Aaron’s Answers: Sales forecasting with sales funnel metrics

I received this excellent sales funnel question from a blog reader a couple of weeks ago. I’m posting the question and answer (slightly edited) here because I think it’s a question and answer that every business owner can benefit from knowing. Thanks again for the question!

The Question:
How do you determine if you have enough opportunities in your sales funnel to hit your fiscal year goal?

Aaron’s Answer:
If you know what your average conversion rate is, and if you know what your average per-customer spend is, you should be able to calculate your answer easily.

  • Your average conversion rate is the number of Prospects in your sales funnel compared to the number of those Prospects who actually become Customers. For example, if you have 1000 Prospects and 100 of them become Customers, then your conversion rate is 10%.
  • Your average per-customer spend is the amount of money each Customer spends on average in a given period of time (in this case, your fiscal year). For example, if each of those 100 customers (from the above example) spend a varying amount of money but it averages out to $1000 per Customer in a fiscal year, then your average per-customer spend is $1000.

Here’s what you do next:

Using the above numbers, along with your fiscal year financial target, you are going to do some simple math in order to know how many people need to be in your sales funnel (as Prospects) in order to reach your financial goals.

First, divide your fiscal year financial target by your average per-customer spend to find out how many Customers you need. (For example, if you need to make $100,000 per year and each Customer pays you $1000 in a fiscal year, you know that you need 100 Customers).

Then, divide the number of Customers you need (which you just identified in the above step) by your conversion rate to find out how many Prospects you need. (For example, if your conversion rate is 10%, then 100 Customers divided by a 10% conversion rate is 1000 people needed in your sales funnel).

That’s it! In the example above, if you want to earn $100,000, and each Customer pays $1000, then you need 100 Customers. In order to get 100 Customers, you need to have 1000 Prospects.

If you want to go deeper, you can divide the results you’ve just achieved into smaller goals to get quarterly, monthly, and weekly goals. I think those might be more helpful. And, if you want to grow your business, consider these tips to increase your conversion rate or my popular blog post 99 ways to optimize your sales funnel and grow your business.

Disclaimer: There are other factors to consider: Outside risks (like the economy) can have an impact. So can seasonal fluctuations if you’re measuring in the middle of a fiscal year. Also, your sales funnel’s conversion period can play a role in determining how accurate your numbers are. Every industry is different and these things need to be considered and factored in, even if it’s just as a rule of thumb.

Check out some of my other Aaron’s Answers blog posts. If you have questions you’d like to ask, feel free to email them to me and if I think all of my readers will benefit, I’ll post them here. Don’t worry, I’ll keep your info anonymous.

Published by Aaron Hoos

Aaron Hoos is a writer, strategist, and investor who builds and optimizes profitable sales funnels. He is the author of The Sales Funnel Bible and other books.

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