9 proven sales forecasting methods to predict revenue

Accurate forecasts help you plan for demand, make informed investments, and improve your overall sales process. But it's often also a high-risk game of chance. Today, too many organizations rely on imperfect data, opinion, and gut feel to generate forecasts. As a result, their ability to diagnose issues in the pipeline is severely limited, and confidence in the forecast remains low.

Proper forecasting — that is, a sales forecast that results in accurate projections backed by reliable data — requires an understanding of purpose, context, and intended outcome. In this article, we’ll explore ten proven sales forecasting methods that can help you predict revenue more accurately. From historical data analysis to regression and time series forecasting, we'll cover the techniques that can guide your sales strategy and improve your forecasting accuracy.

Why choosing the right sales forecasting method matters

Your organization's growth hinges upon its ability to accurately forecast. This may seem like an overstatement, but without accurate revenue predictions, you simply can't get the insights required to:

• Plan for demand
• Make informed investments
• Identify and resolve potential problems
• Improve your overall sales process

Choosing the right sales forecasting method is equally important as the forecast itself. In August 2021, Outreach commissioned Forrester Consulting to conduct a survey of 212 sales leaders representing more than twenty industries at companies with headquarters in the UK and North America. Forrester found that only 43% of respondents are forecasting within 10% accuracy. Even more glaring, 10% of respondents indicated that they regularly miss their forecasts by 25% or more. 

Revenue leaders whose teams are weak at forecasting are perpetually at risk of surprise outcomes. They do not trust their available data, so they are forced to make educated guesses based on intuition and experience. Because they can't see what is actually happening in their deals, they don't know what actions to take to improve the outcomes.

This is largely a result of inaccurate, stale data, which stems from outdated or disjointed tools for collection and manual, error-prone data entry processes. For revenue organizations that still use these traditional methods, forecasting is an imprecise science and a huge time investment. 

However, when you can build a confident forecast, you can enhance both internal and external operations. Consistent, precise predictions can help you to set and achieve realistic goals and how each rep's performance measures up to those objectives. You can also make operational decisions, like hiring, budgets, and investments, with greater confidence, as the right approach (paired with the right technology) promises credible, accurate insights.

10 popular sales forecasting methods to predict revenue

There are many different types of forecasting methods commonly used by sales and revenue operations teams. Keep in mind there is no single “best method” to forecast sales. The best forecasting method for your sales org will depend on the nature of your business. Below, we’ll share examples of different methods of forecasting, how they work, and what kinds of businesses typically use them. 

Before we dive into the various methods of sales forecasting, keep in mind that there are three basic types of forecasts under which each method falls:

• Qualitative techniques use subjective data (like industry knowledge, rep experience, and expert opinions)
• Time series and projection rely on historical data; focus on patterns and changes in patterns
• Casual models also rely on the past and use specific data about relationships between variables (including special events)

Historical data analysis 

One of the quickest methods revenue teams use is historical forecasting, which takes into account past sales data over a given period of time. This approach is best for organizations that operate within a steady marketplace that's not consistently impacted by changing dynamics (seasonality, a market boom, etc.). It does require a fair amount of clean, reliable data, so it might not be a great fit if you don’t have strong data collection tools at your fingertips.

It's important to note that a historical forecast operates on the assumption that buyer demand will increase and that your ability to close deals will not be affected by external factors — so it should be treated as more of a benchmark than your be-all-end-all prediction.

The easiest way to calculate a historical forecast is by looking at monthly recurring revenue (MRR). For example, if your sales reps sold a total of $100,000 in June, you'd lean on the assumption that they'd make at least $100,000 in July, too.

To make your projection more accurate, add in your historical growth percentage. For instance, if your sales team has consistently increased sales by 5% each month, you can safely estimate that they'll reach $105,000 in sales for July.

Regression analysis 

Regression analysis is a powerful sales forecasting method that leverages statistical techniques to examine the relationship between different variables affecting your sales. By identifying and analyzing these variables, you can create a predictive model that estimates future revenue based on historical data.

