7 modern sales forecasting strategies for startups (and how to pick the right one for you)
If you’re looking for a crystal ball to see what your business will look like in a year from now, there are few things as powerful as accurate sales forecasting.
Yes. I know that doesn’t sound as exciting as an actual crystal ball, but we’re talking about business here. Not magic.
However, if you think about it, sales forecasting is basically like sprinkling a little fairy dust on your sales plan (ok, I promise that’s the end of the magic metaphor). With a sales forecast, you get a detailed prediction of what an individual salesperson, sales team, or your entire organization, will sell in a given time period—weekly, monthly, or annually. It gives you a picture of a future you can then build off of.
Want to know if you’ll have enough sales to back that new product development or marketing plan? Check the sales forecast. Want to get investors excited and take on additional funding to fuel your growth? You got it. Check your sales forecast.
In fact, according to research from the Aberdeen Group, companies with accurate sales forecasts are 10% more likely to grow their revenue year-over-year and twice as likely to be at the top of their field.
Let’s say that one more time: Sales forecasting isn’t just about checking off the boxes, filling out spreadsheets, and keeping investors happy. Sure, you can learn the basics from the best sales books out there on the subject, but in the end, sales forecasting is all about having the right information and foresight to drive continuous growth.
It’s also an important metric to make sure you’re not falling off track. Let’s say you see your team is off-target from your forecast by a significant amount mid-quarter. Your forecast lets you identify that issue and course correct before it becomes an issue that’s out of your hands.
Before you get scared off, remember that anyone can put together a sales forecast.
You don’t need a degree in mathematics or accounting to put together your sales forecast. When it comes down to it, sales forecasting is really just educated guessing. And as a business owner or sales leader, you’re in the best position to make that guess.
So, let’s bring a little magic back into this seemingly dry topic and discuss the realities of sales forecasting, different methods you can use, and which one is right to kick your company into growth mode.
Which resources and tools do you need in order to accurately forecast sales?
Making good business decisions depends on good data. So to start forecasting, you’ll need to gather the right assets.
Start with these:
- Individual and team sales goals: What does ‘success’ mean to you and your team? Start by defining realistic goals that work with your overall sales strategy.
- Your detailed sales process: What are the repeatable steps you can take to move a potential customer from prospect to client? How long does it typically take? How often does it work? You can’t experiment and grow if you don’t start with a solid foundational sales process.
- Standardized definitions of leads, opportunities, and closes: This might seem obvious, but the complexity of your business might mean there’s some confusion around when a lead is a lead, opportunity, or prospect. Nail down these terms so everyone’s on the same page when they’re reporting.
- A powerful and flexible CRM: Reps need a way to track and update you on sales, closes, or potential issues, and a CRM gives them all that and more. That same study from the Aberdeen Group showed that sales reps who rely heavily on their CRM hit their quotas 82% of the time versus 65% for non-CRM power users. (We might be a little biased, but we think Close can’t be beat for giving you a clear picture of your current and future sales.)
- Info on product costs, expenses, and potential market or price fluctuations: Again, it depends on what you’re selling, but know the costs of doing business and keep your ear to the ground when it comes to the market. Your forecast is an educated guess, remember? Keep sharp!
- ‘Show me the money!’ data: Knowing where money is coming from and where it’s going is central to an accurate and successful sales forecast. If you have any concerns about this, take time now to get your data in order.
On top of all these, you’ll want to make sure you keep an eye on internal factors that could drastically change your forecast, like adding or removing salespeople from your team, or changing policies that will affect the way your sales team works (like changing your incentive programs or upping commission on certain sales).
There are also external factors you need to be aware of, such as changing economic conditions, competitor advances (which might impact your bottom line), legislation, or even the seasonality of what you’re selling.
A basic rule of thumb is when there are changes to your sales team, update your forecast.
7 sales forecasting strategies (and which one is right for your company):
Alright, now that you have data-in-hand, it’s time to get dirty.
There are many different ways to look at your sales and come up with a forecast, and each method will depend on the info you have, the results you want to know, and how confident you are in the information you have.
Let’s break down a few different modern methods of sales forecasting, explaining which situation they’re best used for so you can choose the one that’s best for you.
1. Lead-driven forecasting
What it is: Relationships are the heart and soul of sales, and the lead-driven method relies on understanding the relationship your leads have with your company, and what they’re likely to do based on that relationship. In essence, you’re analyzing each lead source and assigning a value to that source based on what similar leads have done in the past.
Here’s what you’ll need to get started:
- Leads per month from the previous sales cycle
- Lead to customer conversion rate by lead source
- Average sale price by source
Who it’s for: If you’ve got some data to work off of and a steady stream of inbound leads, the lead-driven model is a great starting point. However, it’s susceptible to changing sales cycles, marketing efforts, or changes to the market.
If you don’t have clear data already on your lead sources or historical acquisition data, you’ll have a hard time creating an accurate forecast with this method.
2. Length of sales cycle forecasting
What it is: This method uses data on how long a lead typically takes to close to forecast an individual rep's sales. Here’s how: Let’s say your average time-to-close is four months and a rep has been working a potential client for three months, your forecast might suggest they have a 75% chance of closing the deal. What’s great about this method is that it’s completely objective. Meaning your sales rep’s ‘gut’ is out of the picture and your forecast isn’t hanging on the fact that they ‘feel good’ about this prospect, but rather on how long it has taken similar ones in the past to close.
