Sales forecasting can be a tedious process filled with endless rows of data that can start to blur together after you've spent one too many days looking at it.
Though it isn't the most exciting process, preparing an accurate, reliable sales forecast is one of the most important tasks a sales team does each year.
A thorough sales forecast can pinpoint how much reps should bring in on a weekly, monthly, quarterly, and annual basis. However, a sales forecast is only as good as the data that goes into it.
There are various data sources that can contribute to a well-rounded sales forecast, however, one of the most underrated sources is sales potential.
What is sales potential?
Sales potential represents the amount of sales a company can expect to bring in during a specific time period, factoring in their market share and product performance.
To understand how well your company is positioned for growth, you need insight into your company’s ability to sell to new and existing customers in your product market — that's where sales potential comes in.
Sales potential can be confused for market potential, however, it is important to understand the difference between the two. As stated above, sales potential shows the maximum amount of sales a company can bring in factoring all potential buyers within their specific product category. Market potential factors in the total sales potential of all competitors within a specific market.
Essentially, sales potential occurs at the company and product level, and market potential occurs at the broad product market level. Knowing your company’s sales potential can help you set well-informed sales targets depending on your company performance and market position.
Now that you know what sales potential is, let’s discuss the key metrics you can leverage to understand it.
How to Calculate Sales Potential
Though there is no single equation that can calculate sales potential, the following metrics can provide valuable insight.
1. Market Penetration
First, take a look at your current customer base, and divide it by the total number of potential buyers within a specific region or demographic. This will give you a rough indication of how much of your product market you have been able to convert.
If this value is low, that’s not necessarily a bad thing. That means your company has potential to tap into a base of buyers who could be a good fit for your product but haven’t made a purchase yet.
If this value is high, it could mean you’ve already saturated your target market, and that it may be a good time to introduce other offerings, or to focus on the upsell to keep buyers engaged.
2. Quantified Purchasing Capacity
What is the maximum number of purchases a customer can make from your company in one year? The answer is known as the quantified purchasing capacity for your business.
As an example, let’s say you work for a supplement company that offers powdered drink supplements. You offer three main products: a morning drink, an afternoon drink, and an evening drink. Each of the products has 30 days worth of servings, and when taken as intended, customers would take one serving of each drink each day.
So reasonably, within a year a customer would purchase three drink canisters per month, for 12 months out of the year, resulting in a total of 36 units each year. Your quantified purchasing capacity would be 36 units per customer per year. If this product costs $30 per unit, and customers by 36 units per year, the beverage company can anticipate bringing in up to $1,080 per customer each year.
You could then take this figure and compare it to the average purchase your customers make. If you find your average customer purchases one drink canister per month, you can adjust your sales forecast to account for those purchasing habits.
To bring in more revenue, you could focus your sales strategy on encouraging existing customers to purchase the entire product line to boost overall sales without having to appeal to a new audience.
3. Competitor Growth Rate
As you do necessary research to understand your company’s sales potential, the growth rates of your competitors should not be underestimated. If your competitors experienced significant growth in a specific product category, their trajectory can provide important information about the consumers you have in common and the potential sales that can be achieved.
If your growth rates are lagging far behind your competitors, that could be a good indication that your company has some internal factors that need to be addressed in order to reach greater sales potential.
Example of Sales Potential
Now let’s walk through a more in-depth example of sales potential for a fictional company called BossCo.
BossCo is a company that creates business management software for creative entrepreneurs. This company offers annual and monthly plans for their signature platform with additional upgrades and exclusive plug-ins customers can purchase to help the software work smoothly and efficiently with other systems.
When looking to understand their sales potential, BossCo factors in the following pieces of data:
Seasonality: They notice their subscriber base goes up in the fall and drops in the summer.
Existing customer data: The average BossCo customer is subscribed to their monthly software subscription, and has purchased one out of five possible upgrades.
Competitor analysis: BossCo currently has one main competitor who has a hold on equal market share, and is growing at a similar rate.
Market demographics: BossCo commissioned a study of 1,000 small business owners in their target market, and found only 15% of those surveyed use a platform to oversee and automate business management tasks.
With this data in mind, the BossCo team now understands the needs and habits of their customer base, and is relieved to not be behind the growth curve of their main competitor. With only 15% of their target demographic currently using the type of software they offer, with roughly half of them likely being BossCo customers, BossCo’s team can infer they have tapped into about 7.5% of their target market with room to grow as they expand their offerings and customer base.
Some of the ways BossCo can tap into a greater share of the market is by doing more research to understand the pain points of the 85% of those surveyed who aren’t using business management software, and incorporating tactics to win over these potential buyers into their sales strategy to increase market share.
As your sales team carries out the necessary analysis to build your forecast and understand your company's sales potential, consider leveraging a tool that can streamline your efforts.
InsightSquared has a revenue intelligence platform that can capture relevant sales activity to provide the visibility you need to build a well-rounded sales forecast. Using the power of AI you can view the data you need to understand your company's sales potential at a glance.
HubSpot users can connect MethodData to their CRM to create custom dashboards and reporting. With custom reports from MethodData, your team can view and process sales data from every angle to create an accurate sales forecast.
Though not as cut-and-dry as other sales metrics, sales potential is an important data point for mapping out your company’s potential growth trajectory and is a worthwhile addition to your sales forecasting process. For more sales forecasting tips, check out this post.
Originally published Dec 9, 2020 7:30:00 AM, updated December 09 2020