8 sales forecasting methods and when to use them

By Indeed Editorial Team

Published 11 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Forecasting sales means companies can determine their future profitability and make more informed business decisions. There are several sales forecasting methods businesses can use to eliminate risk and allocate resources more efficiently to boost revenue. Understanding the differences between these sales forecasting methods is essential when it comes to choosing the right one for your business. In this article, we discuss what sales forecasting is, why it's important and outline the different types of sales forecasting methods.

Related: What is business forecasting (with definition and methods)?

What is sales forecasting?

Sales forecasting is the process of predicting the number of future sales over a specific period. Some companies choose to forecast sales every financial quarter whilst others prefer to predict every month or year. Sales forecasting helps managers track the performance of current sales and make adjustments where necessary. Companies can compare this information on current sales with economic trends and industry developments to make accurate sales forecasts. Newly-established businesses that don't have substantial historical data depend on competitor audits and market research to generate forecasts. Sales forecasting is typically useful for sales representatives, sales teams or particular company departments.

Related: How to create a sales forecast: step-by-step instructions

Why is sales forecasting important?

The primary reason why sales forecasting is important is that it enables businesses to make more informed decisions about their future. It allows them to determine how in-demand their products are and assess their inventory accordingly. If you notice that you're making more sales, you may be able to increase your product inventory and consider hiring more employees. Since forecasting sales also requires you to perform extensive research into your market and current sales history, it ensures you spot potential sales issues or new marketing opportunities easier.

This means you can mitigate risk and capitalise on niches in your market. Additionally, sales forecasting helps companies remain on budget when it comes to future marketing endeavours. For example, if a company forecasts that its finances are going to decrease in the coming period, managers can account for this when creating a realistic budget. Meanwhile, they can seek new ways to increase sales through promotions or loyalty schemes. In essence, sales forecasting is a technique that allows you to pre-empt any problems and prevent them from becoming a reality.

Related: Marketing vs. sales: Differences, definitions and elements

Sales forecasting methods

There are various sales forecasting methods for businesses to choose from. Which forecasting method you use is dependent on the data you have available and what you want to measure and predict. Here are eight different types of sales forecasting methods:

1. Lead-driven forecasting

Lead-driven forecasting relies on the input of sales team members to assign a value to each lead source based on the probability of successful closing. Team members make these forecasts based on what similar leads have done in the past. They can also look at the conversion rates and average sales price based on the lead source. Assigning a value to your lead sources means you can decipher which ones are likely to turn into revenue-generating clients and boost your sales.

Remember to consider any changes you make to your lead generation strategy in line with current trends. This ensures you assign accurate values and consider all factors that contribute towards lead quality. This sales forecasting method is most appropriate for businesses that have sufficient historical sales data and want to use it to assess the value of short-term leads. Sales managers can also use it to make changes to marketing strategies or sales processes to improve results.

Related: What is a sales lead and how can you find a good sales lead?

2. Test-market analysis forecasting

Many businesses consider test-marketing analysis to be the most reliable sales forecasting method. It involves launching a product or service to a certain demographic or target area based on your market segregation. Businesses can then see how the product sells and gauge customer responses to the product.

This information allows businesses to determine whether to commercialise the product on a large scale or abandon operations. This sales forecasting method is suitable for large companies who have the capability to design a product and initiate a soft launch without damage to finances. The success of test-marketing analysis forecasting relies on how well companies select a demographic that depicts their overall market.

3. Length of sales cycle forecasting

This sales forecasting method helps determine when prospects are likely to close on a sale. This means it calculates how long leads typically take to convert into paying customers. Many companies choose the length of the sales cycle forecasting method because it's objective and isn't dependent on subjective factors, such as a sales representative's opinion.

This method also allows you to differentiate between conversion rate times for different sales cycles. For instance, it may a cold email outreach may take three months to generate a customer whereas a client referral may take 10 days. This allows sales teams to capitalise on the most efficient sales methods. Companies who want to track how and when leads enter their sales pipeline can benefit from this sales forecasting method.

Related: What is a sales cycle and why is it important in business?

4. Historical forecasting

Historical forecasting involves using data on previous sales in a given time period to assume whether future sales are equal to or greater. You can use it to determine whether sales vary from one month to the next or within different financial quarters. Historical forecasting allows you to predict sales growth rather than assess the quality of leads, changes in sales processes or perform market research.

Since historical data forecasting relies on past trends, it may not be useful for new products or services in the way that test-market analysis forecasting can be. Sales managers usually use this forecasting method as a benchmark for their sales forecasts rather than a foundation. As a result, businesses often use it in conjunction with other sales forecasting methods, such as lead-driven forecasting or length of sales cycle forecasting.

5. Intuitive forecasting

Intuitive forecasting relies on the analysis of your sales representatives. First, ask each team member how confident they are that a sale may close and when. Specifically, focus on team members who have the most interaction with prospects and these individuals have a better understanding of the sales process and consumer behaviours. This information helps predict the conversation rate over a specific time period and is useful for businesses that don't have a sufficient amount of historical data.

Related: What is the role of a sales manager? (Plus salary)

6. Multivariable sales forecasting

Multivariable sales forecasting incorporates various forecasting techniques from the above methods. This means it provides a more comprehensive sales analysis than most methods and is more accurate. Multivariable sales forecasting considers your sales pipeline, market share, seasonality of sales, historical sales data and past rep performance.

The aim of this forecasting method is to help you make more informed decisions about sales process changes and marketing strategies. This method is primarily useful for businesses that want to determine their growth rate or predict annual sales. It's important to note that multivariable sales forecasting requires advanced analytics solutions, therefore meaning it's an impractical option for start-ups or small businesses. It requires you to generate clean data that sales representatives can accurately monitor.

7. Pipeline forecasting

Pipeline forecasting allows you to determine the sales opportunities present and assess the closing probability of every opportunity in the pipeline at any given stage. It ensures that businesses have an accurate estimation of all sales opportunities in their immediate pipeline and capitalise on those nearing the end of the sales funnel. You can also use this sales forecasting method to make changes to your pipeline and cut out any unnecessary sales processes that aren't generating leads or causing conversion fallout.

Related: What is a sales pipeline? A guide on how to build one

8. Opportunity stage forecasting

This sales forecasting method allows you to determine the probability of a deal closing based on a prospect's current position in the sales process. For opportunity forecasting to be effective, break down your sales pipeline into various stages. Each opportunity stage has its own probability of closing based on past conversion rates. Some common stages of a sales pipeline that businesses use include:

  • prospecting phase

  • quote phase

  • demo phase

  • closing phase

The further the prospect makes it down the sales pipeline, the more likely they are to close the deal and become a revenue-generating customer. This method requires you to have a good understanding of your past performance so you can determine the success rates for each stage of your pipeline. This means you need accurate historical data at your disposal. Remember that seasonality is likely to affect sales, which opportunity stage forecasting doesn't consider.

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