Sales forecasting methods are like shoes – you need to find the right fit for your business. But with so many options out there, it can feel like shopping for shoes on a Saturday afternoon – overwhelming and a little bit painful.
However, with the right sales forecasting methods, you can avoid blisters (and missed targets) and step confidently towards your goals. In this article, we’ll walk you through the different types of sales forecasting methods.
We’ll explain what they are, how they work, and even give you some tips on how to break them in. So, let’s take a stroll through the world of sales forecasting methods that will keep your business moving forward!
What is Sales Forecasting?
Sales forecasting is the estimation of a company’s sales revenue over a specific period of time – typically a month, quarter, or year.
To put it simply, sales forecasting gives an estimate of how much a company is likely to sell in the future.
Why is Sales Forecasting Important?
Sales forecasting pertains to the future. Thus, we cannot emphasize enough the importance of accurate sales forecasting.
Let’s take an example. Say your team is underachieving the targets for the quarter. Maybe your competitor is rolling out different plans that are sabotaging yours. These and many such issues can be spotted and rectified in time with accurate sales forecasting.
Being able to identify such issues early, as opposed to at the end of a period, has a profound impact on how your business will progress. Also, when it comes to sales forecasts, you should remember that they do not need to be perfect. More often than not, your sales forecasts will differ from your actual results.
Inaccurate sales forecasting will definitely be a problem. The data you use must be right, and the right sales forecasting methods must be chosen. Then, you will be able to make better business decisions using sales forecasting.
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How do you make accurate Sales Forecasts?
The following is a quick guide to sales forecasting. Follow these steps to ensure that your sales forecasting is accurate.
1) Plan your sales
You can’t predict how likely you are to achieve your sales targets if your sales team does not follow a standard process. Every team member needs to have clarity regarding the goals that they derive from sales forecasting. They must also be familiar with the techniques and criteria for qualifying a lead and more.
2) Analyze previous patterns
To form the basis of your sales forecasts, first, analyze the previous quarter or year’s sales or any time period of your choosing. Separate the data by product, price, timeframe, sales representatives, and other pertinent factors. Then based on your previous sales revenue, calculate the revenue run rate.
3) Make modifications
Once you have your revenue run rate, revise your sales plan accordingly to achieve targets according to your sales forecasts. The following are the factors you should consider when incorporating changes to your plan:
Price
Is your product or service going to need a price change? Are your competitors selling at a lower price?
Product
Will you be bringing any major updates to your product or service? How well did the previous changes do? Is there anything that should be removed?
Promotion
What was the ROI on the previous promotion? Will there be any new promotions for the upcoming time period?
Customer
How many customers do you target to onboard in the coming quarter/year? Does your customer base demand anything in particular?
Expansion
Do you plan to expand your outlets? Do you plan to go online?
4) Keep an eye on competitors
Consider your competitors’ products and campaigns, especially the major players in your space. Additionally, you may want to check to see if any new competitors have entered your market.
5) Select a sales forecasting method
There are a few factors that will determine the sales forecasting methods you use. These factors include the size of your sales team, the quantity and quality of your leads, etc.
Also read: Sales KPIs You Need To Know
Top 4 Sales Forecasting Methods That Work
There are different sales forecasting methods that you could use for your business. Here are some of the most common ones that are highly effective:
1) Intuition
As the name suggests, this method is purely based on the estimates a salesperson gives, that is, when he thinks a deal is likely to close. A sales forecasting method such as this is useful at the very beginning stages of a company or product. That is because there is little or no historical data available.
One advantage of this sales forecasting method is that it takes into account the opinions of the people closest to your prospects, i.e., your salespeople. On the other hand, reps are generally optimistic and often provide overly ambitious estimates.
Furthermore, their assessment cannot be verified on a scalable basis. Sales managers need to know if a prospect is as likely to close as the salesperson claims. In that case, they need to be present in the salespeoples’ conversations with the prospects.
2) Opportunity stage
In this sales forecasting method, each stage that a lead goes through is taken into account. The further the lead is down the sales funnel, the likelier it is to close.
After selecting a time period, multiply the potential value of each deal by the likelihood it will close. Calculate your overall sales forecasts by adding up the result you obtained for each lead.
This sales forecasting method is among the easiest but the results may not always be accurate. Also, historical data may be too heavily weighted when forecasting sales based on the opportunity stage. You may see a different percentage of deals closing for each stage if you bring any changes, be it to your product or service or promotions, etc.
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3) Sales cycle
If you use this method of sales forecasting, you will have to consider the age of every single opportunity. You are less likely to get a prediction that is too liberal since this sales forecasting method only uses objective data. It does not rely on the sales rep’s opinion.
Your salespeople’s pipelines need to be tracked carefully so that you can get accurate results from this sales forecasting method.
4) Historical data
With this sales forecasting method, all you have to do is refer to your previous time periods. Then pick the one that is most similar to the current time period. You can then make sales forecasts that results of this period will be similar to those of the previous one.
However, this sales forecasting method has many drawbacks. Many factors, both internal and external, change. Moreover, the current period may not have the same type of promotions or sales reps to achieve the same results as the previous period.
In the end, historical data should be regarded as a benchmark, not a basis for sales.
Conclusion
The methods listed here are just a few among the many types of sales forecasting methods. Choosing which to use depends on your company’s needs.
In conclusion, sales forecasting is a critical component of any business strategy. It helps you predict future sales, identify trends, and make informed decisions that will ultimately drive revenue growth. By understanding the different sales forecasting methods, you can choose the one that fits your business best and use it to its full potential.
So, whether you’re just starting out or you’re a seasoned pro, keep these sales forecasting methods in mind and stay ahead of the competition. Remember, sales forecasting isn’t just a numbers game – it’s about making strategic decisions that will help your business succeed in the long run.
Frequently Asked Questions (FAQs)
The three key elements of sales forecasting are historical data analysis, market research, and expert judgment.
Historical data analysis involves reviewing past sales data to identify trends and patterns.
Market research involves analyzing customer behavior, competitor activity, and market conditions to forecast future sales.
Expert judgment involves input from sales managers and other knowledgeable personnel who can provide insights into factors that may affect sales.
Three benefits of sales forecasting include better decision-making, improved resource allocation, and increased revenue.
By accurately forecasting sales, businesses can make informed decisions about production, inventory, and staffing levels. This can help to optimize resources and reduce costs.