Sales Forecasting Methods – The Complete Beginner’s Guide

No one can predict the future. 

But that doesn’t mean that you shouldn’t try!

Learning to forecast sales as accurately as possible can help you make better business decisions.

Today we are going to discuss what sales forecasting is, the key sales forecasting challenges, and how to forecast sales.

We will also share a sales funnel that you can use to increase sales. It’s the same funnel that we used to grow our business from zero to $100M+ in annual revenue!

What Is Sales Forecasting?

Sales forecasting is the process of predicting future sales.

Typically, it’s primarily based on historical sales data, though of course new developments and future plans should also be taken into consideration. 

While you can make educated guesses without historical data, it probably shouldn’t be considered sales forecasting. After all, in such a situation, you are literally just guessing. 

What Are the Key Sales Forecasting Challenges?

Here are some issues that you need to be mindful of because they might get in the way of accurately forecasting sales:

Optimism Bias

Optimism bias is a cognitive bias that makes people believe that they are:

1. More likely to experience positive events.
2. Less likely to experience negative events.

In the business context, this bias can lead to making overly optimistic sales projections, especially in situations where you can’t rely on historical data (e.g. product launches). 

It can also lead to failures in risk assessment, such as being overly optimistic about the economy, market conditions, geopolitics, etc.

This unwarranted belief that everything is going to work out well means that you might get caught unprepared by something that you could have predicted had you been more realistic. 

Incentivizing Dishonesty

Your company culture will inevitably affect the accuracy of your sales forecasting. 

Human behavior is shaped by incentives so you need to ask yourself: what are you incentivizing?

Do you reward your employees for being honest, voicing their concerns, and giving you realistic estimates?

Or do you reward them for lying, hiding problems, and telling you what you want to hear?

No business owner would consciously incentivize the latter but you might be doing it without realizing it. So who are you giving raises, bonuses, and promotions to?

This shouldn’t be an issue if you only have a handful of employees who report directly to you. 

After all, when you are working with a small team, everyone knows what everyone else is up to. It’s not possible to sweep problems under the rug. 

However, the larger the company, the more misaligned the incentives. When individuals, teams, and departments are competing for limited resources, they might start cutting corners, embellishing their achievements, providing unrealistic timelines, etc.

For example:

A product manager might present an unrealistic project timeline to make themselves look good, the development team might go along with it despite knowing full well that they will fail to meet the deadline, and then the marketing team may be unable to launch their new marketing campaign on time because the product isn’t finished yet. 

If you had forecasted sales based on the original timeline the product manager presented, you would likely fail to meet your sales target for that quarter, which might then lead to failing to meet your annual sales target. 

You will likely encounter this issue as your business grows and you need to nip it in the bud once you do. Reward honesty, not pie-in-the-sky BS!

Building a House of Cards Instead of a Sustainable Business

Entrepreneurs sometimes make the mistake of optimizing for short-term gain without considering the long-term consequences of those decisions.

This can increase the fragility of your business and lead to a house of cards situation: you don’t know when it’s going to collapse but you best believe that it will.

For example, if you have:

1. A terrible product.
2. Great marketing.

…you can make a lot of money in a short period of time!

But this approach isn’t sustainable so you can’t use that sales data to forecast future sales. 

Sooner or later, disgruntled customers will begin complaining on social media, bad reviews will start cropping up, and you might even get in trouble with the law.

Same time next year, despite your company’s early success, you will probably be out of business. The gravy train will have stopped.

This is an extreme example that implies intentional dishonesty. But you don’t need to be a scammer to find yourself in a similar situation. The same thing can happen to companies that chase trends, depend on virality, or are overly reliant on venture capital. 

So make sure that you play the long game. Focus on building a sustainable business, not on making a quick buck.

And if you see a promising trend and decide to capitalize on it, exclude that spike in sales from your sales forecasts unless you are confident that this trend is going to continue (spoiler alert: it probably won’t!).

Becoming Complacent Due to Market Dominance

Complacency is a common problem among market leaders.

It’s easy to rest on your laurels when you are one of the main players in your niche. You’re safe, right?

No, you’re not! There was a time when Yahoo was the most popular search engine… And then Google showed up with a better product. The rest is history.

That’s why you can never allow yourself to become complacent. Listen to your customers, take what they say seriously, and keep improving your products.

And when you are doing sales forecasting, make sure that you take into account the possibility of a disruptive competitor entering the market. 

