The commercial landscape is seeing rapid changes. And this often means that business owners are left holding the bag. In this post, we explain how, using sales forecasting methods, you can now tip the scales in your favour by predicting revenue outcomes and preparing adequately for market fluctuations.
Mages, fortune tellers, and a swathe of clairvoyants in ages past made their living off telling people their supposed future. Whether or not they were just tricksters is not for us to decide. What we know for sure, is that in the teeming jungle of marketing & sales, using modern techniques, we can now definitively predict the future—in a sense.
To put it into context: armed with an array of sales forecasting methods, with data on past customer purchases and transactions, we can now predict future customer behaviour to a comfortable degree of certainty.
This does exactly what it says on the tin — forecast what numbers you’re going to be doing in sales for your business. Thanks to this, business owners now have the tools with which they can predict future consumer behaviour and make corrections where necessary, to obtain more-desirable business outcomes.
Sales forecasting leaves a rich vein of opportunity to be tapped into, given that companies hitting the bull’s eye with their forecasts have a 10% better chance at ramping up their revenue yearly.
In this post, we drill down on what sales forecasting is about and all the benefits it portends. More contextually, we point you to our tried-and-true strategy templates for applying these techniques to your marketing strategy. Looking to learn a few tricks? Let’s dive right into it then:
What is sales forecasting and its methods?
In other words, is the marketing technique of estimating potential sales revenue for a particular period in the future being reviewed. As with all kinds of forecasting, the most important requirement for sales forecasting is data. This data may be scraped from CRM software, consumer surveys, expert analysis, and even employee estimates, among a few other sources.
And if the cat isn’t out of the bag just yet, the quality of forecast estimates depends not only on the quality of the inputted data but also on the quality of your chosen method. If you’re a sales manager, you want to get these factors right on the money as incorrect predictions may have dire consequences.
Below, we outline the four major methods:
Historical sales forecasting
The historical forecasting method utilises data on previous sales and consumer interactions to build models to predict future market behaviour and sales revenues. Though the most common and fastest method of sales forecasting, it’s an armchair approach that could backfire because it’s simply just… lazy.
By simply extrapolating historical data to the future, the model assumes that all variables will remain the same. An assumption that we all know does not hold sway given the ever-changing economic landscape triggered by — you guessed it — an ever-changing tide fo affairs.
To illustrate, any entity that had based its sales forecast for the year 2020 based solely on 2019 data would have made huge losses following the COVID-19 pandemic and the resultant countermeasures that dealt a devastating blow to the global supply chain.
To be on the ball, experts advise that the historical sales forecasting method should not be used in isolation but just to set benchmark estimates.
Opportunity stage forecasting
Opportunity stage forecasting involves breaking down the sales pipeline into (usually) 8 instinct stages and then making estimates based on a sales opportunity’s stage in the pipeline.
The further down prospect is in the sales pipeline, the more you are to closing a sale. The eight stages of the sales pipeline are prospecting, demo, investigating, trial, proposal, roadblocks, negotiations, and closed win/loss.
For instance, if you’re selling to an already existing customer as opposed to a new prospect, chances are that you have a higher probability of closing the sale to an already existing customer than you are to a new prospect.
Length of sales cycle forecasting
Similar to opportunity stage forecasting, the length of the sales cycle forecasting model also involves evaluating leads based on their position in the sales pipeline.
But instead of evaluating the potential financial value of leads, it estimates how long it will take for a lead to be converted into a sale, allowing sales executives to maintain objectivity about potential sales.
Let’s say it takes your business two months to convert a lead into a customer. Going by that logic, a lead that’s spent just one month in your sales pipeline is only 50% likely to convert.
The reliance on the timeframe between lead acquisition and final conversion means you cannot pull this off without a reliable CRM (like Efficy) partner to rock with. This is especially true of CRM systems that integrate seamlessly with marketing solutions and immediately register every interaction with your leads—in real-time.
