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Forecasting a market-area's sales -- with accuracy
General Business News
November 2002
Forecasting a market-area's sales -- with accuracy
Wouldn't you like to know now what next year's sales are going to be, and where they'll come from? Yes, that information may be hidden in the future. But an accurate forecast is easier than you might think.
If your business has multiple sales outlets or sales areas, it is important to accurately estimate how much revenue to expect from each one. If you expect too much from any one area, you will most likely be disappointed. If you expect too little, you may be missing sales opportunities.
Whether you have one sales area or 100, the first step in estimating sales is to determine as accurately as possible who your customers are, how many are located in each trade area or sales territory, and how much they spend on average in your product or service category.
Some people just use total population to estimate the number of buyers in each area, assuming that everyone is a potential customer. That is a bad assumption. Everyone is probably not a potential customer. In any area, there will always be some people who are too young, too old, too poor or too busy to buy what you are selling. Using population figures can lead to very inaccurate sales estimates.
Translating hunches into demographic data
Most business people have in mind an image of their customers. Or they may have some idea of who would be ideal customers. The trick is to translate that image or idea into demographic terms, in order to determine what part of the total population might actually become customers. Do so, and you will make more accurate estimates of how much your target customer group is likely to spend â per week, month, quarter, or year.
Using Consumer Expenditure Surveys (CES). Your first step is to accurately estimate the number of potential customers in each trade area. Your next step involves using Household Spending, a tool driven by data from the CES. These surveys are conducted annually by the Bureau of Labor Statistics.
One of the surveys is a quarterly interview of 7,500 households, in which the interviewers collect information about everything those households purchased over the past three months, as well as the age, income and other demographics of those households. The other survey asks another 7,500 households to record in a diary everything, no matter how small, that they purchased over two consecutive one-week periods. The resulting tables of data (because of strict confidentiality rules, there is no information on individuals) provide a useful picture of how much money different demographic segments spend on goods and services.
Now, to estimate sales potential for each of your market areas, simply multiply the number of target households described above by the average estimated spending on your product or service. In each of the areas where you currently do business it is now possible to compare your actual sales against the estimate of sales potential, to measure how each market area is performing.
Planning for expansion
Suppose you wish to expand into a new trade area. You now have some idea of what fraction of your target customers you can expect to do business with under optimal conditions. If you've found that your best marketing efforts are able to turn 15% of the high-income households into customers, then for business planning purposes estimating 10% to 12% for new areas might be a good, conservative estimate.
Your estimates can, of course, be changed as new customer information becomes available. But the central purpose is still the same â managing expectations. Any sales and marketing operation will benefit from setting realistic goals based on market conditions. It's not hard to develop attainable sales goals using customer-based estimates of market potential in the manner described here.
If your business has multiple sales outlets or sales areas, it is important to accurately estimate how much revenue to expect from each one. If you expect too much from any one area, you will most likely be disappointed. If you expect too little, you may be missing sales opportunities.
Whether you have one sales area or 100, the first step in estimating sales is to determine as accurately as possible who your customers are, how many are located in each trade area or sales territory, and how much they spend on average in your product or service category.
Some people just use total population to estimate the number of buyers in each area, assuming that everyone is a potential customer. That is a bad assumption. Everyone is probably not a potential customer. In any area, there will always be some people who are too young, too old, too poor or too busy to buy what you are selling. Using population figures can lead to very inaccurate sales estimates.
Translating hunches into demographic data
Most business people have in mind an image of their customers. Or they may have some idea of who would be ideal customers. The trick is to translate that image or idea into demographic terms, in order to determine what part of the total population might actually become customers. Do so, and you will make more accurate estimates of how much your target customer group is likely to spend â per week, month, quarter, or year.
Using Consumer Expenditure Surveys (CES). Your first step is to accurately estimate the number of potential customers in each trade area. Your next step involves using Household Spending, a tool driven by data from the CES. These surveys are conducted annually by the Bureau of Labor Statistics.
One of the surveys is a quarterly interview of 7,500 households, in which the interviewers collect information about everything those households purchased over the past three months, as well as the age, income and other demographics of those households. The other survey asks another 7,500 households to record in a diary everything, no matter how small, that they purchased over two consecutive one-week periods. The resulting tables of data (because of strict confidentiality rules, there is no information on individuals) provide a useful picture of how much money different demographic segments spend on goods and services.
Now, to estimate sales potential for each of your market areas, simply multiply the number of target households described above by the average estimated spending on your product or service. In each of the areas where you currently do business it is now possible to compare your actual sales against the estimate of sales potential, to measure how each market area is performing.
Planning for expansion
Suppose you wish to expand into a new trade area. You now have some idea of what fraction of your target customers you can expect to do business with under optimal conditions. If you've found that your best marketing efforts are able to turn 15% of the high-income households into customers, then for business planning purposes estimating 10% to 12% for new areas might be a good, conservative estimate.
Your estimates can, of course, be changed as new customer information becomes available. But the central purpose is still the same â managing expectations. Any sales and marketing operation will benefit from setting realistic goals based on market conditions. It's not hard to develop attainable sales goals using customer-based estimates of market potential in the manner described here.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.
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