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Sales Forecasting Methods

How to Build Revenue and Sales Forecasts

Sales forecasting methods

Developing a sales or revenue forecast can feel a lot like trying to magically see into a crystal ball – and is one of the most difficult aspects of creating a strategic marketing plan.   After all, if you don’t know how much revenue you’re aiming for, how will you know how much to spend on achieving it?

On the surface, we’re talking about unit sales times the price of the sales to get a revenue number.  But how many units of each aspect might you sell?

Here are three basic methods to develop sales forecasts, along with some good insight on the limitations of each.

1. Percentage of Market Share

This method is often the first-thought of the new businessperson.   It is common to read in business plans, “the market is X billions, and if we get just 2% of that, we’ll have $x in revenue” which then amounts to some astronomical number, indicating overwhelming success.  Using this kind of assumption alone is much to0 simplified.

What you’re not accounting for is how many competitors, their relative size, and how strong their market entrenchment is.

What needs to be considered is a concept called “Share of Voice.”  (SOV).  Share of Voice simply means the share of the total marketing spending that a company is undertaking, when compared to the industry as a whole.   Theoretically, if none of your competitors is marketing at all, and you come out with a big marketing campaign and a team of salespeople, and are doing 100% of the marketing, then eventually, all else being equal, you should gain 100% of the market.  However,  the amount of time is a factor here —depending on relationship bonds, it may take several years for you to eventually gain full control of the market.

But it does mean that if you want to have roughly the same market share as the #1 player, match them on Share of Voice.   And then assume that they might likely increase their efforts as well, which means you’ll need to follow suit.  It might take a few years to overtake them, but it will come.

Need help on estimating the size and growth trends in an industry sector?   Always look to your corresponding industry association for the latest data.  Many of them post reports online regarding overall trends.  In addition, chatting to the people running the association will yield great insight on the identities and marketing efforts of the industry leaders.

2. Basing Sales Forecasts on the Previous Year

If you’ve got some historical data, why not use it?

In this method, a business might go by last year’s results, and decide whether certain factors will positively or negatively affect revenue.  Some of these factors might include:

  • Economic growth – Take a look at provincial forecasts, national forecasts, US forecasts, and any other global forecasts relevant to your business.  If you have a retail business, ask the closest retailers nearby what they are forecasting, and if they are planning to boost marketing efforts which might bring traffic your way.
  •  Pricing factors – Can your pricing stay the same, be increased, or
  •  Competitive factors – Do your homework on your competitors. Do they have new innovations likely to steal market share from you?  Or do they look tired and weak?  One quick tool you can use is an online traffic estimation tool called SEMRush.  This tool allows you to enter a competitor’s URL and it will tell you whether the site is growing or shrinking in traffic.  This can tell you whether or not a given competitor is on top of its marketing.
  • Your improvements – Have  you developed anything new and exciting lately?   Can you go to your existing client base and sell them a new element of your service?   Or, are you sitting still?
  • Interrelated products – Will an increase in one product or service line affect sales of another?  If you are estimating several distinct products or services, consider the relationships between them.

The above factors will certainly be part of the puzzle, but you also need to look at the third method.

3. Forecasting Based a Marketing or Sales Funnel

Especially if a company is starting from scratch in its first year, often the best approach is to set a sales goal,  make a commitment to a certain level of marketing, and then make reasonable assumptions about closing rates.

If direct sales is your core marketing method, this is basically a “sales funnel”  – in other words, there are lot of people at the top of the funnel, but only a few actually become real clients.  i.e. Contact 500 people, meet with say 100 of them, make proposals to 50 of them, close on 20 of them in a year.  Now, is 20 clients enough?  If not, you might want to start by contacting 1000!

Now, what if you are using indirect marketing or advertising?   Traditional advertising typically has very weak statistics to indicate how many leads might come from a given advertisement.    This is why few new businesses try traditional media advertising.   The first year is kind of a gamble; only in the second year or so can you reliably forecast the affect it will have on your business.  Sometimes it is best to wait until you have some money to gamble before using traditional print or broadcast media.  That’s not to say it won’t work — it just takes money to refine it, and enough money to stick out until it is refined.  And certainly, don’t do it without the help of an expert to give you the best shot at messaging and designing for maximum impact.

The sales funnel concept also applies to website traffic.   And the good news is, there are tons of statistics on web traffic.  A recent study by Google showed that getting your website into the #1 position on a key search term means you’ll get about 42% of the traffic for that term. And remember that I mentioned SEMRush?  This will tell you how much traffic that is, i.e. you can find out how many visitors your competitors are getting, and if you see they are in #1 for several search terms, you know what kind of traffic that might bring to your website if you can match it.  A good SEO expert will be able to give you quite accurate information on this, as well as how much traffic can be gained by ranking on various keywords (as can we, at Tenato).  If you’re a real do-it-yourselfer, try the Google Adwords Keyword tool to search for traffic volumes on various keywords…however, make sure you’ve selected exact match in the correct “location” – i.e. country.

Once you know how much traffic you might be able to generate, you need only estimate the conversion rate – i.e. how many of the visitors to your website will make inquiries?  Here’s a good resource for estimating conversion rates.

And from there, what is your sales closing rate?    If you’re new to your industry, estimate  1/6 (which is a conservative closing rate across industries), and see if you can do it!  If not, you might need a little sales training

 

Sales Forecasting is a difficult task, to be sure.   As you can see, there are benefits to all of the methods, and the best approach is to take what you can from all of them.  Even as I write this, I continually think of more ideas, more ways to get better information!   If you have any ideas to add, I’d love to hear them.

One final word of advice — when doing your research, be sure to triple-check your sources for currency, and make note of which sources you used throughout.  And if you need a hand, please give us a call.

 

 

 

 

 

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Jacqueline Drew
About the Author - Jacqueline Drew
Jacqueline M. Drew, BComm MBA is CEO of Tenato Strategy Inc., a Calgary-based marketing research and strategy firm. She loves to use her superpowers "to help the good guys win" and is also an energetic supermom, bandleader and songwriter.

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