100 sold… 300, 1 million, 10 billion…
What are your projected revenues for this year? Next year? The year after that? Or, in other words, how much are you going to sell and when? And how much money are you going to make from these sales?
A sales projection is difference from a sales pipeline (in these ways…).
For a startup that hasn’t made its first sale yet, or even for a startup with its first few sales closed, making projections of future sales is very difficult, bordering on impossible. It’s a “guesstimate.”
Nonetheless, you need to try your best. Having a reasonably accurate set of sales projections will let your startup better predict its future revenues and, from that, its future number of employees, expenses, and other operational costs.
Two key pieces of information discussed earlier will help you predict future sales and revenues. What is the average selling price, and how long will it take on average to close a sale?
If you have a service that sells at different prices for different amounts, or a product that a customer might buy two of, or anything where a customer might be a repeat customer in a single year, then estimating an average price can be complicated and difficult. Make an educated guess.
The much harder factor to estimate is how long it will take to close a sale. Go back to the sales funnel you created earlier, and break down this problem into stages. Does each stage take an hour, a day, a week, or a month? How many conversations might it take to get from stage to stage? If you have to, set a range for each stage. Add up the results, and you’ll have an educated guess for the duration of a sale and the number of times you’ll need to talk to a customer to get them through the funnel.
With this information, the last step is to determine how many potential customers a single salesperson could possibly talk to in a day. If this salesperson is both a hunter and farmer, then expect half the workday to be spent farming and making current customers happy, even early on, when there is nothing more to sell to existing customers. If you’ve divided your team by geography or segment, budget some time for someone to sort through and assign each prospective customer to each sales segment. That exercise helps estimate how many customers can be moving through the funnel at one time.
The end goal is an estimate of how many customers could possibly make it through the funnel in a given month, quarter, and year.
Take the estimate of how many new paying customers a salesperson can close per month, then multiply that by the number of salespeople and by the average sales price. The result is your sales projections.
(Customers/month) x (# of salespeople) x ($ price) = sales projections
Does the result look reasonable? It should look difficult, but not impossible.
If you expect a significant number of repeat customers, then change the first factor to count the number of sales rather than the number of customers:
(# of sales/month) x (# of salespeople) x ($ price) = sales projections
Note also that each salesperson will have his or her own rate. If your sales team is small, you can add up the individual estimates for each salesperson. However, if you have a large sales team, you will need to estimate an average rate across the whole sales team.
If you are projecting revenues for a few years into the future, keep in mind that for successful products, the average sales price tends to rise year by year, and, as the sales team gains knowledge from customers and experience in selling your product, your deal-flow increases, even as the average time through the pipeline decreases.
Also note that, once you have been selling the product for a few months, you should have actual numbers you can use in future projections. After a few dozen sales, your average sale price is simply the average of your last dozen sales. (Ignore the price of your first few sales, as it is common for those first few customers to pay far less than the eventual average). Keep measuring your sales funnel, as well, so you have actual data on the average time it takes to make a sale.
Lastly, sales projection is far easier when salespeople consistently “meet” their quota, i.e., when they bring in at least as much revenue as you ask them to. To encourage this behavior, give out bonuses to salespeople who are consistent.