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among these three channels: catalog, store, and Website.” Analysis replaces number crunching in channel al- location. “Do I expect each channel to continue last year’s sales?” the consultant asks. “Suppose I do. I look next at the budgeted increase. Where will that show up? By channel? I must analyze each channel. Maybe I expect retail stores to hold steady, while the Website grows by selling to entirely new customers. So the Web channel is my top division, and it gets a big allocation of the increase.”


The purpose of channel allocation is not just forecast accuracy, but something much more important. It sets your overall business strategy for the year, determines where you must spend money, and helps minimize channel conflicts. The consultant illustrates the point with book selling. “Over the long run, can my bookshops really do better than my catalog or Website? Perhaps stores could offer coffee shops and book clubs. If you are losing money on the stores, you should close them or set a bigger goal. Then you must come up with a strategy to make the bigger goal.”


In short, every sales channel should offer something distinctive to customers. “The channel strategy should drive the revenue goals you set for each channel – not the other way around,” he emphasizes. “If you foul up the channel allocation, you have probably fouled up your sales strategy for the year.” Another way to allocate revenue goals is by individual customer. This is usually done for only a small number of very large customers or complex sales. Managers make a detailed analysis of each major account’s needs, its past commitments, and its potential for future purchas- es – often over several years.


BOTTOM-UP & MANAGEMENT PRESSURES All these techniques for breaking down the sales budget are what the consultant calls “top-down.” But bottom-up is another option. “Here you start at an elemental level – going into each account, territory, or state. You get the past 36 months’ data and you trend that out. Then you have forecasts of the next 12 months’ sales – territory by territory or account by account. You roll these up to get a national sales budget.” Bottom-up forecasting does not require analysis by busy


reps. “It can be done at headquarters,” the consultant says. “One analyst starts with the individual territory data. Or you can give the reps the data and ask them to trend it out.” In practice, companies often combine different meth- ods to produce the best results. “Very few companies are purely top-down or bottom-up in their sales forecasts,” he notes. “Usually, it’s a mixture. And the fun part is when the top hits the bottom.”


For example, a market analyst makes a bottom-up


forecast for each territory. “He rolls these forecasts up to, say, a 20 percent national increase. Then top management


says, ‘To hit our target stock price, we must increase sales 25 percent, so that’s the goal.’”


Then the fun begins, the consultant explains. “Three months of analytical work and management pressure col- lide on the desk of the VP of sales. Bottom-up says we can grow by 20 percent, but the CEO says we have to grow by 25 percent.


“That is when the inspirational VP of sales must shine. That person must inspire the team to find ways to increase sales by trying something they didn’t think of in their bot- tom-up forecast. Or, the VP might persuade the executive committee to look at the long term. Perhaps building in- frastructure is more important than raising sales 25 percent this year. The VP must inspire both upward and downward to move the different objectives closer together.” Even here, the bottom-up exercise is useful. “The bot- tom-up forecast gives you a basis upon which to allocate your eventual goal,” the consultant points out. “You may just have to raise all the bottom-up goals by 10 percent.”


COSTS


Allocating the other side of the sales budget – selling costs – is much different. This involves promotion, advertising, discounts and rebates, entertainment, and travel. “There is a lot of pressure to allocate the money equally to every rep,” he notes. “So every rep gets $10,000 for travel – or every district gets a $50,000 budget for in-store displays.” The consultant understands these pressures. “The expenditures are linked to work. If each territory has one worker, it should get the same expense budget. If each district has 10 people, it should get the same district bud- get. Most selling companies are tremendously socialistic about their cost budgets.”


Still, the consultant suggests applying a little market


pressure. “It’s a huge advantage if you analyze the market before you allocate your costs,” he says. For example, instead of shipping each rep 10 samples of a new prod- uct, look at the potential market by territory and allocate samples according to this potential. Or learn how many customers each rep has over a minimum-dollar level, so you can focus entertainment budgets on your best cus- tomers. For in-store displays, find out how many big stores each rep calls on. “We question the equal allocation of sales expendi-


tures,” the consultant summarizes. “We push companies to allocate expenditures by the same variables used in their revenue allocations – including market potential.” When allocating selling costs over time, the proce-


dure is the same as for revenue. “You start with histori- cal seasonality,” he says. “When have we spent this money in the past? When have we incurred our travel and entertainment costs? Then you lay on top of that any special events you have planned for this year – for example, inviting your best customers to a Super Bowl party in January or a new-product launch in July.” 


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