What exactly is sales forecasting?
Sales forecasting means predicting future revenue by estimating how much product or service a sales unit will sell in the coming defined period. A sales unit refers to an individual salesperson, a sales team, or a company.
Sales forecasting is a projected measure of how a market will react to a company's go-to-market efforts.
Estimating your sales is essential to make credible, evidence-based sales projections. This estimation will help business owners to plan their business strategies.
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Why should you consider Forecasting?
Forecasting sales is necessary for a variety of reasons, including:
- To allocate future resources efficiently: Sales forecasting allows you to plan your stock and inventory and hire employees as needed. Knowing what it takes to grow ahead of time would be beneficial.
- To Accurately estimate revenue and investment plan: When needing funds to allocate resources, and with an accurate sales forecast, you can determine when your company will have enough funds to make the investment you intend to make.
- To identify problems in the work process: Sales forecasting allows you to identify issues as they arise. When something unusual occurs, you will become aware of it and take the necessary action. E.g., a 30% ROI decrease indicates t a problem in the work process that needs to be addressed. The problem can be detected early on and handled better than waiting for it to become complicated.
- To Establish an overall business objective: Continuous sales forecasting allows you to allocate resources, hire a workforce, identify problems, and manage risk. This allows for working on strategically planning of your business goals.
- To Facilitate growth by improving decision-making: Forecasting allows for spotting red flags before they become nightmares affecting business. You are more likely to grow as an organisation with accurate sales forecasting.
Sales Forecasting Methods
Although different businesses have significantly other sales structures and processes, a significant proportion uses one or a combination of the primary approaches to sales forecasting listed below:
Test-Market Analysis Forecasting
You can use this method to introduce your new product/service to a specific group of people based on their market segmentation. For example, you could test the product in a small geographical area to see how well it sells. This result is then analysed and used to make an accurate forecast for the entire release. This Forecasting method is helpful for large companies that are launching a new product and want to understand the market reaction, as well as startups doing a soft launch to increase brand awareness. However, when using this method, remember that not all markets are the same - what occurs in one market may not happen in another.
Sales Cycle Length Forecasting
This focusing method uses information on how long it takes a prospect to convert into a paying customer successfully. This method is entirely objective, and it's not based on the sales rep's positive gut towards a potential customer. Also, depending on the source, the procedure can be applied to various sales cycles.
Intuitive Forecasting
The Intuitive Forecasting method is based on your trust in your sales representatives. You begin by asking them how certain they are that their sale will be completed and when. It considers the sales reps' opinions, as they are the ones closest to the prospects and know-how; they are most likely to understand how things are going. The disadvantage of this method is obvious. It's entirely subjective. The reps are naturally optimistic and will most likely provide generous estimates. The strategy needs one to go through the sales reps' interactions with the customer to be verified.
Opportunity Stage Forecasting
In this method, you examine the prospect in your pipeline and calculate the likelihood of the deal closing. Companies can divide their pipeline into stages, such as generating leads, eligible, demos, quotations, close, and so on, and track everything with sales pipeline software. Generally, the further down the prospect's pipeline, the better the chances of closing the deal. To implement this technique, the analysis and understating of past performance are needed to estimate the success rates for each state reasonably. Despite being a data-driven prediction, it isn't wholly accurate. Opportunity Stage Forecasting does not consider each deal's distinctive features, such as the lead's age. A prospect, e.g., could be in the trial stage for two months and have the same success rate as a hot lead that reached the trial stage in a matter of weeks.
Lead-driven Forecasting
This forecasting method entails analysing each lead source, assigning a score based on the similarity of leads in the past, and forecasting based on that value. By giving importance to each lead source, you'll better understand the likelihood of each lead converting into revenue-generating clients. The following Matrices are needed for this Method:
- Leads per month for the previous month;
- Source of prospect-to-customer conversion rate;
- Source-specific average sales price.
However, this data-driven sales forecasting is subject to change. e.g., suppose your marketing team changes its lead generation strategy to align with current trends. In that case, the number of leads from various sources may change, affecting your lead-to-customer conversion rates. To lower the varying results of this method, stay up to date on the latest changes and factor them into forecasting.
Multivariable Analysis Forecasting Method
The most advanced sales forecasting method, multivariable analysis forecasting, integrates several factors, including average sales cycle length, the likelihood of closing based on prospect type, and individual rep performance. This forecast is usually the most accurate. However, it necessitates an advanced analytics solution, which is not always feasible if your budget is limited. Data cleaning is essential if your sales reps aren't tracking their progress and activities in deals; no matter how good your software is, your outcomes will be inaccurate.
Pipeline Forecasting Method
This method needs a program or software to run the focus. Otherwise, it proves to be cumbersome. It analyses each opportunity in your pipeline and calculates its chances of closing based on specific company variables such as the rep's win percentage and opportunity value. It depends on your ability to supply high-quality data. If you mistake the numbers or use incorrect data, you will have worthless sales forecasting. To get the most out of this method, ensure your reps regularly enter accurate, timely data into their CRM.
How shaky are sales projections? According to Gartner, 55% of sales leaders and 57% of quota-carrying sellers lack confidence in forecast accuracy. While you might expect this situation to improve over time, Gartner predicts that by 2025, "90% of B2B enterprise sales organisations will continue to rely on intuition rather than advanced data analytics or their B2B CRM, resulting in inaccurate forecasts, sales pipelines, and quota attainment."
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