Importance of Sales Forecasting in Context of Product Life Cycle
Shubham Anil Jain
Aditya Birla Fashion and Retail Limited
Sales forecasting is the practice of estimating how much income a business, group of people, or individual will produce over a certain period of time. This may be a day, a week, a month, a quarter, or even a year. In order for a company’s leadership to efficiently manage day-to-day operations and future-proof its strategic vision, the ability to estimate revenues is essential. Forecasting sales involves both science and creativity. These forecasts are used by decision-makers to prepare for corporate growth and choose how to bolster the company’s expansion. Consequently, everyone in the company is impacted by sales forecasting in many different ways.
Product Life Cycle:
A product’s life cycle is the period from when it is first introduced to consumers until it starts to lose sales or is discontinued, at which point it is taken off the market. Introduction, growth, maturity, and decline are the four stages that make up a product’s life cycle.
1. Introduction stage:
When your product is first introduced to the market, demand is developed during this phase. Depending on the complexity of the product, how novel and innovative it is, how well it meets customer wants, and whether there is any competition in the market, this stage may cause sales to lag.
2. Growth stage:
The product is in the growth stage when customers have embraced it and the market share has increased. The time it takes to achieve consistent growth entirely depends on your product, the state of the market, and the rate at which customers embrace it.
3. Maturity stage:
As a product reaches its maturity stage, it is well-established in the market, and as a result, the cost of creating and promoting the current product will decrease. Since many customers will have now purchased the goods and competitors will already be created, sustaining a market share will depend even more on branding, price, and product distinction.
4. Decline stage:
The decline stage of a product’s life cycle is characterized by declining revenue because of the saturation of the market, fierce rivalry, innovations that replace existing items, and shifting consumer demands. When deciding whether to stop producing a product, sell the production rights to another company, develop new applications for the product, or enter new markets, businesses must assess the costs and benefits.
All products have a life cycle, although many of the most popular ones can stay in the mature stage for a long time before eventually declining.
It is possible to boost profitability and maximize returns by managing the four stages of the product life cycle. Yet, failing to do so could result in higher marketing and production costs, which would ultimately result in their product having a shorter shelf life(s).
Product Life Cycle Forecasting vs. Conventional:
When creating forecasts based on complicated data, quantitative financial forecasting adopts a simple methodology. Straight-line or growth rates, where the rates are applied to quantities/volume sold, pricing assumptions, or both, are the most popular quantitative method for sales forecasting. The simplest way to use, it offers accurate projections of what companies might expect in potential financial situations.
1. Stable Growth Items:
Sales are predicted inexpertly, which could lead to a flat curve or a line of constant growth. For a product like biodiesel, where the volume output is constant and depending on production capacity, flat sales would be ideal. The revenue would remain constant month over month if no projected sales growth rate were used. The production volume would remain constant due to processing capacity if the growth rate is applied to the price assumptions in the biodiesel manufacturing plant financial model, which would result in a consistent annual increase in revenue.
2. Fashion or Seasonal Items:
Using product life cycles for revenue analysis and forecasting is crucial for some products, such as fashion apparel. Since the products sell at their peak during their seasonal months and then begin to drop in the months that follow until they are no longer marketable, fashion trends typically have short product life cycles. Traditional methods for predicting sales do not take into account seasonality or changes in the market and demand, thus they do not accurately reflect reality.
3. Failed Goods:
Financial planning frequently overlooks failure, despite the fact that it is a possibility and will happen. At some time, newly released products will fall short of expectations, causing revenues to decline until they are nil. Also, the likelihood of a product failure is not taken into account by conventional sales forecasting techniques.
Why Correct Sales Forecasting is Important:
- Every organization benefits from using a sales forecast to guide decision-making. It aids in budgeting, risk management, and general business planning.
- Businesses may effectively manage their cash flow and devote resources for future growth thanks to sales forecasting.
- By spotting early warning signs in their sales funnel and correcting their course before it’s too late, sales forecasts assist sales teams in achieving their objectives.
- The correct estimation of costs and income by organizations, which allows them to forecast their short and long-term performance, is another benefit of sales forecasting.
- It aids in estimating production volumes by taking into account the availability of resources like equipment, money, personnel, and space, among others.
- It serves as the foundation for budgets for sales, production, natural resources, etc. It assists in making decisions regarding plant development, changes to the production mix, and whether or not to redirect resources to produce different goods.
- It aids in making policy decisions. It makes it easier to determine the scope of advertising, etc.
- The sales forecast represents a commitment from the sales department and must be fulfilled within the specified time frame.
Sales forecasting informs virtually every strategic choice you make and has an impact on every division of your business. For instance, it is used by the finance department to plan its quarterly and yearly investments. Product managers use the forecast to plan the demand for new goods, while HR uses it to match recruiting plans to firm expansion objectives. It’s more crucial than ever to be able to foresee accurately because the business environments are changing pretty quickly. For a business to last, accurate sales estimates are essential. The future of the firm depends on you having a rock-solid sales forecasting methodology in place.
You may also like:
- Life Cycle Assessment (LCA): The Cradle to Grave of Your Clothes
- Product Life Cycle (PLC) | Stages and Limitations of Product Life Cycle
Founder & Editor of Textile Learner. He is a Textile Consultant, Blogger & Entrepreneur. He is working as a textile consultant in several local and international companies. He is also a contributor of Wikipedia.