4 Methods for Forecasting Revenue

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Introduction

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Recent statistics say that 46% of sales people at established software firms fail to meet their quotas.

 

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And this causes an annual churn of over 25% of these same salespeople in these most established firms.

 

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But perhaps the problem is not with the sales people but with their quotas. Maybe these firms are basing quotas on poorly calculated sales forecasts

 

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There is no one right way to forecast revenue. That’s why you need to look at a few different ways and compare the results.

 

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Four ways to forecast revenue are •  Market based forecasts •  Funnel based forecasts •  Salesperson based forecasts •  Adword based forecasts

 

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Before you start you must know

•  Your target market •  Your business model •  Your go-to-market

strategy

Market Based Forecasts

Market based forecasts make assumptions about the size of the market, how fast it is growing and what percentage of the market you’ll get to arrive at forecasted revenue

 

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Many people start by trying to figure out how big the market is

•  Gartner says the market is $50 billion •  We’re going to get 1%.

•  But this is just wrong

 

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First you need to figure out how many potential users there are out there.

 

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Then you’ve got to make a few guesses as to the rate of adoption by the market.  

 

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This will give you your total market size at any point in time.

 

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Next you have to figure out what share of the market you’re going to get.

 

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When you put it all together you get market based revenue forecasts.

Funnel Based Forecasts

Funnel based forecasts don’t use assumptions. Instead, they rely on your understanding of the causal relationship between activities and results to determine what you need to do to reach revenue goals.

 

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Lost of people start their revenue forecasts with a plug.

•  Lets see, $100k the first month….

•  Increase it by 5% a month

•  But this too is just wrong.

 

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First you have to start with a sales funnel

 

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Sales funnel

•  Lead •  Discussion •  Proposal •  Evaluation •  Trial •  Order •  Install

 

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Figure out how long each stage of the funnel takes.

Stage   Time  

Lead   Start  

Discussion   1  Month  

Proposal   1  Month  

EvaluaBon   2  Months  

Trial   2  Months  

Order   1  Month  

Delivery   2  Months  

       Total  Time   9  Months  

 

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Then figure out the conversion rate from one stage to the next.

Stage   Stage  Conversion   Conversion  Rate  

Lead   100%   100%  

Discussion   50%   50%  

Proposal   40%   20%  

EvaluaBon   50%   10%  

Trial   50%   5%  

Order   80%   4%  

Delivery   75%   3%  

       Total  Conversion  

3%  

 

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Calculate how many real leads you can generate per year.

 

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Then work use these formulas to calculate expected sales

Salesperson Based Forecasts

The Salesperson based Forecast relies on industry benchmarks to figure out what is possible for an individual salesperson. don’t make assumptions.

 

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This approach starts with how much revenue an experienced salesperson in an established firm can generate.

 

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Then discount that if: •  Your company isn’t as established •  Your product isn’t competitive •  Your sales person is new •  Etc.

 

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In fact, you may need to discount it by 50% to 75%.

 

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If your primary way of reaching the market is through sales people then how many of those do you plan on having?

 

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And then look at lead times from when you bring on a sales person.

 

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Finally multiply the number of salespeople you have in any month by the sales you expect them to have that month to arrive at revenue numbers.

Adword Based Forecasts

Adword based forecasts are for companies that sell primarily through the Internet (although this technique can be used to calculate leads generated as an input for the Funnel Based approach. don’t make assumptions.

 

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First you have to start with how much you intend to spend on adwords to generate click-throughs.

 

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Then figure out what percentage of click-throughs result in trials.

 

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And how many of those trials convert to paid purchases and even perhaps to repeat purchases if appropriate.

 

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And then what your churn rate is.

 

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Then work use these formulas to calculate expected sales

And then what?

 

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Compare all of these approaches to arrive at a workable forecast. (And don’t be surprised if you find you’re wrong.

 

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Check and re-check your assumptions over time

 

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Revise your forecasts every month

 

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The key to all of these methods is that you must know how your customers buy, how your sales engine sells and how the two relate to create sales.

 

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And you must keep re-evaluating this model and adjusting your forecasts accordingly.

 

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Helping individuals, managers, and entrepreneurs improve strategy execution.

Charles Plant 416 458 4850 cplant (at) materialminds.com

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