AnalyticsActionable AnalysisOnline Revenue Forecasting Demystified

Online Revenue Forecasting Demystified

Hint: It's not just about the numbers.

With the close of the second quarter, many companies start their 2005 budget process. A driver of profitability, revenue forecasting plays a critical role in this analysis. As an online marketer, you probably think revenue forecasting is the bean counter’s responsibility. Not necessarily.

Since these numbers ultimately may become your sales goals, I strongly recommend you get involved in this process. In my experience, while actual promotions may vary from plan and attract management attention, the greater challenges online marketers face with revenue forecasts are management pressure to budget overly aggressive goals without historic basis and outside factors beyond your control, such as changes in technology, competitors’ strategies, or market demand.

Building a sales forecast from a solid foundation gives you a good understanding of your firm’s revenue dynamics. That enables you to 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 hurdles):

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 adjustments.

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 year-to-date sales:

Run rate = total revenue to date / sales periods to date

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 months:

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, implemented a no-shipping-fee policy for orders over $25 to increase order size.
  • 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 revenues.

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 sales projections.

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 fad.

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 fatiguing?
  • 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 seven.

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 business!

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