With the close of the second quarter, many SMBs start their 2005 budget process. A driver of profitability, revenue forecasting plays a critical role in this analysis.
Building a sales forecast from a solid foundation lets you plan more effective marketing. Consider the environment in which you operate as well as related factors that may affect your ability to drive customers to your Web site and complete transactions.
Developing an Online Revenue Forecast
The following steps contain insights to help you think more strategically
about your business and, with luck, uncover new opportunities (if possible, keep
a couple of promotions on the side to overcome those inevitable budget
1. Calculate a run rate as a base from which to estimate revenues.
A run rate is a simplified calculation using recent history to project sales
through the end of the period. To improve this forecast, make appropriate
Divide year-to-date sales by the number of sales periods to date. Multiply
this result by the number of remaining sales periods and add it to your
Run rate = total revenue to date / sales periods to
Projected annual sales = total revenue to date + (run rate x
remaining sales periods)
To spread the run rate over a year, use actual performance to date and spread
the projected remaining sales based on prior year’s actual results for those
Projected month’s sales = year-ago month actual sales / prior year
remaining sales x run rate x remaining sales periods
2. Determine historical trends.
Examine prior history to discern future trends. Consider how your Web site
and the market have evolved. Analyze the following key factors using past rates
to predict future ones as the basis for your initial projection:
- Acquisition. How many visitors did your site have? What were your
click-through and conversion rates? Did they vary by source or advertising type?
Were visitors only information-seekers? If so, are there other ways to monetize
visitor time on your site? For example, online travelers tend to check two to
four sites before purchasing.
- Customers. Did customers purchase more than once, or were they only
testing your products? How can you convert one-time buyers into loyal customers?
Did some segments purchase differently than the rest? Should they be promoted
differently going forward? How well were customers retained? Did they keep
purchasing? Should any segments no longer be marketed to?
- Price. What’s your product’s price? Were incentives needed to induce
purchase? How did this affect anticipated pricing? For example, Amazon.com
implemented a no-shipping-fee policy for orders over $25 to increase order
- Product mix. Which products sold, in what combinations, and how much?
Many online media companies have diversified advertising dependent models to
include paid products and subscriptions.
3. Establish seasonality.
Seasonality is recurring factors that affect your sales. These events may be
driven by internal business factors, such as planned promotions or product
changes, or by external factors, such as seasons or holidays.
Consider how being in an online environment may change your product set’s
seasonality. For example, some women’s clothing e-tailers sell bathing suits
beyond the traditional summer season to meet the needs of women who use indoor
pools year round. Without the need to devote expensive retail space or have
concentrations of highly targeted niches, you can capture markets that may not
otherwise be cost-effective.
4. Include foreseeable market-moving events that will affect
Market-moving events may be public occasions, such as the presidential
election, or more industry-specific ones, such as the publication of Bill
Clinton’s memoirs. Use these events to drive sales by leveraging their promotion
value. Forecast and document the revenue increase they generate, as they may not
be repeated next year. An ad-driven sports site might, for example, create
special sponsorships for areas tracking Olympic events.
5. Adjust forecast for anticipated market trends and changes affecting
Online merchandisers introduced the concept of advance-ordering “hot” books
and DVDs, fueled by the Harry Potter phenomenon. As a result, these product
events have different revenue forecasts. Factors to consider include:
- Market growth rate. Has the online market increased overall demand
for your product or only shifted where or how the product is purchased?
- Consumer behavior. Has customer behavior regarding your product or
market changed? With the introduction of DVDs, customers shifted from renting
videos to buying DVDs, increasing online sales.
- New trends. Which trends on the horizon will affect your customers or
sales? This may be the shift to broadband, CAN-SPAM, or a new product
6. Monitor competitors’ activities and anticipate what they’ll do.
Shop the competition to experience its customer process. Observe each aspect,
from product presentation to ease of purchase to packaging. Assess how these
actions will affect your customers and business.
Outsiders can cause a paradigm shift. Think Amazon versus Barnes & Noble,
or Netflix versus Blockbuster. To counter this, use a broad definition of
competition to ensure you don’t miss a major change in your marketplace.
7. Add your firm’s strategic business plans to the sales forecast.
Flesh out your marketing strategy and translate it into tactics with
realistic timeframes. Consider the following factors:
- Product. Are any aspects of your product offering changing? Do you
regularly liquidate excess inventory?
- Customers. Are there target markets or customer segments with high
growth potential? Do they require different marketing or other treatment?
- Price. Are prices changing? At a minimum, consider inflation.
- Promotion. Are new promotions planned? Are existing promotions
- Market spend. What size and type of marketing is needed to achieve
your revenue forecast? Are advertising formats changing? Remember marketing
returns diminish over time.
8. Adjust pricing and promotions.
Base calculations on the information gathered in steps four through
Following these steps should help you develop a comprehensive, realistic
online revenue forecast. To combat unexpected events that may hamper your
ability to meet or exceed revenue goals, ensure every aspect of each promotion
delivers maximum results throughout the year.
Of course, revenue is only part of the budget story. Margins and capital
investments also matter a lot. Remember: Without revenue, there is no
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