What’s even more beneficial is that the length of sales cycle method can be applied to a multitude of sales cycles, depending on the source. So, if a referral client typically takes two weeks, while a trade show source takes six months, you can group these deal types by their source and still have an accurate picture.
Who it’s for: If you’re carefully and accurately tracking when and how a prospect enters your sales pipeline, this is a great option. It means a tight integration between both your sales and marketing plans, however. So if you’re not at a stage where this information is easily accessible to both teams, or your CRM doesn’t integrate with your marketing software, your reps are going to be bogged down in manually entering information and not out there closing.
3. Opportunity stage forecasting
What it is: The opportunity stage method takes your sales pipeline, chops it up, and assigns a percentage value to each one based on how likely a lead is to close. So, a new prospect might have a 10% potential close rate, whereas someone who has gone through a product demo might be at 80%.
Then, you pick a forecasting period—monthly, quarterly, yearly—and multiply each deal’s potential value by where it is in your pipeline. So, a $2,500 deal that’s gone through a product demo is worth $2,000 ($2,500 x 80%).
Who it’s for: Again, you’ll need a good set of historical data in order to use this method accurately, so if you’re starting out it’s probably not the right one. The opportunity stage method also doesn’t take into account the age of a lead, and assigns the same value to a prospect that’s been humming and hawing for five months as it does to a hot, new lead.
So, while it’s relatively easy to set up and will give you a quick picture, it probably won’t give you anything too close to a bullseye.
4. Intuitive forecasting
What it is: When you want to know about sales, who do you talk to? Why not your own sales team, who spend day-in, day-out in the trenches hustling up leads and closing sales? The intuitive method is based on trusting that your salespeople are your best resource for accurately forecasting their own sales, and starts by asking each one how confident they are that their sale will close, and when.
Now, I’m sure you already see the downside. First off, the answer is completely subjective, and coming from someone whose best interest is to give you an optimistic and positive answer. No sales rep wants to sit there and tell their boss, “That lead I’ve been working for the last three months? Yeah, it could be a waste of time.” There’s also no scalable way to verify this information, as you’d need to literally be in the head of your sales team in order to know whether what they’re saying is on the mark or not.
Who it’s for: While there are definitely some downsides, this is one of the few sales forecasting methods that is great for early stage startups or companies without a plethora of historic data. So, while you use it at your own risk, it’s a great way to get started on building a forecast before you have past sales to go by.
5. Test-market analysis forecasting
What it is: The test-market analysis method is great if you’re rolling out a new product or service and want to get an idea of what your sales might look like. As the name implies, this method involves doing a limited launch of your product or service and then analyzing the response. Using that number as a base, you can then make an accurate forecast on the response of a full rollout.
Who it’s for: If you’re a large company rolling out a new product without any concrete market research, or a startup doing a soft launch to gauge interest in your offering, this is a good way to get a read on the market through real sales. However, launches are notoriously expensive, so it doesn’t come cheap. Plus, not all markets are the same, and what happens in one territory might not be what happens elsewhere.
6. Historical forecasting
What it is: As the name implies, this method takes historical sales data and assumes you’ll grow year-on-year. If you sold $15,000 in November last year, this model assumes you’ll sell at least $15,000 in November of this year. Add in your average or projected growth rate and you’ll get an even better picture. So, if you grow an average of 5% year-on-year, you can expect $15,750 in sales.
Who it’s for: It’s quick. It’s dirty. And it’s completely isolated from what’s going on elsewhere in the market. It’s like looking at a weather app and packing your bag for vacation next year, assuming the weather will be the same. Anything out of the ordinary and you’ll end up soaked, or worse. Ultimately, there’s still value in looking at your historical data (if you have it), but it should be used as a benchmark, not the fundamentals of your sales forecast.
7. Multivariable analysis
What it is: As you can probably tell by now, the previous methods have their own pros and cons. The multivariable analysis method, however, takes the best parts of all these forecasting methods, and puts them together into one complex, analytics-driven system.
Here’s an example using data from the lead-driven, opportunity stage, and sales cycle methods we discussed earlier:
Let’s say you’ve got two sales reps hustling the same or a similar account. The first one is working a $10,000 deal and has just finished a successful product demo. Based on your rep’s individual win rate for this stage of the deal, your multivariable analysis says he’s 40% likely to close the deal this quarter, giving you a sales forecast of $4,000.
Your second rep is selling a smaller, $2,000 deal and is earlier in the process, yet their win rate is through the roof, also giving them a 40% chance of closing the deal this quarter and a forecast of $800. Your total sales forecast at this point for the quarter would be $4,800.
Who it’s for: While the example I used was incredibly simple, in real life the numbers rarely work out like that. Accurate forecasts based on multivariable analysis involve an advanced analytics setup that might not be in the cards for startups with a smaller sales budget. Also, you need clean data. So, if you don’t have sales reps who are diligent about tracking their deal progress and activities, this won’t work.
Just starting out? You still need a sales forecast
Yes, I can hear you groaning already.
You’ve just started your company and while you understand the value of sales forecasting, so many of these methods rely on historic data to get up and running. I won’t lie, it helps to have benchmarks to work off of, but if you don’t, it’s not an excuse to just go running out there blindly.
Sales forecasts are what will help you keep your startup alive and know you have the resources to go after big leads or take on new team members. So start where you can. Even if that’s just asking your sales team what’s in their pipeline and whether or not they think they’ll close. It might not be accurate, but it will get the ball rolling.
Like all aspects of your sales strategy, your forecast will constantly change and evolve. Revisit it regularly as you grow or the market changes and you’ll be ready to take advantage of whatever the world throws at you.
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