As a business, you can never know exactly what tomorrow will bring. Or the day after that. Or even the one after that. But when you look long term, things start to change. It’s possible (with a little help from data) to find patterns that can inform future trends—especially in sales.
Confident assumptions don’t grow on trees; they come from making accurate sales projections. In this article, we’ll explain everything you need to know about sales projections and how you can make them more precise.
What is a sales projection, exactly?
Fundamentally, sales projections are estimates of future sales figures within a certain timeframe. That could be anything from your business’s sales quarter to the next 5 years. They are a strategic tool businesses use to anticipate and plan for future sales performance.
Sales projections vs. sales forecasts
Like sales projections, sales forecasts are also used to estimate future sales. How then, can we differentiate between the two?
The main distinction is that a sales forecast is a specific prediction of sales volumes. The final calculation primarily comes about by analyzing historical sales data. Sales forecasts tend to be updated more frequently and focus on the near future.
Comparatively, a sales projection considers more qualitative aspects alongside quantitative ones like historical sales data. Anything from consumer trends and expected technological advances to expert opinions can be used to produce a range of different scenarios for future sales performance. This is especially useful when looking years down the line, or for launching a new product.
Generally, businesses will use both sales projections and sales forecasts to help plan for anticipated changes in the economy or consumer demand, thereby reducing potential risks to their revenue.
Why are sales projections important?
Sales projections are important because they help businesses make informed decisions about their operations and investments. For example, if a company is projecting strong sales, it can prepare to recruit more staff or invest in new product lines. Alternatively, if projected sales are likely to fall, it can scale back production to compensate.
The effective use of sales projections is hugely influential in building more resilience into your business. After all, you can only properly prepare for what you can see ahead. Sales projections allow you to have more flexibility in your forward planning and to take a proactive approach to market changes rather than a reactive one.
Each of the following 3 areas is where sales projections will make a difference.
1. Strategy and goal setting
Strategic planning
Sales projections are a crucial element in deciding your business’s future goals, outlook, and direction. They are necessary to understand and manage your company’s growth, devise new business models, and plan resource allocation over extended periods of time. This will help set your business up for success in the long run.
Marketing strategy
By looking at historical sales data, segmenting it, and projecting it—in combination with market forecasting—you can inform your overall marketing strategies. Past data can help you identify growing target markets, set sales targets for specific products or services, and allocate resources to the marketing channels that are expected to be the most effective.
Goal setting
Through analyzing projected sales over an extended period, businesses can set realistic short- and long-term goals. This helps in creating specific sales milestones that can be used to measure whether growth is on track. Even more vitally, when goals are achieved, they can be shared internally to boost motivation and ensure individual effort is aligned with business needs.
Competitive benchmarking
Sales projections enable more accurate benchmarking against industry standards. By comparing projected sales growth or revenue with industry averages, you can better assess your competitive position and identify areas where you may need to improve or capitalize on strengths, which in turn informs your overall strategic priorities.
Performance analysis
Actual sales performance can be compared with your sales projections. Variance is almost certainly a given, but analyzing the variance between projected and actual sales helps pinpoint areas of strength or weakness. If performance is below projections, it prompts a closer examination to understand the reasons and implement corrective measures.
Risk reduction
With a solid sales projection and sales forecast, you can account for potential risks in advance by putting preventive measures in place to mitigate these risks. Actions could involve adjusting budgets, reallocating resources, or changing up your entire strategy.
2. Resource allocation and budgeting
Staffing needs
Sales projections can help you with your staff allocation. They can predict if product demand in a particular city or region is likely to increase quickly and will necessitate extra staffing. By planning ahead, you can move more sales reps and resources to those areas and capitalize on growing opportunities.
Marketing budget
Smart marketing budgets shouldn’t just be based on your company’s business as it is now. They should be drawn up with your future position in mind. Your sales projections and forecasts help you paint a picture of what the market should look like. Using that information, you can then decide on an optimal budget in line with projected revenue and return on investment.
Logistics support
Sales projections play a critical role in supporting logistics by providing valuable insights that help optimize the supply chain and enhance overall efficiency. Your projections allow you to better collaborate with suppliers, manage transportation and warehousing more optimally, and continuously improve your sales processes.
Production management
Accurately assessing levels of production is a key benefit to performing sales projections. In conjunction with sales forecasts, you can better understand future demand and plan to avoid both overproduction and underproduction. In that way, you can move resources where they will be most needed and avoid both waste and lost sales.
Product development
What’s selling well and what isn’t? If those trends continue, should you be moving away from a certain market or embracing it? The qualitative aspect of sales projections is especially useful for making product decisions. Perhaps you were considering discontinuing a product, but a major competitor has announced they are leaving the market. Or perhaps you are looking to introduce a new product and need to estimate demand.