You can’t prevent it from happening but you can prepare for it. What are your weaknesses that a newcomer might capitalize on and what would be the best way to respond to that?

Unexpected Events (Black Swans)

Back in 2007, mathematical statistician and essayist Nassim Nicholas Taleb published his book “The Black Swan” in which he introduced the concept of a black swan: a hard-to-predict, highly improbable event that has a disproportionate impact. 

The term “black swan” comes from the fact that since time immemorial it was presumed that black swans didn’t exist until they were discovered in Australia in 1697. 

Arguably, the Covid-19 pandemic was the most recent worldwide black swan event, with the lockdowns having no precedent in living memory.

The pandemic is a great example of the limitations inherent in sales forecasting based on historical data:

Back in December 2019, companies were creating their sales projections for 2020, expecting the upcoming year to be business as usual. The Covid-19 outbreak in Wuhan, China, had made the news but no one was paying much attention to it at the time. And then the entire world shut down a few months later. 

While black swan events are by definition hard to predict, there’s something that you can predict with complete confidence: at some point in the future, something will go wrong.

You can prepare for these tough times ahead by:

1. Minimizing your burn rate aka ongoing expenses (e.g. why pay for an office if your team can work remotely?).
2. Make sure that you have enough money in the bank to keep the company afloat for at least a year should the revenue dry up.

Remember, your sales projections are just that, projections. They aren’t reality. A black swan event can change everything overnight. 

But being prepared to survive black swans can give you a competitive advantage. Who is going to be left standing when the smoke clears? 

Hopefully, you.

How to Forecast Sales As Accurately as Possible

Okay, so now that you are aware of the key sales forecasting challenges, let’s discuss how to forecast sales as accurately as possible.

We are going to discuss forecasting sales for the next year but the same principles apply if you want to forecast sales for the next quarter.

Carefully Analyze Historical Sales Data and Use It to Make Predictions About the Future

Historical sales data should be the foundation of your sales forecasting. And the more data you have, the stronger that foundation is going to be.

Look at the patterns:

What can be reasonably extrapolated into the future and what is temporary (e.g. a spike in sales due to launching a new product, hopping on a trend, being featured in the media, etc.)?

Remember that you can’t simply project last year’s revenue into the next year because it’s likely that some of the factors that contributed to it can’t be reliably replicated. You need to make sure that you understand what was going on during that timeframe if you want to make accurate predictions about the future!

Look at Your Business From a Systems Engineering Perspective

Systems engineering is a discipline that focuses on how to design, integrate, and manage complex systems throughout their entire lifecycles. Well, guess what? Your business is a complex system!

Take a step back and look at your business as a whole: how do its different parts (e.g. product development, marketing, and sales) interact with each other?

This is important because making changes to one part of your business will almost certainly create cascading effects that will affect other parts. Having a systems engineering mindset can help you foresee those effects!

Say, if you focus on generating more leads, you might end up using a strategy that increases lead quantity but decreases their quality. If you only look at lead generation in isolation, it will seem that you are doing great. You are bringing in more leads, right?

But then your sales might take a nosedive because those low-quality leads are unlikely to convert into paying customers. If you then look at sales in isolation, you might struggle to identify the problem. Why the sudden drop?

You need to consider what cascading effects your big plans  – product launches, promotional campaigns, pricing changes, etc. – might have on sales if you want to create an accurate forecast!

Don’t Be Too Optimistic About Your Future Plans

It’s important to not fall into the optimism bias trap. As the saying goes, you should hope for the best but prepare for the worst. What if nothing works out the way you expected?

Create a sales forecast based on the most conservative estimation of future growth by projecting the current growth rate into the future after removing random spikes in sales that can’t be replicated. Assume that none of your big plans will work out.

This should be your primary forecast. Use it to make good decisions. Be especially careful about not overextending yourself financially: never make new commitments based on optimism alone. Wait until the money is in the bank!

Make Sure to Take New Developments into Consideration

You should always keep your ear to the ground when it comes to changing market conditions:

• What are your main rivals up to?
• Who are the promising up-and-comers?
• Did anyone recently raise a round of venture capital?
• Are there any new technologies that might disrupt your industry in the foreseeable future?
• Can you identify any societal trends that might have an effect on your industry once they start picking up the pace?
• Are there any political changes that might impact your industry?

The reality is that most new developments aren’t black swans: they can be seen from a mile away but entrepreneurs choose to ignore them until it’s too late and then get caught unprepared.

