

Forecasted Sales=1,000×1.3=1,300 units

In short, the Ratio to Moving Average method lets you adjust your forecasts by the usual seasonal changes, so you get a more accurate prediction that considers both the overall trend and seasonal ups and downs.

Using S curves to Forecast Sales of a New Product 

Using an S-curve to forecast sales of a new product is a way to understand how sales might grow and change over time, especially for products that start slow, pick up quickly, and then level off. The S-curve shape, which looks like an "S," helps visualize this typical growth pattern.

What Is an S-Curve?

An S-curve shows three main stages in the life of a product:

• Introduction: Sales start slowly because not many people know about the new product. Only early adopters and a small group of people may buy it at first.
• Growth: As more people hear about the product, demand grows quickly, and sales rise sharply. This is often the biggest sales boost.
• Maturity: Eventually, sales start to level off as most people who want the product have already bought it, and the market becomes saturated.

For a new product, this S-curve helps you predict:

• When sales will pick up: Knowing the curve shape, you can anticipate a slow start and prepare for a big sales spike as the product gains popularity.
• When sales might slow down: The curve also shows that, after a certain point, sales will stabilize or even decrease as the product reaches its peak.

Example: Imagine you’re launching a new smartphone. In the beginning (introduction phase), sales might be modest because only a few people have heard about it or trust it. After a few months (growth phase), positive reviews and ads lead to a sales surge as more people buy it. Eventually, after a year or so (maturity phase), sales start to level off because most people who wanted the phone have it, and new customers slow down.

The S-curve helps you:

• Plan production: By knowing the growth pattern, you can avoid overproducing early on and ramp up production during the growth phase.
• Budget marketing: You can focus your marketing efforts to boost sales during the introduction and growth phases.
• Make long-term decisions: You’ll know when to start planning new products as sales of the current product begin to stabilize.

In short, the S-curve gives you a road map of how a new product's sales might grow over time, helping you prepare for each phase and make the most of the product's life cycle.

Unit-2: Pricing Analytics |  Unit 1 Marketing Analytic and Market Sizing