Sales Forecasting Methods: The Ultimate Guide
As with any budgeting process, it is necessary to estimate the future sales of products and services to one’s market. Sales forecasting methods help your company to anticipate potential problems. The earlier you are prepared to face issues, the better you will react.
There is a real difference between noticing an issue when it just appeared and reacting only after some time. Sales forecasting allows you to understand what is possible, and what is not.
Less than half of sales forecasting result in a sales-win (source). That is to say how necessary it is to be as precise and realistic as possible. Indeed, there is no perfect sales forecasting possible. However, the aim is to be as close as possible to reality.
Intrigued by improving your sales and reducing your losses? Find in this article a complete guide on the different sales forecasting methods!
What is sales forecasting, and why is it important?
Definition
Sales forecasting methods are ways of estimating future sales based on past data and comparative studies corresponding to a particular sector of activity.
Sales forecasting allows companies to generate the data needed to prepare future plans and strategies.
One of the advantages of sales forecasting is that it allows your company to forecast future revenues over specific periods of time in order to better allocate resources. Therefore, your company is also able to develop projects and plans based on this data and ultimately contribute to the growth of your business.
Its importance
Sales forecasting impacts many of the decisions your company must make in a number of ways, including providing the data to support those decisions.
Sales targets are at the top of the list of key considerations. There are the minimum numbers of sales that each salesperson or sales team should aim for in order to contribute to the company’s projects and more importantly, objectives.
Therefore, sales forecasting allows a company to set its objectives with precision. Thanks to precise and realistic objectives, your sales team works more efficiently and contributes to the success of your company.
List your SoftwareHow to forecast sales? 5 sales forecasting methods
There are several techniques to deal with sales forecasting. Find below 5 examples of frequently used methods.
1. Use historical forecasting data
With the will of maintaining a continuous improvement process, the first possible method to forecast sales would be to use your already existing data.
Historical data is a quick and efficient way to sketch monthly, quarterly or annual forecasts. What you do is that you consult the data from the previous period and assume identical or better results.
Some data you collect through your journey can be essential and is potentially reusable, therefore you should not hesitate to use information such as:
- Competitors you have to face and their services
- Types of customers and their habits
- What budget was granted for a certain period of time
- Etc.
To use your own intent data or to buy it from a third party can be an effective way to collect relevant information to help you.
Past sales data can be used to predict your company’s future performance. However, historical data does not take into account changes that your company or the market is facing currently. Is the demand the same as a year ago? Are your competitors the same or did they change something in their campaigns? Are there new trends?
You should use historical forecasting data as support, not as your main pillar.
2. Ask your reps
In order to speed up your sales pipeline, you should entrust the estimate of your sales forecasting to your sales reps. They are the people on the front line and therefore should be the ones to make the forecasts. With experience in the field, they will be able to more realistically assess what is and is not possible.
By giving them this role, and not to sales managers, you will surely obtain a more accurate analysis of the market and its possibilities.
This is a matter of strategically assigning roles so that each individual can perform optimally where they should be.
Your reps will become more and more accurate if they do their own sales forecasting.
3. Base your forecasts on sales cycles’ phases
This method takes into account the position of each opportunity in the sales pipeline. The probability of closing increases as the process progresses.
The forecasting frequency is based on the length of the sales cycle and the sales team’s quotas: most often, it is monthly, quarterly, or annually. The potential value of each transaction is simply multiplied by the probability of the conclusion.
Even though this method is super easy to apply, the forecasts obtained are rarely viable. This is due mostly because the age of the opportunities is not taken into account. A transaction that has been in the pipeline for 6 months will be assigned the same probability of closing as a recent opportunity: this is a problem.
However, this method goes very well with historical data. Without it, forecasts based on sales cycles’ phases are only guesses. Therefore, you clearly understand that more variables are needed to create forecasts you can truly rely on.
4. Base your forecasts on the sales cycle’s length
This forecasting method relies on the age of the opportunities to assess the probability of the conclusion. If we had to illustrate this: an account that has been in the pipeline for 5 months of a sales cycle that lasts 10 months would be assigned a probability of closing of approximately 50%.
This calculation is based on objective data rather than the opinion of sales reps. The forecasts obtained are generally more objective.
Moreover, this method allows covering different sales cycles. Where a standard prospect will need six to ten months to make a purchase, a referral sale may be processed in one month, while a trade show lead may become a customer later. You are able to segment transactions according to the average length of each sales cycle.
To obtain reliable forecasts, it is necessary to accurately track where and when each lead enters the pipeline.
5. Realize customer intention surveys
As for every business that wants to sell a product or service, you need to collect information from your future targets, that is to say, your potential customers. Meaningful insight can be obtained by surveying the purchase intentions of these future customers.
This method will allow you to better understand their plans and estimate future sales. You will be able to extrapolate the result of the sample to your entire customer base. This method is normally recommended in the industrial sector, but it is still applicable to all kinds of businesses.
Sales forecasting: the door to profits
Sales forecasting is a fundamental tool for strategic planning. It is used by a wide range of stakeholders, from sales managers to the finance department. The goal is to make the right decisions to ensure the overall success of the organization.
It allows you to forecast budgets for each project and achieve your objectives. Sales forecasting depends on your economic model, at what stage prospects are on your sales cycle, and several other factors.
A company that meets or exceeds its sales forecasts is a company with a great reputation. Good things come in threes, and the better you will act, the more people will trust you in the future.
Sales forecasts also allow your marketers to plan promotional actions needed to support operational activity and weather market turbulence.
Always remember this: the most important thing is not the method you plan to use, but how realistic you have to be to forecast accurately.