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What is Sales Forecasting in Site Selection?
From The Buxton Co
Sales forecasting has become an increasingly common element of the site selection process and is often the focus of real estate modeling projects. Given the wide variety of forecasting options available, what is sales forecasting in a site selection context and how does it differ from other forecasting methods?
Common Approaches to Sales Forecasting
In a time-series forecasting approach, the analyst uses the existing sales history of a location to extrapolate likely sales performance at that location in future quarters. The goal is to identify trends in store performance and to set goals. This approach is commonly used for existing locations but cannot easily be used for new locations since it requires prior sales history.
Forecasting sales for a location with no prior sales history is more challenging. The analyst first compares the performance of existing locations to measurable characteristics of the trade area to quantify relationships between variables and performance. Those quantifiable relationships are integrated into a sales forecasting model that can be applied on a go-forward basis to new sites when there is no sales history to leverage. The model can also be applied to existing locations to forecast what sales “should” be given the underlying factors in the trade area/site.
The Maturity Factor
Sales Forecasting Error
How can you make decisions with confidence given the fact that all models will have a certain level of error? Consider this:
• While imperfect, the sales forecast allows you to narrow the list of possible outcomes and reduce risk. If you open just one store based on the model, the performance may or may not be an outlier, but over time the performance of stores opened based on the model should even out. Consider how your sales average over time when evaluating the effectiveness of a sales forecasting model.
• Manage the margin of error by factoring it into your evaluation. Don’t put yourself in a position where the forecast must be perfect in order to break even on the investment. Incorporate some margin for error into your decision making.
The Bottom Line
Explore our blog to learn more about common types of site selection models
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