3. Sales optimization
Product pricing
Sales projections also influence your pricing and sales strategy. If your sales projections predict a large purchase volume of a product or service, you may decide on a penetration pricing strategy to attract even more customers. On the flip side, if your sales projections estimate a small volume of a product or service, you may opt for a premium pricing strategy to maximize sales. If you want more information on strategic product pricing, we have written this helpful guide to pricing methods.
Inventory levels
A key element in running a successful business is making sure you have the right inventory available at all times. An accurate sales forecast or projection can help you estimate demand and determine how much inventory you need to keep on-site. Not only will you save time stressing over inventory levels, but you can also reduce costs in extra shipping fees for inventory that might be better deployed elsewhere.
Sales team motivation
Being able to set accurate sales projections is a powerful tool for improving Sales team motivation. It can provide a clear roadmap and sense of purpose for teams, and help in the setting of achievable targets. When these are met or exceeded, it boosts team confidence and creates a sense of achievement. Confident teams have higher morale, perform better, and have less turnover.
Better customer service
A sales projection can give you an idea of how many purchases you’ll get in a certain timeframe, so you can prepare your Sales Managers and Sales team to efficiently handle calls or emails from customers. Consequently, you can stock the items they need, optimize your sales process, and provide better customer service.
Performance tracking
You can also use sales projections to set goals for Sales Reps and track their progress over a set period of time. This lets them see how well they are progressing and highlights any areas they may need to improve on. It will also help in setting career development targets and fostering transparent, robust career paths within your business.
What do you need to make a sales projection?
So, it’s safe to say that sales projection is a vital tool if you want to plan ahead effectively and make informed business decisions. But they don’t just appear out of thin air. To create one, you need to consider various factors. And for it to be as accurate—and therefore useful—as possible, the more holistic your approach, the better.
Here are some factors you should consider including in your plans.
Historic sales data
The first step for sales projections is the same as it is for sales forecasts: Collect historical sales data. Month-to-month or year-on-year, past results can predict future performance most of the time. So, it’s the perfect place to start when looking to the future. Exactly how far back you go is up to your access to data and resources.
Also, understanding the context of your past sales data vastly increases its usefulness. Consider that colder weather may drive demand for streaming services or events like the Olympics for sportswear.
Economic factors
Economic factors drive very different purchasing decisions. High inflation and stagnating wages may lead to a drop in consumer spending on luxuries while boosting spending on cheaper alternatives. If you make a sales projection or sales forecast without factoring in the state of the economy (or its projected state), your predictions will fall flat.
Market analysis
Context matters. It isn’t possible to understand how your offering will sit in the market without first understanding the market and its influences. For example, if you sell consulting services to hotels in a specific region, the state of tourism and air travel cannot be ignored. Similarly, it’s crucial to know how you stack up to your competitors. How are they faring and what can that teach you? Is there an edge in going cheaper or a gap in the market that’s untapped?
Industry trends
Accounting for trends is one of the most difficult parts of sales projections. It’s also one of the most valuable. Understanding trends is never guaranteed, but it can help you anticipate changes in consumer behavior, so you can better understand what will happen in your industry and seize potential opportunities. A classic example is monitoring trends in one country and seeing them begin to play out in another as word spreads.
Product lifecycle issues
How mature is your product in the market? Are there alternatives with newer features? If most of your customer base has already bought in, you’ll need to account for market saturation. Consider leading phone manufacturers. Their year-on-year sales figures are close to useless as there tends to be a new model every year, making sales of the previous one obsolete. And each new generation of phones faces a different competitive landscape, so drawing on previous experiences might not be helpful.
Obstacles to a successful sales projection
It’s not possible for sales projections to be 100% accurate. We can’t know the future, after all. This is why it’s important to have realistic expectations and use them as a guide, not a guarantee.
Here are some of the most common challenges that can interfere with a sales projection.
Market volatility
Times of market volatility can be very difficult to predict, making it difficult to account for in the sales projection process. Market volatility causes fluctuations in commodity prices, difficulties in getting hold of raw materials, and supply chain disruptions. All of these scenarios can, in turn, affect the production price of goods and lead to issues with fulfilling orders. Most sales projections should spare some thought to best- and worst-case economic scenarios and not bank on one particular outcome.
Unforeseeable circumstances
You do not have to go back far to find a transformative event that ruined almost every sales projection going. COVID-19 was disruptive on an unprecedented scale and threw many industries into unknown waters nearly overnight. There is the possibility that similar global events or technological breakthroughs will also rapidly change an industry landscape. While upcoming technologies and potentially relevant geopolitical events should be monitored, the lesson here is to never fully rely on a single projection coming true.