You need to have your eyes wide open so that you can predict market changes, prepare for them, and mitigate threats to your business as much as possible. Don’t tell yourself “This is fine” when you know that it’s not!

Create several additional sales forecasts based on the most likely disaster scenarios and then prepare a response plan for each of them. Hopefully, you’ll never have to use these plans, but you want to be prepared just in case!

Be Prepared For Winning the Lottery Just In Case You Do!

Business is not all doom and gloom. Your big plans might work out even better than you hoped they would. You need to prepare for that possibility as well!

Do you know how lottery winners tend to go broke? Well, no one expects to win the lottery, so they don’t have a plan for handling a sudden influx of cash. It’s easy to make bad decisions when you haven’t thought things through in advance.

Don’t let the business equivalent of this happen to you. In the extremely unlikely event that your company ends up making way more money than you expected, you want to have a plan of what to do with all that cash.

Create one more sales forecast based on the most optimistic estimation of future growth by projecting the current growth including random spikes into the future and adding estimated additional growth fuelled by your big plans working out. 

Then decide what you would do with that money. What would be the wisest way to invest it? 

Increase Sales With the Value Ladder Sales Funnel

Okay, so now that you know how to forecast sales, let’s talk about the best way to increase them. 

What Is the Value Ladder Sales Funnel?

We believe that the most effective way to sell anything online is the Value Ladder sales funnel.

It was created by our co-founder Russell Brunson who then used it to take ClickFunnels from zero to $10M+ in annual revenue in just one year (it’s at $100M+ now!). 

This sales funnel has four stages:

• Bait. You offer the potential customer your lead magnet in exchange for their email address.
• Frontend. You offer the potential customer your least expensive and least valuable product or service.
• Middle. You offer the customer a more expensive and more valuable product or service.
• Backend. You offer the customer your most expensive and most valuable product or service.

Ideally, you also offer a continuity program of some sort, meaning, a subscription product that generates recurring revenue.

We also recommend adding downsells, upsells, and cross-sells to these core offers in order to maximize your revenue.

Why Is the Value Ladder Sales Funnel So Effective?

We would argue that the most common online marketing mistake that entrepreneurs make is driving traffic directly to their company websites or product sales pages.

The problem with this is that it’s the online equivalent of walking up to a complete stranger and saying “Yo, here’s my product, now buy it!”.

They don’t know you, they don’t trust you, and they haven’t had the time to do their research. So why would you expect them to buy from you??

Meanwhile, with the Value Ladder sales funnel, instead of driving traffic directly to your company’s website or a product sales page, you drive it to your lead magnet landing page and convert those visitors into email subscribers.

Then, once you have their email addresses, you pitch your products and services to them via email and drive traffic from your email list to your sales pages. Ideally, they make their first purchase then. 

But if they aren’t ready to buy yet, you still have their email addresses, so you can continue nurturing that relationship by providing free value via email. This allows you to stay top of mind with them.

That way, when they decide that they need a solution to a problem that your product or service addresses, it will be the first thing that comes to their minds!

Here’s how Russell explains it:

The Power of the Value Ladder Sales Funnel

You wouldn’t expect to be instant BFFs with someone you just met, you wouldn’t propose to someone on the first date, and you wouldn’t launch into an unsolicited sales pitch if you ran into a potential investor at a friend’s birthday party.

Likewise, you shouldn’t expect random people who have never heard of you before to give you their hard-earned money.

However, if you are patient, take time to build trust, and play your cards right, you can get really far, both in business and in life.

For example, Russell charges brands more than $1,000,000 for building sales funnels for them.

But he didn’t get there by asking random people to give him a million bucks. He started by providing free value to his dream customers in the form of various lead magnets and then continued building trust, step by step, year after year.  Now brands come to him ready to pay whatever he asks. This is the power of the Value Ladder!

This sales funnel is what allowed us to grow our company from zero to $100M+ in annual revenue in a few short years. 

We are confident that it could help you grow your business faster than you ever thought possible.

It’s time to exceed all sales projections!

Build Your First Sales Funnel In Just Five Days!

Let’s keep it real:

Building a sales funnel from scratch can seem like a daunting task.

That’s why we created our 5 Day Lead Challenge where Russell walks you through it step-by-step.

You will:

• Create your first lead magnet.
• Build your first sales funnel.
• Set up a six-email welcome sequence.

…and launch your funnel in just five days!

So don’t hesitate. Take action now. It can change your life!

Join Our 5 Day Lead Challenge Today!

P.S. This challenge is completely FREE!