Bottom-Up Sales Forecasting for Startups

The purpose of this simulation is to demonstrate the implications of forecasting sales without consideration for how much it cost you to acquire a lead and how much you have available to spend. A common mistake in sales forecasting is to define your # of expected sales leads based on your total market size and your assumption regarding the % of that market you can reach.

This model demonstrates the forecasting impact to defining the # of expect leads based on how much it cost you to acquire a lead and how much you have available to spend.

Important Variables:
1. [UseLAC?] (set to 1 to use the lead acquisition cost to define your reachable market; use 0 to set the reachable market to equal the total available market size)
2. LAC (should equal what it cost you to acquire a lead)
3. SalesMarketingBudget : how much you have available to spend on customer acquisition

Other Variables:
4. Price : Avg spending amount per new customer
5. Total Available Market : Total available market size
6. Conversion Rate : the % of your target market that will become a lead

The Goal
The purpose of this simulation is to demonstrate the implications of a startup using assumptions regarding market reach to forecast sales.
Sales Funnel Metrics
The Sales Funnel displayed is typical and demonstrates the process for converting potential customers to actual customers. The model includes Funnel Metrics which demonstrate how the funnel behaves. The conversion rates demonstrate the % of customers that will progress on to the next stage of the sales process.
Market Metrics
A common mistake in sales forecasting is to define your # of expected sales leads based on your total market size and your assumption regarding the % of that market you can reach.

Market Metrics (con't)
The important items here are:
1. TotalAvailableMarket (TAM) is the total market demand for your product of service.
2. Target Market is the share of the TAM that you expect to fulfill.
3. ConversionRate is the % of the Target Market that you expect to become a lead
The variables in black are business metrics that dictate things like how much you spent on operations, sales and marketing as well as how much the average customer spends (labeled as Price).
The important items here are:
1. LAC : should equal what it cost you to acquire a lead
2. SalesMarketingBudget : should equal how much you have available to spend on customer acquisition
3. Price : should equal how much you charge the average customer
Simulation Model
This simulation allows you to evaluate the impact on your profit forecasts by modifying how to calculate the # of expected leads.
The model uses two methods:1. Determine # of leads in multiply % of total market size by desired conversion rate (to use this calculation method, set the variable [UseLAC?] = 0)2. Determine # of leads by dividing the total sales budget by the cost required to get a lead. (to use this calculation method, set variable [UseLAC?] = 1)

Simulation #1 Results
Likely you noticed a consistent profit that is based on an assumption of your being able to reach a fixed % of the total available market.

Simulation #2 Results
You will likely notice that profits that are much lower than the first simulation.  Also, dependent on your set price, your sales & marketing budget, and your LAC (lead acquisition cost), you may even notice a negative profit.

The Takeaway
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In running simulation #1, a consistent, fixed profit is projected after a few months in business. The profits are a result of an assumption that the startup has the ability to convert 20% of the total market size to leads.  Using the same business metrics, simulation #2 is projecting a loss, every single month. Both simulations were generated using the same business metrics for pricing and expenses, the only thing that changed was the value regarding the target (reachable) audience.  The first simulation assumes that the business can reach 20% of the marketplace with no consideration for the cost incurred to reach them. The second simulation integrates the budget for sales & marketing and a cost-per-lead metric to determine the reachable marketplace.
Feel free to play around with the variables and provide feedback. Over time, I will update and expand the model to consider other factors that are important to know as well. (@kishau)