As a startup, one of the first questions you are likely to face is, "How much money will it make?" From hiring to seeking investors, you need an idea of the sales you can expect to make sound business decisions.
The answer to this question can be challenging for startups because most businesses build their sales forecasts on past sales data, which you don't have.
Of course, if you are entering an established market, you can use current market data to get a feel for what to expect. However, you also need to account for differentiating factors of your business, differences in expenses, and variations in product costs.
It feels a lot like guessing, which can be dangerous. When it comes to hiring or ordering supplies, a wrong guess can leave you with stock you can't sell or people you can't afford to pay.
How can you create an accurate sales forecast for a pre-revenue startup? Well, it all starts with data--and luckily you don't have to have previous sales to create a solid sales forecast.
Resources & Information Needed to Accurately Forecast Startup Sales
Making accurate forecasting predictions starts with accurate data and tools to help your company and your employees get the job done. Before you create your startup sales forecast, ensure you have the following resources and information in place.
Set Individual and Team Sales Goals
What will a really good month look like for your team? How much do you expect each sales team member to bring in? Outline realistic goals that you expect to meet and leave the 'ideal' goals for another time.
Start by looking at the overall market and buzz or site traffic your company is already seeing. Then, consider the time required to close leads, the number of leads assigned to each sales rep, and other factors that might impact sales, such as the difference in close time between qualified and unqualified leads.
Create a Detailed Sales Process
The sales process is a living, breathing, ever-changing document. However, it heavily impacts your sales forecast. Even if the process will change, you need to consider the sales process as a whole when calculating your sales forecast.
Start by outlining your audience, defining leads, listing opportunities, and define what will be considered a conversion. For example, a free trial for your SaaS might be a hot lead, whereas someone who pays for a three-year subscription would be viewed as a conversion.
What steps will your sales team take to move a customer through the sales process? How long will that process take? Will they use email, phone, or live chat? Can you automate any of this process? Outline the sales process, and you will be in a better position to test new strategies as you grow.
Use A Powerful CRM
Sales reps need a way to stay organized, track leads, flag potential issues, and signal when leads have been closed. CRMs don't just make sales rep's jobs easier; it makes them far more effective. In fact, using the right CRM can improve sales rep productivity by up to 30%.
The issue for many startups, however, is the cost and time required to launch a complex CRM system can create a bottleneck. Many CRM costs hundreds of dollars a month and takes reps weeks to figure out how to use.
Propeller CRM, on the other hand, integrates right into Gmail, which makes it easy to use and reduces onboarding friction. Unlike other CRMs, Propeller doesn't require sales reps to spend hours or days learning how to use a new system; they can jump in and start making sales right away.
Once your business starts making sales, Propeller provides the data you need to make accurate forecasts for sales as you grow, making it an ideal CRM for startups.
Information About Product Costs, Expenses, and Potential Market or Price Fluctuations
How much do your products cost to make? What other expenses are you facing? Is the market showing indications of growth or other fluctuations? While these are educated guesses, they can be critical to ensuring your startup is prepared for the months and years to come.
Top-Down and Bottom-up Sales Forecasting for Pre-Revenue Startups
When performed accurately, forecasting can be incredibly powerful. It can help your business obtain funding, inform hiring decisions, provide hard data for negotiating with suppliers, and supercharge your business' growth.
There are two main strategies for projecting growth in a startup; we'll take a deeper look at the advantages and disadvantages of each and help you decide which is right for your startup.
Financial Projections Using a Top-Down Analysis
Top-down forecasting takes a wide view of the market you will serve as a whole, then extrapolates how much of that market you might capture. This method considers current sales trends and estimates how much product or service your business is likely to sell.
To ensure accuracy, business owners must take a deep look at their strengths and weaknesses, and objectively consider how those characteristics might impact sales.
The top-down method can reduce the impact of statistical outliers that can skew data, which are common in more detailed data. This method is also easier for startups who do not have access to day-to-day sales stats or previous records.
Bottom-Up Financial Projections
Bottom-up projections start at the other end of your business--the final product and your customers--and works it's way back up. Projections often start with customer-related data, such as the number of leads you already have or website traffic.
This model can be more accurate, as it uses actual data startups already have, such as website traffic. Bottom-up calculations also make it easier to understand projected sales of each product, versus the top-down model which often lumps all product lines together.
Top-Down or Bottom-up? Which is Better?
While top-down and bottom-up forecasting methods both offer advantages, each method also has its drawbacks. Top-down is often the right sales forecasting method for startups when forecasting revenue to investors, due to the lack of day-to-day sales figures and it's simplicity.
However, the detailed data about costs and expenses used in bottom-down forecast models can help startups uncover routes to growth. For example, companies can quickly see how new marketing strategies perform compared to projected goals, allowing them to double down on highly effective channels and strategies.
One is not better than the other; rather, startups should choose the best method based on the data that is available to them. For example, if you have access to a large amount of competitor data, then the top-down funnel may be the right choice.
How to Make Realistic Sales Forecasts as a Startup with a Bottom-up Method
- Research Your Competition: As a startup, you don't have your own sales data, so look to your competitors to understand what they are selling. Keep in mind that not all competitors may be direct. For example, if you sell stock images, you are competing with other stock image sites, but also cloud-based design programs that offer stock images.
- Research Your Customers: Who is your customer base? How big is your base, and what are they willing to spend on a similar product? Is a percentage willing to spend less or more? What are they currently using instead of your product?
- Calculate Stable Sales Volume: How much product will you sell each month, and what will the price of each item be? How many customers will you need to make that happen? Does that number make sense based on the market and your competition's current sales?
- Calculate Customer Conversions: Ideally, this is based on data you already have. For example, if your site gets 5,000 hits per month, how many will you need to convert? How many customers can you reach with PPC, content marketing, etc.?
What Does the Future Hold?
The main purpose of creating a sales forecast is to provide startups with the information they need to make smart business decisions for the future. Startups, in particular, should pay careful attention to areas where data is extrapolated or could be based on unknown factors.
For example, you may know your competitor's quarterly sales figures, but you might not know how many three year contracts renewed during that period, which could skew figures.
Above all, keep in mind that sales forecasts are just that--forecasts. Be sure to build in contingency plans for keeping your business going if you are unable to meet your goals off the bat.