For example, you might look at factors like marketing spend, seasonality, economic indicators, and sales team performance to understand their impact on sales outcomes. This method requires a robust data set and advanced analytical tools to perform accurate regressions and make reliable predictions.

Regression analysis can be particularly useful for identifying trends and making data-driven decisions. However, it's essential to ensure that the data used is clean and accurately reflects the variables affecting your sales. This approach can provide a high level of precision but also requires significant expertise in statistical analysis and data handling.

Time series forecasting

Time series forecasting involves analyzing historical sales data to identify patterns or trends over time. This method is especially effective for businesses with stable sales cycles and predictable demand patterns.

Using time series forecasting, you can apply different techniques such as moving averages, exponential smoothing, and ARIMA (AutoRegressive Integrated Moving Average) models to predict future sales. These forecasting techniques help smooth out fluctuations in the data and highlight underlying trends.

For instance, a retail business might use time series forecasting to predict monthly sales based on historical sales performance, considering factors like seasonal peaks during holidays. This method is valuable for making inventory decisions, planning marketing campaigns, and setting sales targets.

Opportunity stage forecasting

If your existing sales process runs like a well-oiled machine, you can use opportunity stage forecasting. The forecasting method is used to predict the likelihood of each opportunity closing (based on the prospect's current position within the sales process). As deals move further along in the pipeline, they're more likely to close.

Keep in mind that this method doesn't take into consideration the age of each opportunity, so it produces more of a rough estimate than an accurate projection. Also, because opportunity stage forecasting relies on historical data, it's not a great method for businesses that frequently change messaging, offerings, or parts of the sales process.

Start by determining a reporting period, which should be dependent upon your sales cycle lengths and sales team's quota, then multiply the potential value of each deal by the probability of it closing. For example, your past data might help you determine these likelihood-to-close percentages for your pipeline stages:

1. Prospecting: 3%
2. Qualification: 8%
3. Contact: 25%
4. Relationship building: 45%
5. Meeting, demo, sales call: 80%
6. Deal closing: 100%

The opportunity stage forecasting model predicts that a $8,000 deal at the relationship-building stage has a 45% chance of closing. Thus, its forecasted amount would be $3,600.

Lead-driven forecasting

Lead-driven forecasting focuses on the quality and quantity of leads entering your sales pipeline. By analyzing lead data, such as the source, behavior, and engagement levels, you can predict the likelihood of these leads converting into sales.

This method involves tracking key metrics like lead conversion rates, average deal size, and sales cycle length. By understanding these metrics, you can forecast future sales based on the current pipeline's health and the effectiveness of your lead generation efforts.

For example, if your data shows that leads from webinars have a higher conversion rate than those from social media campaigns, you can adjust your forecasting model to reflect this insight. Lead-driven forecasting helps sales teams prioritize high-potential leads and allocate resources more effectively.

Length of sales cycle forecasting

It can be difficult to accurately predict the likelihood of an opportunity closing if you rely on subjective information. The length of the sales cycle method takes into consideration key factors like the age of individual opportunities and how a prospect entered the pipeline to provide a more precise projection.

Let's say a sales rep books a meeting with a prospect who they just started talking to this week. Based on the likelihood-to-close percentages we outlined in the opportunity stage forecasting section, this would mean the prospect has an 80% chance of closing. But that calculation doesn't take into account the fact that they're unlikely to buy because of how young the opportunity actually is.

Length of sales cycle forecasting can even be used for different sales cycles (e.g. normal leads vs. referrals vs. leads from field events). With this method, you can categorize each type of deal by the average sales cycle length, which helps to boost accuracy.

But it's important to remember that this technique is only precise if your reps track when and how prospects enter their pipelines. They need intelligent, integrated tools that let them track and manage these details without having to waste precious time on manual, error-prone data entry.

Multivariable analysis forecasting

If you're looking for extremely accurate forecasts, multivariable analysis is the way to go. Keep in mind that you'll need a large amount of clean data and likely a sophisticated tool to handle some complex equations, so skip this approach if you still rely on manual methods for tracking deal progress and individual sales activities within your pipeline.

