7 Tips for Acing Your Startup's Sales Forecast
By Lior Ronen (@Lior_Ronen) | Founder, Finro Financial Consulting
Since I founded Finro in 2014, I've built hundreds of financial models for startups.
I worked with startups in endless different niches and with investors from European and American family offices, private equity, and venture funds.
Forecasting the company's future sales is a crucial element of every financial model of every company. The tips below are focused on SaaS business but certainly apply to every business, especially tech businesses.
After modeling almost every business idea and business model possible, I want to highlight seven practical tips that I learned the hard way of building a sales forecast:
1. Break down the user acquisition process from A to Z.
The user acquisition process usually includes small factors and steps that can fluctuate over time and impact the overall growth rate of the business.
For example, if you use social ads to attract users to the free trial tier of your product, you will need to include:
The number of potential clients who will see your ads on social media.
Click-through-rate (CTR): how many people will click on your ad.
Sign-ups: how many people that saw your ad clicked it will sign up for the free plan or trial.
Forecasting each of these factors will help better analyze growth drivers and estimate acquisition costs.
2. Multiple conversion rates.
The basic conversion rate assumption represents the percentage of active users in the trial plan to convert to the premium plan.
BUT,
Users can move from the free tier to several potential premium tiers when you have multiple price points. Capturing this nuance can significantly change the accuracy of the sales forecast.
So the conversion rate should include the free to premium conversion AND the conversion to each price plan.
3. Single-User vs. Multi-User Accounts Conversion.
The conversion from free to premium is a different single-user account plan to an enterprise or corporate account with multiple users and more complex internal procurement processes.
Single-user accounts: You can look at the historical data if you have it. If you have no past sales, you can use an assumption relevant to your industry or niche.
Multi-user accounts: you can consider all the accounts in a trial as your sales pipeline, which falls under your sales team's responsibility. Then, by looking at the historical sales, every sales rep succeeded in closing in a specific period.
Capture this distinction in the conversion process, and it will help you analyze future growth trends and sales and marketing costs.
4. Growth is not linear.
There are two common mistakes that startups make when they build their financial forecast: either assume a linear growth of 10% or 20% every year or present a sharp increase in the first month of every year compared to the previous month.
Of course, both don't make much sense.
and
First, it's reasonable and realistic to see a declining growth rate rather than a linear trend. No business grows at a constant rate.
Second, try to make the growth as smooth as possible and avoid the stairs pattern in your sales forecast. No business grows massively only in a specific month.
5. Roadmap impacts sales.
The release of a new feature, product, price plan, etc., could impact user acquisition. Make sure to reflect it.
It's not realistic that new releases or products will not t impact the user base growth or pricing. Your model should reflect these impacts.
6. Users will leave.
I know that it doesn't look like it right now, but users join a service and leave it someday, so make sure to include it.
Reflect a churn rate and split it between multi-user and single-user accounts - They will be different.
7. Breakdown Sales Price to Its Components.
Show both the gross and net prices (after discounts and promotions). It will help you better understand and explain driving growth in certain months: discounts, gross prices, or maybe other promotions.
Got any tips of your own? I'd love to hear them. Add your recommendations to the comments below.