## Step 3 for Calulating a Weighted Average - Forecast the Sales Percentage

STEP 3 -  FORECAST THE SALES PERCENTAGES FOR YOUR PRODUCT LINE

So far you have created a product line list and a list of all the products you plan to sell within each of your product lines. The next task is to assign sales percentages to your product line. In other words, you must forecast the rate at which you feel customers will purchase each product line. In our retail clothing store example, assume John assigns the following sales percentages to his product line:

 PRODUCT LINE ITEM SALES % OF PRODUCT LINE Denim Jeans 40% Casual Pants 15% Sweaters 5% Long Sleeve Shirt 25% T-Shirts 10% Belts 5% Total Percentage 100%

As you can see, a percentage is allocated to each product line item. These percentage are extremely crucial since they represent the anticipated buying behaviors of John's customers. Through market research and personal judgement, John estimates 40% percent of his customers will buy Denim Jeans, 15% of his customers will buy Casual Pants, 5% of customers will buy Sweaters, 25% of customers will buy Long Sleeve Shirts, 10% of customers will buy T-shirts, and 5% of his customers will purchase Belts. These percentages MUST add up to 100%, since they represent 100% of John's total customers during the year. Lets take a closer look at the meaning behind these percentages.

Assume for a moment that John estimates 5,000 customers will purchase something from his store within his first year of operation. Using this assumption as well as the John's estimated sales percentages (presented above), we can conclude the following;

• 2000 customers will purchase Denim Jeans (40% x 5000 customers)
• 750 customers will purchase Casual Pants (15% x 5000 customers)
• 250 customers will purchase sweaters (5% x 5000 customers)
• 1250 customers will purchase long-sleeve shirts ( 25% x 5000 customers)
• 500 customers will purchase T-shirts ( 10% x 5000 customers)
• 250 customers will purchase belts ( 5% x 5000 customers)
• 5000 customers will purchase something during the year.

If you were to add the number of customers buying something from John's store (on the left hand side), the total would be 5000 customers. In addition, if you were to add the percentages on the right hand side, the total would be 100%. It is important that the percentages allocated to your product line total 100%. If the percentage  exceeds 100% or is lower than 100%, then the number of customers will not total John's estimated yearly customers of 5000.

Many people find the task of assigning sales percentages rather difficult. With a little research and personal judgement, however, you'll be surprised at how easy it is. The following are some of the strategies John would have used to estimate his sales percentages for each product line item. Many of the strategies are universal, allowing you to utilize them when estimating your own sales percentages.

• John, with assistance from his wife and kids, visited several competitors on various days throughout the week to observe consumer buying patterns. They noticed more people on average purchased Denim Jeans than dress jeans, more long-sleeve shirts than T-shirts and sweaters, and finally belts were not purchased frequently.
• John asked sales clerks working at various competitor's stores, "What are your best selling products?"
• A friend of John works for a retail clothing store similar to the one he is proposing. He asked for her opinion and past experience on consumers buyer behaviors. She verified his observations discussed above.
• John called several clothing suppliers and asked; "On average which clothing products are more popular with similar retailers in my proposed business location"?  If retailers are purchasing more Denim Jeans than Casual Pants within a similar geographical area, for instance, it generally means consumers within this area purchase more of these items.
• John developed a questionnaire and distributed it to several people who he felt represented his target market. If you develop a questionnaire make sure people within your target market complete it. Consumers outside your anticipated target market will only "skew" your analysis. For instance, the buying patterns and buying behaviors of a ninety year old female will NOT provide John with useful information if she does NOT represent his target market.
• John and his family sat down at the dining room table on two separate occasions and analyzed the information collected from the above findings. After hours of analyzing the information they decided on the selected percentage. That is,
•  40% of all customers will buy Denim Jeans,
• 15% of their customers will purchase Casual Pants,
• 5% will purchase Sweaters,
• 25% will buy Long Sleeve Shirts,
• 10% of all customers will buy T-Shirts, and;
• 5% of total customers will purchase Belts.

During John's first year of operation, he would closely monitor these percentages to determine their accuracy. By doing so, John will be able to "grade" his forecasting ability. At the end of his first year, if these percentages are off slightly, which they will be, John would make a note of the differences. If, however, his forecasted product line sales percentages are off by more than 5% in any category, he would revise each percentage and recalculate his weighted averages.

Categories: Financial