Multivariable analysis relies on predictive tools that take into account many different factors, like average sales cycle length, probability of closing based on opportunity type, and each rep's performance.

For example, you might have two sellers working individually on two separate deals. Sales rep A is further along in the sales process for a large deal size, with a certain number of days remaining in the sales quarter. That, combined with her average win rate for this specific stage in the sales process, might indicate a 50% probability of her closing the deal; giving you a forecast of, say, $10,500.

Seller B is still in the beginning stage of the sales process for a smaller deal size, and he has a higher average close rate. Based on these factors, you might calculate that he also has a 50% probability of closing the deal, with a forecast of $7,200.

When you add them together, you'll get a combined quarterly sales forecast of $17,700. Of course, this is an overly simplified example, as a real multivariable forecast considers many variables for many different reps.

Test-market analysis forecasting 

If your business plans to deploy a new product or service, you might have a difficult time predicting your future sales. With test market forecasting, you focus on two smaller target regions and apply two separate sales strategies for each. By measuring the results, you can better understand how the product or service will perform and how much revenue it will likely generate.

For example, you might establish a direct sales strategy for Market A, while taking a heavy marketing/advertising approach for Market B. Then, you can collect data for each stage of the sales process, respectively, and unlock insights into:

1. How each sales strategy would potentially impact your revenue
2. What your larger sales strategy should look like, moving forward
3. How much revenue the strategy you choose will likely generate

Moreover, test market forecasting can help you determine whether or not the new product or service is truly viable without spending excessive amounts on broader sales efforts. It's not always a true reflection of the general market, though, since the smaller regions you choose might have more or less buyer demand than the industry as a whole.

Casual analysis forecasting 

Casual analysis forecasting, also known as causal modeling, examines the cause-and-effect relationships between different factors influencing your sales. This method goes beyond historical data and looks at external variables that can impact sales outcomes — like how economic conditions, competitive actions, or changes in consumer behavior affect your sales. By understanding these causal relationships, you can create more accurate forecasts and develop strategies to mitigate risks.

Casual analysis requires a deep understanding of your market and the ability to identify and measure relevant external factors. This method can provide valuable insights but is complex to implement without advanced analytical tools and expertise.

Intuitive forecasting

Intuitive forecasting relies on gut instinct and subjective judgment for sales predictions. While it might be used when time is short or data is unavailable, we don’t recommend it.

This approach depends on sales reps' opinions about whether opportunities will close within a given period, which is often biased and overly optimistic. Although it considers the insights of experienced salespeople, intuitive forecasting lacks the reliability of data-driven methods.

This method can be somewhat improved if sales leaders have access to comprehensive data from meetings, calls, and customer interactions. Conversation intelligence software and pipeline management software can help validate rep assessments. However, without these support tools, verifying intuitive forecasts is impractical on a large scale.

How to choose the right sales forecasting method

Your sales forecasting method should align with your business goals, needs, and resources. Not all methods will garner the results you're looking for, so as you evaluate your forecasting options, you'll need to keep some key considerations in mind:

Use and purpose of the forecast 

It is important to align the method you use with the actual objective(s) of your forecast. This allows you to balance the forecast cost (i.e. scope, required resources) vs. value (i.e. precision) based on the impact a certain level of accuracy will have on the audience. The technique required for a forecast that will be used to make decisions around production and inventory, for example, will need to be quite sophisticated to reap reliable, highly accurate results. On the other hand, a forecast that will be used for a more general projection of growth (without any changes to existing sales and marketing strategies) can be built with less accuracy and more flexibility.

Business context 

Long-term sustainability relies on a deep understanding of all the trends, impacts, and relationships between your business and the industry in which it operates. For a newer, emerging organization, this might mean your initial forecasts will be built on simpler, less accurate methods, as you won’t yet have robust data around how your business operates within the larger marketplace. A more mature company, though, should take into account a broader dataset that reflects competitive performance and utilize a more advanced forecasting method for projections.