Customer behavior
Accurate sales forecasts rely on your ability to understand your customer, their preferences, and their buying patterns. That can be notoriously difficult to get right. Even multibillion-dollar companies have failed to keep up at times, notably in areas such as the rise and fall of social media platforms and the shift to digital streaming services over physical media. Effective sales projections need to look at uncomfortable truths and where alternative models are seeing success.
Insufficient information
In a way, all challenges to accurate sales projections come down to this. The more assumptions you make, the more room for error you add into your projections. Being as comprehensive as possible at the data-gathering stage is essential. Run as much market research and as many analyses as is feasible and implement learnings from each projection you run over time.
Extra tips for projecting accurate future sales revenue
To help you create more precise future sales projections and sales forecasts, the following tips can help you craft the best sales projection possible.
Listen to your Sales team
The best and most accessible sources of sales information you have are your Sales Managers and Sales teams, so talk to them first. They’ll have a bird’s-eye view of how your products are selling, what recent demand has been like, and what customers are saying. These valuable insights can help you react to industry changes or opportunities you were previously unaware of, which will definitely help improve your sales projections.
Know your customers
Don’t forget to make use of your existing customer data. By understanding which groups of customers are most likely to purchase certain products, you can predict future demand. For example, if you sell products that are popular among teenage girls, you may want to focus your sales forecast on this demographic to yield the most accurate results.
Monitor your competition
It’s clearly important to look at your own sales and experiences as a predictor first. But no business is an island: How you stand in the market also matters. What is your market share and what is it projected to be? It’s important to know what your competitors are doing and whether new competitors are entering the market, and to adjust your future sales projections accordingly. Things like projected competitor product launches can hugely disrupt a shorter-term projection.
Make adjustments
Perfection isn’t possible, but that doesn’t mean you can’t hone your technique. Sales projections aren’t static things that you are locked into. If significant new information comes to light, you should be able to adapt and incorporate that into your projections. This doesn’t mean you should be constantly adjusting your projections to match reality, as the latter can change from day to day, but there is little point in clinging to wildly out-of-sync projections.
What are the different sales forecast and projection tools?
Different businesses use different tools to create their sales projections. These tools vary in cost, complexity, and relevance. Individual businesses usually use a combination of them to best suit their situation. Let’s take a quick look at some of the tools that are currently available.
Sales forecasting software
Dedicated sales forecasting modules within customer relationship management (CRM) and point-of-sale (POS) software allow businesses to track and analyze sales data, manage sales pipelines, and generate sales forecasts.
Financial software
Accounting and financial software often include features for budgeting and forecasting. These can help businesses align their sales projections with any sales forecast or overall financial planning.
Business intelligence (BI) tools
BI tools help businesses analyze and visualize data, including historical sales data. They can provide insights into trends, patterns, and performance metrics, contributing to more informed sales projections.
Statistical models
Businesses with access to statistical expertise may use statistical models such as regression analyses to analyze historical data and create an accurate sales forecast. These models can be implemented using software like R or Python.
Demand planning software
Companies with complex supply chain and demand planning needs may find specialized demand planning software useful. These tools often incorporate advanced algorithms and analytics to improve accuracy in sales projections.
Collaborative planning tools
Collaborative planning tools facilitate cross-functional collaboration by allowing different teams, such as Sales, Marketing, and Finance, to contribute to the sales forecasting process in real time.
AI and machine learning
Research from McKinsey has found that up to 60% of business executives project a significant or very significant impact of AI on sales functions. Unlike humans, AI platforms with forecasting modules can analyze large data sets and automatically adjust sales projections based on changing variables. As a result, many software vendors are incorporating machine learning and artificial intelligence (AI) into their toolbox.
Scenario planning tools
Scenario planning tools allow businesses to model various scenarios and assess the potential impact on sales projections and future revenue. This helps in identifying risks and planning for uncertainties.
Market research tools
Businesses engaged in comprehensive market research may use specialized tools to gather external data and market insights. These tools contribute to a more informed understanding of market conditions for sales projections.
How you can use sales projections to maximize your future sales revenue
At their core, sales projections empower you as a business to lower your risk profile and maximize revenue. They do this by helping you to set realistic goals and chart an intelligent course in the market. The insight they offer helps you tailor your marketing strategy, optimize your product mix, target high-value customers, implement dynamic pricing, motivate Sales teams, and manage inventory, among others.
Regularly running projections and comparing them to actual performance enhances their accuracy and fosters a proactive and data-driven approach within your business. Not only will you drive growth and efficiency, but you will also stay resilient in dynamic market conditions. Plus, with AI tools entering the market, the potential benefits to be gained from sales projections are greater and more accessible than ever.