Multivariable analysis forecasting
Think of it as a hybrid forecasting method, one that combines elements of all other methods to create a sophisticated model that delivers the most accurate predictions.
By combining variables such as average length of the sales cycle, individual rep performance, probability of closing with predictive analysis, allows sales executives to forecast sales revenue to the highest degree of accuracy possible.
However, there are two drawbacks to this method. One, it’s a little complex and requires a lot of effort to track and ensure that all multiple sets of data inputs are correct. Again, it’s quite expensive, compared to the other methods.
What are the steps involved in sales forecasting?
So, how do you forecast sales? What are the steps involved? This segment outlines a 7-point chronologically ordered guideline for creating a sales forecast estimate.
Define your goals
As is always the case in developing any action plan, the first thing to do here is to define the goals of the forecast.
Are you trying to forecast growth in revenue, profits, or just growth in sales? Defining your goals will enable you to develop a better sense of direction towards calculating your estimate figures.
Outline the current dynamics in the market
Understanding your market, its dynamics, and your position in relation to it all is just as important as defining your goals. The more accurately you understand the current dynamics in your market, the better equipped you will be to create accurate forecasts.
The best way to do this is to ask yourself a raft of specific questions that may include;
- What exactly is your industry sector?
- What regulations are in place or are likely to be put in place during the period being evaluated?
- What is the likely trend of the market – growth or correction?
- What is the state of competition?
These questions will help you to gain a clearer view of the markets, your strengths and possibilities, as against blind optimism that leaves you taking shots in the dark.
Pick your ‘Poison’
More like your preferred forecasting model. But you get the gist.
You want to pick a model for analysing data inputs and run with it rather than hovering on multiple choices that leave you stuck in analysis paralysis. (say that hurriedly, 5 times)
Gather and sanitise data to be inputted
Regardless of the forecasting method that you choose, it is important that the data sets you input are accurate. One single incorrect data set could cost you heavily when it produces an over/underestimation to which you then align your production rates and sales thrusts.
Experts recommend that using a reliable CRM system like Efficy’s is the best way to manage data for sales forecasting. Not only does it help you to streamline reporting and invoicing processes across multiple employees, but it also has an interest management feature that helps to simplify database segmentation.
Evaluate historical data of your sales forecasting
As much as the future is unpredictable, business owners need to understand past trends and their causes in order to better under the market and prepare for the future.
By plotting out quarterly or yearly data, you can identify seasonal trends and adapt in time by either raising or lowering production as the case may require. However, sales executives must note that historical data does not account for possible future random fluctuations in the market.
Make room for unprecedented changes
To handle these potential future fluctuations, you must introduce some flexibility and margin of error into your calculations. Whether unforeseen market developments or outright ‘acts of god’ (events involving uncontrollable natural forces in operation like the COVID-19 pandemic)
For example, Toyota overtook General Motors as the number one carmaker in the US in 2021 despite Toyota being based in Japan and GM being an American brand. (the major reason touted by experts was Toyota’s stockpile of chips.)
Make your sales forecast reasonable. No. Really.
If for whatever reason, your forecast model predicts a 20,000% growth in sales revenue, it only stands to reason that you go back to inspect the date inputs and formulas in your model.
At this stage, it’s always helpful to use past sales and growth figures as a benchmark for forecast estimates.
The jury is out. The statistics tell us about 97% of companies that implement forecasting met their quotas when compared to a failing 55%. Sales forecasting places the future in your hands; giving you the resources to predict and prepare for future movements in the market.
But for this to work,you need not only the most sophisticated forecast model that fits in your budget. Above all, you also need to prioritise data collection and management.
Think of Efficy as that solution that separates you from taking a leap in the dark and a well-informed, crystal-clear vision of what side of the pendulum your sales numbers could swing.
Our CRM software flexible, fully integratable, and easy to use. We’re confident that using a strategic approach to sales forecasting, and the crystal-clear vision of a trustable partner solution, you’re well on course to smashing your sales targets! Click here to schedule your free demo starting today.
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