Improving Sales Forecasts for Subscription Businesses
Forecasting sales is a crucial task for subscription-based businesses. It allows companies to anticipate future revenue, plan resources, and make informed business decisions. However, accurately predicting sales can be challenging due to various factors that can impact customer behavior. With that in mind, here are some tips to help subscription businesses improve their sales forecasting methods.
1. Understand and Analyze Historical Data: Start by collecting and analyzing historical sales data. Look for trends, patterns, and seasonality to identify any recurring factors that influence sales. This analysis will provide valuable insights into customer behavior and help in creating accurate sales forecasts.
2. Segment Your Customer Base: Take into account the different types of customers that subscribe to your business. Segment them based on their demographics, behaviors, and preferences. By understanding specific customer segments, you can better forecast their demand patterns and tailor your offerings accordingly.
3. Consider External Factors: In addition to historical data, it’s important to consider external factors that can influence sales. These include market trends, economic conditions, industry developments, and competitors’ activities. By keeping an eye on these factors, you can adjust your forecasts to reflect any potential impact on sales.
4. Leverage Technology and Analytics: Utilize technology and data analytics tools to enhance your forecasting capabilities. Machine learning algorithms and predictive analytics can help automate and optimize the forecasting process, taking into account multiple variables and producing more accurate predictions.
5. Collaborate with Sales and Marketing Teams: The sales and marketing teams have valuable insights into customer behavior and market dynamics. Engage them in the forecasting process to gain their input and align forecasts with their strategies and initiatives.
6. Regularly Review and Update Forecasts: Sales forecasting is an ongoing process. It’s important to regularly review and update your forecasts based on actual sales performance and any new insights or changes in the market. This will ensure that your forecasts remain accurate and relevant.
By following these steps, subscription businesses can improve their sales forecasting capabilities and make more informed business decisions. Remember, accurate sales forecasts are crucial for effective resource planning, budgeting, and overall business growth.
We’re living in a subscription world. More and more, everything we do and use is no longer being sold to us directly. Instead, we now pay monthly for everything.
While a lot of press has been given to the software as a service boom (SaaS), subscriptions are everywhere now. Some business models, like gym memberships and magazines, have been around for a long time, while other subscription businesses are brand new and innovative.
These days, we pay small monthly fees to access almost everything. From music services like Spotify and Pandora, to movie streaming sites like Netflix, to snacks and meal delivery like NatureBox and HelloFresh, there’s a subscription service for everything.
Even my local heating repair company has launched a $10/month subscription service that includes basic system tune-ups, maintenance, and discounts on larger services.
Subscription services are popular because they often cost less, in the short run, to start using. For the price of buying one album on iTunes, I can get access to the entire world of music on Spotify for one month. For the price of buying a new DVD, I can get access to the deep catalog of content available on Netflix. For a fraction of the cost of buying a treadmill, I can use an entire gym.
Customers are flocking to subscription services to replace things they once bought and owned outright. Businesses are trying to come up with new and innovative subscription business models to offer to their customers.
If your business is building a subscription service, creating a reliable sales forecast is a critical step to understand how your business will grow and what the key drivers of revenue growth will be.
A few definitions you’ll need to know to build your subscription forecast
When you’re building a subscription sales forecast, there are a few terms you need to understand that you won’t find in your traditional sales forecast.
Subscription period: This is the length of time a customer commits to subscribing to your service. Many services operate on a monthly subscription period, meaning customers pay a monthly fee to access the service and can cancel at any time – think Netflix or your gym membership.
Some services have annual subscription periods. In this case, customers pay to get access to the service for a year and can renew at the end of the year. Magazines and enterprise software offerings often have annual subscription periods. This article focuses on forecasting sales for a monthly subscription service. Annual subscriptions and other subscription lengths will be discussed in a future post.
New subscribers: This is the number of new customers you sign up for your service in a given month.
Cancellations: These are the customers who choose to cancel your service each month.
Churn: This is the percentage of customers that cancel and leave your service during the month. Low churn equals happy customers, while high churn means users are cancelling quickly and not subscribing for a long time.
You calculate churn by taking the number of customers who cancel during a month and divide by the number of customers you had at the beginning of the month:
Churn = Cancellations During a Month ÷ Customers at Start of Month
But, there is a wrinkle to the concept of churn because it’s really just like a leaky bucket. Think of churn as a hole in the bottom of the bucket. As long as the hole (churn) is small, you can keep the bucket full simply by adding more water (new subscribers) than is draining out.
The definitions above are all you need to know to forecast your customer growth. The next few things we’ll talk about relate to the revenue you will make from these customers.
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I’m Andrew Brooks, a seasoned finance consultant from the USA and the mind behind phonenumber247.com.
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