Amount of historical data 

The method you choose will always be limited by the amount of historical data at your disposal. If you've been capturing accurate data over a longer period of time, for instance, you can use that data to create a forecast that acts as a benchmark for future demand. If you're a brand new business, you simply won't have the foundational data needed for any forecasting method that relies on a wide breadth of past information.

Time to complete forecast 

Some forecasting methods take hours to generate a report particularly if you don't have the proper systems in place to handle complex calculations. If you can't provide high-quality, timely data or if you don't have an intelligent tool to execute intricate calculations, then you should avoid any forecasting method that relies on specific variables that are unique to your company (e.g. win rate, opportunity value, etc.). If not, you'll risk wasting precious time using imperfect data to create forecasts that don't provide any real value.

Accuracy needed 

When determining which method to use, you should determine whether the results you're expecting should be qualitative or quantitative in nature. If you're entering into a new market, for example, a more qualitative forecast can certainly be sufficient, so the method you use can rely upon industry knowledge and observations. If your business is shifting strategies to become more data-driven, however, make sure the forecasting method you choose is quantitative. That way, your predictions will be based on the highly accurate data, historical analysis, and pipeline visibility required for a more data-driven approach.

3 keys to success in sales forecasting & 3 common pitfalls to avoid 

To make your sales forecasting more effective and lead to better decisions and business outcomes, focus on these key strategies and steer clear of common pitfalls.

#1 common pitfall: missing relevant context

Often, the data feeding teams’ sales forecasts is pulled from multiple disconnected systems. As a result, not all key inputs are captured, pulled data is quickly out of date, and the process is inconsistent and time-consuming. At the same time, many forecasting tools ignore qualitative inputs such as customer sentiment, industry knowledge, and sales team feedback. These qualitative factors provide context and nuance that quantitative data alone cannot capture, leading to more holistic and accurate predictions.

#2 common pitfall: overlooking external factors

Neglecting to account for external factors such as economic trends, market shifts, and competitive dynamics can lead to inaccurate forecasts and missed opportunities. It's important to continuously monitor and incorporate these external influences into your forecasting models to stay ahead of potential disruptions.

#3 common pitfall: relying solely on historical data

While historical data is valuable, relying solely on it without considering emerging trends or customer feedback can result in outdated forecasts. Incorporate forward-looking indicators and qualitative insights to create a more comprehensive and realistic forecast.

#1 key to success: continuous review and adaptation

Sales forecasting is not a set-it-and-forget-it process. Regularly reviewing and adapting your forecast based on market changes, customer feedback, and internal performance indicators is crucial for maintaining accuracy. An agile approach allows you to respond swiftly to unexpected changes and refine your predictions over time.

#2 key to success: the right technology  

The right sales execution platform can transform your sales forecasting methods from time consuming, piecemeal, and unreliable to one that’s automated, flexible, and accurate using AI-driven insights. Look for solutions that are designed to improve forecast accuracy with insight into all stages of the funnel, allow you to audit the underlying assumptions in the forecast, and quickly drill down into how deals are moving at all levels of the organization.

#3 key to success: collaboration

Fostering collaboration between sales, marketing, and finance teams is essential for gathering diverse perspectives and insights. This collaborative approach ensures that your forecasts are well-rounded and consider different aspects of your business, leading to more accurate and reliable predictions.

Features to look for when implementing a sales forecasting solution

Regardless of the forecasting method you choose, accurate predictions require sophisticated tools for support. Many modern businesses have realized that going it alone just isn't realistic in terms of scalability and precision.

When evaluating software to help you forecast and plan, consider the capabilities that revenue teams rely on the most: 

• Team pipeline inspection: Your sales software should help you quickly assess and take action to capitalize on opportunities or mitigate risks within deals. It should also enable you to make quick adjustments to the forecast to improve its accuracy and predictability. 
• Sales pipeline management: You should be able to create a detailed plan of the right activities when the team is coming up short and close gaps in pipeline coverage. Identifying pipeline risk and preemptively influencing opportunities critical to the current and future quarters will help you build a healthy pipeline. 
• Forecasting: Unlock visibility into all stages of the funnel, be able to audit the underlying assumptions in the forecast, and quickly drill down into how deals are moving at all levels of the organization to improve your overall forecast accuracy.  
• Annual planning capabilities: Look for software that helps you generate attainable goals rooted in data instead of human assumptions. Your solution should leverage buyer data, see historical trends, and identify sources of pipeline and revenue to model revenue scenarios that support the annual plan. 

