Is your company planning and predicting your sales for the upcoming year and does your company find the importance in this method? If the answer is no, you are actually on the right path to get the info. Before we jump into the ‘How’ in this article, let’s take a look at the ‘What’ first.
What is sales forecasting? Sales forecasting is the method of projecting potential revenue by predicting how many goods or services a sales unit (which may be an individual salesperson, a sales team, or a whole company) can deliver in the coming week, month, quarter, or year. In simple terms, sales forecast is a projected measure of how a market will respond to a company’s go-to-market efforts.
Forecasting your sales brings profit to a company's bottom line. Forecasts are used in finance to build budgets for capacity plans and recruiting. Sales projections are used by production to schedule their periods. Sales operations with territory and quota preparation, supply chain with inventory purchases and processing capability, and sales management with channel and partner strategies all benefit from forecasts.
1. Lead-Driven Forecasting
Lead-driven forecasting entails evaluating each lead source, assigning a value based on what comparable leads have achieved in the past, and then making a prediction based on that value. You'll be able to get a better idea of the likelihood of each lead converting into revenue-generating clients if you give a weight to each of the lead sources.
What you need to measure lead driven forecasting method are:
- Lead to customer conversion rate by source
- Average sales price by source
- Leads per month for the previous time period
However, this data-driven forecasting is subject to adjustment. For example, if your marketing team updates its lead generation plan to reflect current trends, the amount of leads from various sources can fluctuate, affecting your lead to consumer conversion rates.
2. Pipeline Forecasting
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This approach is much more precise, but it still relies on high-quality results. Pipeline forecasting examines each opportunity in your pipeline and evaluates it based on a variety of criteria, including age, deal form, and deal level.
This is a fairly advanced approach, but it's unlikely to succeed without specialised equipment capable of analysing what's in the pipeline.
3. Test-Market Analysis Forecasting
You will use this approach to carry out a new product/service to a certain segment of the population depending on their consumer segmentation. For example, you might test the product in a small geographic region and see how well it sells. This information is then analysed, and it can be used to make a precise prediction for the whole release.
Large companies that are launching a new product and want to know how the market reacts, as well as startups that are doing a soft launch to raise brand awareness, can benefit from Test-Market Analysis forecasting. However, keep in mind that not all markets are created equal, and what happens in one market may not occur in another.
4. Multivariable Analysis Forecasting
Multivariable Analysis is the most sophisticated and reliable forecasting tool, incorporating different variables from other forecasting methods such as sales cycle time, individual rep results, and opportunity stage chance.
Consider the following example. The same client is being handled by two salespeople. Ali is working on a RM 8000 contract and has just completed the demo; according to opportunity stage forecasting, a completed demo stage has a 60% win rate, so the deal's revenue projection is RM 4800.
Johnny is working on a smaller deal of RM 3000 and is earlier in the sales process, but Johnny's win rate is around 80% making the forecast RM 2400.
Thus, the sales breakdown for both representative are:
RM 4800 + RM 2400 = RM 7200
Forecasts based on Multivariable Analysis, in contrast to this case, are extremely complex and require a sophisticated analytics approach, rendering them impractical for small businesses or startups. You'll still need clean data – sales reps can keep track of transaction progress and actions, otherwise the performance, regardless of tech, would be unreliable.
5. Historical Data Forecasting
You use a record of your past performance under similar conditions to predict how you'll perform in the present with this method. For example, you might know that your company expands at a rate of 15% year over year and that you closed RM 100k in new business last month. As a result, you should expect RM 115,000 in sales this month.
This method is slightly more accurate but ignores other factors that may have changed in the last year, like the number of sales reps you have, or how your competitors are doing.
In conclusion, just remember that sales forecasting doesn’t have to be hard. Anyone can do it and you, as an entrepreneur, are the most qualified to do it for your business. You know your customers, and you know your market, so you can forecast your sales.