Top 8 sales forecasting methods that help you exceed your target revenue
Every business that aspires to success shares one clear goal - to make sales. Methods for achieving this might differ from business to business. Many will focus on more effective marketing, others will seek the perfect domain name. But all businesses agree, making sales is essential.
That’s why sales forecasting needs to be at the heart of every business’s strategy. This article will introduce you to sales forecasting and explore some different methods that will help you exceed your target revenue.
That’s why sales forecasting needs to be at the heart of every business’s strategy. This article will introduce you to sales forecasting and explore some different methods that will help you exceed your target revenue.
What Is Sales Forecasting and Why Is It Important?
A sales forecast is a method for predicting sales within a given period. A sales forecast can be based upon several factors, ranging from budget allocation and economic conditions to industry trends and historical data.
Remember, just because you’ve forecasted a certain amount of revenue, doesn’t mean that you’re guaranteed to hit your target. Although, an effective sales forecast will have a high degree of accuracy and better planning will help to increase sales.
There are many reasons why having a sales forecast is important for your business. A common mistake for many businesses is failure to properly plan ahead. A forecast will provide a useful guide, allowing for better business decisions.
This is especially important for start-ups; it’s estimated that 20% of new businesses don’t make it past their first year. Even more alarming is that 60% fail within their first three years. One of the main factors in this failure is a lack of planning.
Whether your business focuses on B2C or B2B marketing, the importance of a sales forecast cannot be overstated. But what are the best methods that you can follow? Let’s explore some of the available options.
Different methods of sales forecasting:
- Time Series Methods
- Qualitative Methods
- Lead Value
- Opportunity Stage Forecasting
- Test Market Analysis
- Straight-line Method
- Run Rate
- Multivariable Analysis
1. Time Series Methods
This is one of the two major models that provide blueprints for forecasting. This model is best suited to long-term businesses. If you’ve been operating over a longer period, you’ll likely have collected a large amount of product data.
This information can be used to measure how the performance rate of a product has changed over time. This information can be used for the basis of your forecast. There are three different forms of analysis to consider when dealing with time-series data. These are functional analysis, trend analysis, and seasonal variation.
Functional analysis
This involves searching data for patterns and relationships to locate noteworthy events (changes that occur at a certain point in time).
Trend analysis
This form of analysis focuses on two types of trends. The first is deterministic; a trend that has an underlying cause. The second, stochastic, has no clear explanation or cause.
Seasonal variation
This describes events that fall into certain intervals throughout the year. Has a product experienced a certain trend during a specific time of year? Seasonal variation analysis helps you to gain a greater understanding of when a product is performing well. This information can then be used to project future sales.
2. Qualitative Methods
This is the second major model for forecasting. Unlike time series, qualitative techniques do not require there to be a large amount of detail readily available. Is your business just starting? These techniques are ideal for you. They will also come into use if you are launching a new product, as there will be less information to help with forecasting.
Qualitative techniques work with the data that you have available to produce a quantitative estimate. There are five different techniques that you can adopt. These are:
The Delphi Model
This model uses surveys and questionnaires in order to forecast future sales. Multiple rounds of surveys are sent to a panel of experts. On the completion of each round, a coordinator gives members of the panel are given an aggregated summary of results. They then have the option of changing their answers based on the responses of other members of the group.
By receiving input from experts, you can build a more effective sales forecast.
Expert’s Opinion
As the name suggests, this method involves enlisting the help of experts to accurately forecast the demand for a product. Unlike the Delphi method, there’s a coordinator and no chance for revision of opinion.
With the expert opinion method, forecasts are more prevalent. This means that you receive less of an aggregated score. For this reason, this method is usually seen as inferior to the Delphi Method.
Salesforce Composite Technique
This technique requires you to ask each member of your sales team to make their forecast for a product. The theory behind this technique is that because the sales team is in constant communication with customers, they have a greater understanding of their needs. This insight helps create accurate forecasts based on how a customer might respond to a product.
Of course, for sales teams to get to know customers and provide more useful insights, there needs to be clear communication. Consider introducing a direct inward dial system to ensure that customers regularly reach sales teams.
Buyer’s Expectations
This technique revolves around surveying potential buyers about their thoughts on certain products. By introducing people to a variety of different products, you can better forecast which are likely to generate the most revenue.
Market Research
Market research is perhaps the most methodical form technique for forecasting; combining systematic and formal processes to test theories about the market. Even if your organization is marketing a new product, competitors may have released something similar. How well did the competitor’s product perform? The use of historical data can provide an insight into the potential demand for a new product.
Consider introducing a workforce management system so you can better understand the needs of your team. This, in turn, will help employees conduct more effective market research.
3. Lead Value
Lead Value is a method that focuses on using historical data that is derived from your “lead source”. If you’re unfamiliar with the term, a lead is simply a prospective customer. They could have been contacted by a sales representative, added a product to their basket, or visited your website multiple times. A lead source is a method through which a lead discovered you.