Most forecasting solutions are black boxes for customers, who are forced to trust projected numbers without any details. But leaders should have the tools they need to tweak assumptions and see the logic behind their outcomes.

Your sales forecasting software should build confidence in their forecasting methods by showing their evolution over time, including how and why they changed. This gives leaders visibility into rich data inputs and historical snapshots to augment their specialized forecasting methodology.

Accurate sales forecasts require a unified platform and real-time data

It's true that choosing the right method is a crucial part of gaining valuable, accurate forecasts. But the right method will only get you so far if you don't have tools that offer transparency, reliable data, and the ability to fix potential issues before it's too late.

Sales teams' standard approach to forecasting is often filled with gaps when the data they rely on is pulled from disparate tools and dashboards. Without a consolidated view of pipeline health and buyer insights, teams end up guessing their forecast number and they're perpetually at risk of surprise outcomes. But, forecasting with Outreach can help you make the shift — from a critical gap to a seamless, highly valuable component of your business. 

Outreach’s forecasting software delivers real-time pipeline data and buyer engagement signals to bring science to the art of forecasting, enabling revenue leaders to go from guessing the future to changing it with recommended actions. What's more, Outreach shows you the math behind every prediction, so you can understand what's actually driving the number and how to change it. 

Improve the way your revenue team forecasts with Outreach

Today’s shifting economy means revenue leaders have to do more with fewer resources. So how do you deliver on lofty revenue targets while also reducing costs? It starts with more efficient forecasting processes. Instead of spending anxious hours on manual forecasts, modern revenue leaders are embracing ways to save time and refocus their energy on growing revenue. 

Additional FAQs about sales forecasting methods

How often should I update my sales forecasting model?

Adjusting your forecasting assumptions based on new information, such as shifts in the market or changes within your business, is helpful. How often you update your model will depend on the nature of your business. For example, businesses with long or complex sales cycles are more likely to revisit their model on a quarterly basis, while businesses with a short or more transactional sales cycle on a weekly basis. 

Regardless of how often you update your model, run your updated model and compare its predictions against actual results to refine and improve its accuracy over time. Regularly repeating this process helps keep your forecasts reliable and relevant.

What role does qualitative data play in sales forecasting?

While quantitative data offers hard numbers and trends, qualitative data adds context and nuance, including customer feedback, market trends, and insights from your sales team. It helps you understand why things are happening, not just what is happening. Combining both types of data gives you a fuller picture that can reveal underlying factors influencing sales, such as customer preferences, emerging trends, and competitive dynamics. 

Can machine learning algorithms improve sales forecasting accuracy?

Yes, machine learning can boost forecasting accuracy. These algorithms can process vast amounts of historical data and continuously learn and adapt as new data becomes available. This allows for more precise predictions, even in the face of changing market dynamics. At the same time, machine learning models can automate the forecasting process, saving time and reducing the potential for human error.

What are the benefits of using predictive analytics in sales forecasting?

Predictive analytics keeps you ahead of market trends and ready to act on new opportunities. It helps you make smarter decisions and grow revenue by analyzing past data and spotting patterns. This lets you forecast future sales trends, anticipate demand, and allocate resources more effectively. As a result, businesses should see improved lead qualification, better alignment between sales and marketing, and more accurate forecasts.

How do you account for seasonality in sales forecasting?

Accounting for seasonality in sales forecasting involves adjusting your models to reflect predictable fluctuations in sales patterns throughout the year. This can be done by analyzing historical sales data to identify seasonal trends and incorporating these insights into your sales forecasting model. Forecasting techniques such as time series analysis, seasonal decomposition, and the use of seasonal indices can help isolate and measure the impact of seasonality.