The beginning of a customer’s journey can provide valuable information about their later actions. With the lead value forecasting model, a user can utilize historical sales data that resulted from leads, this information can then be used to forecast the value of new lead sources.
If each lead source is assigned a value, a business can have a greater understanding of which leads are likely to bring the highest amount of revenue. For example, do leads derived from door-to-door marketing prove to be more profitable than those online? If this is the case, you can put more of your resources into on-the-ground marketing.
If a certain lead is underperforming, you can begin to investigate why. If your online leads are performing poorly, you could examine ways to reduce the bounce rate. If you’re wondering, what is bounce rate, the term simply refers to visitors that leave after viewing a single page of your website.
Average Sales Price Per Lead
Calculating the average sales price per lead is simple. To do so, Divide the total revenue by the number of leads from each source. For example, let’s imagine that on your website you have 1,000 leads and earn revenue of $10,000. The average sales price for leads that originated on your website is $10.
Average Lead Value [#averagelead}
To determine the average lead value, you first need to work out the conversion rate. To do so, divide the total number of conversions (the moment when a prospective customer makes the desired action) by the total number of visitors. Multiply this by 100 to get a percentage value.
Now, multiply your average sales price by the conversion rate. This will provide you with the average lead value.
Let’s imagine that on average, leads spend $200 on your online store. Let’s also imagine that your conversion rate is 5%. This means that your average lead value is $10.
4. Opportunity Stage Forecasting
This method examines the position of a prospect within the sales pipeline (a way of tracking a customer’s journey). A customer’s position within the pipeline will determine the likelihood of making a successful sale. A pipeline contains various stages, including:
- Initial call - your sales team has reached out to a prospect.
- Qualified - a prospect has shown some interest in your product/service.
- Product demo - a prospect has been presented with a demo so that they can gain more information about your product.
- Final call - your sales team has made a final call to attempt to close a deal.
- Deal closed - a sale has been made successfully.
Each stage within the pipeline is assigned a score. The earlier the stage within the model, the lower the chances of a sale. For example, the “initial call” stage is typically assigned a number between 1 and 5%. “Final call” on the other hand is given a number between 70 and 80%. To increase the chances of a sale, invest in remote call center management.
5. Test Market Analysis
As a business, you’ll already have likely segmented prospects into different groups. This could be based on their demographic, location, or whether they have signed up for a newsletter.
With this method of forecasting, you can pre-release a product to people within a segment. Once members of a segmented group have had access to a product you can then gather information.
This data can be used to predict a product’s performance more accurately upon its full release. For example, you might release a product located in a certain geographical area.
It should be noted that this method is best suited to larger companies that want to run a soft launch of a product before going global.
6. Straight-line Method
This is the simplest method for forecasting sales and is accessible to businesses of all sizes. The straight-line method looks at historical data to produce a sales projection. More specifically, the model looks at patterns from previous years as a way of showing future growth.
To calculate this, you’ll need to subtract the revenue at the end of year two from the revenue from the end of year two. This gives you an increase in revenue. Now, divide the increase in revenue by the year one revenue. This gives the rate of growth. To convert this to a percentage, simply multiply the answer by 100. This will give you a growth percentage that can be applied to future periods.
7. Run Rate
If time-relevant sales are important to your business, this method may be the best to use. It’s a simple calculation that uses an average of past sales information. It’s calculated by dividing the total revenue over the period by the number of periods.
Let’s assume that’s the end of September and your revenue from product A is $90,000. Based on a calendar year, $90,000 divided by nine months equals $10,000 per month. This figure would be applied to the remaining months (October to December). Your forecast revenue would, therefore, be $90,000 + $30,000 (3 x $10,000) giving a total forecast revenue of $120,000.
8. Multivariable Analysis
This method brings together different aspects from various forecasting models. This is perhaps why multivariable analysis is often considered one of the most effective methods of forecasting. Combining sales cycle length, rep performance, and opportunity stage probability, this data-driven method provides accurate results.
Due to its reliance on advanced analytical methods, this is a model that is better suited to larger businesses.
Don’t Delay, Start Forecasting Today
Sales forecasting is an absolute must for any business that wishes to have success. Yet it can be complicated, so much so, that many are dissuaded from sales forecasting altogether. As illustrated in this document, however, there are numerous simple methods for forecasting. Take the time to assess each method and decide which is the fit for your organization.
Whatever process you decide to use, make sure that you have appropriate policies in place (such as flexible working, or a BYOD policy) for your workplace to follow. This will result in more predictable behavior and reduces the risk of error when forecasting.
The benefits, such as better planning and a more organized business, are too significant to overlook. By failing to properly forecast, your business has a much lower chance of success. So, don’t delay, ensure that you start forecasting today.
About the author
Grace Lau is the Director of Growth Content at Dialpad, an AI-powered cloud communication platform for better and easier team collaboration to help brands in scaling business. She has over 10 years of experience in content writing and strategy. Currently, she is responsible for leading branded and editorial content strategies, partnering with SEO and Ops teams to build and nurture content. Here is her LinkedIn.