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For your business to be successful, you have to be aware of multiple factors influencing your sales. You have to know your strengths and areas of improvement and learn the proper use of resources. One of the things you have to do while planning your business functions is forecast your sales.
Forecasting your sales can be a chaotic and tedious process. From data computation to analysis, it can be a stressful job. But it is an essential task for your business. It helps you determine how much sales you can bring in at a particular time and assign tasks accordingly to the reps.
There are many sales parameters to determine and plan your sales functions. One of the most important ones is your sales potential. The determination of your sales potential is crucial to the growth of your business. And we are going to tell you how to do it correctly.
Let’s dive in!
What is Sales Potential?
Sales potential is the estimated sales your business expects to achieve in a specific period after considering various market factors and product performance. It is an essential parameter for businesses to decide whether they should enter the market depending on the profits estimated from sales potential.
In other words, sales potential basically means how well your product is performing in the market or how many times you can sell your product in the market after considering all the competition and market factors.
While determining your sales potential, you have to examine how market factors can influence your product sales. These common market factors can include government regulations, competitions, seasonality, technological change, and more.
Let us try to understand sales potential with the help of a basic example.
Suppose, you own a software development company that develops recruitment software for businesses. They offer exclusive monthly and annual packages and a wide range of plugins to simplify the experience of recruitment for organizations.
While calculating their sales potential, the team sat together to analyze the following influencing factors -
- Competitions- The organization has 3 powerful competitors in the market who offer the same set of functions and perks to the consumers.
- Seasonal impact- After analyzing the data from their market research, they found out that their sales are higher in the spring and summer and drop by autumn.
- Customer Data- While computing and analyzing the data of existing customers, they found out that 3 out of 5 customers have additionally purchased plugins and upgrades to the software.
- Territorial factors- They noticed that specific territories are doing better than others.
- Market demography- To understand the buying patterns of consumers, they surveyed 200 companies and found out that about 30% of them use recruiting software for their recruitment process.
With the analysis of all the above aspects, you now understand the different factors influencing their sales pattern. You also know your strongest competitors and can devise new strategies to outshine them by targeting new areas of customers’ pain points.
You also understand which seasons are the best to market their product to the prospects. Since some territories are doing better than others, you can easily assign more expert reps to manage it. Also, you have a fair idea about the population most likely to use their product and are devising strategies to tap into at least half of their target consumers, i.e 15%.
How to Calculate Sales Potential- 7 Key Metrics
By now, you must already have a fair idea of the key factors influencing sales potential. We shall discuss the 7 most important key metrics.
- Average sales volume and market influences
- Market penetration
- Competitor growth rate
- Territory management
- Quantified purchasing capacity
- Competition analysis
1. Average sales volume and market influences
Your sales volume is the total number of products sold in a particular period, say a year. To get an idea of your sales potential, you have to know the average volume you can target in a smaller period, i.e, each month. In this way, you can easily determine your sales potential in a month and set goals accordingly.
It is important to know that every month will not fetch you a similar amount of sales. The sales can be exceptionally high during some months, and sometimes it can be unexpectedly low. This can happen due to various other market influences that you have to keep a tap on. Some of it can be seasonality, government regulations, inflation, etc.
2. Market penetration
Market penetration is the ratio between your current customer base to the total number of prospects in a specific region or demography. It helps you evaluate how deep you have been able to enter the market, i.e. how many prospects you have converted into customers.
This will help you understand how well you are doing against your competitors and in which regions. You will be able to analyze your strengths and areas of improvement. If the market penetration value is low, it can mean that you still have huge potential to penetrate deeper and capture more areas, which can be done by strategizing your sales function.
If the value is high, that means you have already been able to enter deep into the market and capture most parts of it. You can start offering your new products and engage existing customers.
3. Competitor growth rate
Your competitor’s growth rate is one of the most important factors influencing your sales potential. Never underestimate it. You have to be mindful of your competitor’s activities on the market as much as your own. If your competitor's growth rate has risen significantly, you can learn from their strategies and innovations.
If your growth rate is lagging, it is time to evaluate. These may be due to both external and internal factors. External factors may include the various market factors including your competitor's growth rate. Internal factors may be lack of resources and training, communication gap, etc.
4. Territory management
Efficient territory management can help in increasing sales volume. You should assign reps to each of the territories defined. These territories do not necessarily have to be based on specific geographical areas but can also mean behavioral patterns, demographics of consumers, etc.
Your sales potential will depend on how well your sales reps manage their territory. There may be certain cases where some specific territories are doing better than the rest. You have to identify the reasons through market surveys and research.
This way, you can understand why your product is doing well in certain areas and why not in some areas. You can devise new ways and strategies to address the drawbacks and work on them.
5. Quantified purchasing capacity
It is the maximum number of purchases a customer can make in a particular year.
For example, let’s say that you deal in customer management software. You have monthly plans for users to have a premium experience at $30 per month. If your consumers purchase the premium mode for all 12 months, your company can anticipate a total sales of $360($30 x 12) per customer every year.
With the help of this figure, you can calculate the average purchases your customers make. Suppose some consumers opt for the premium model only in certain months, then you can adjust your sales forecast and plan accordingly.
6. Competition analysis
As already said, your competitions play a huge role in identifying your sales potential and planning your next moves. Your growth and sales have a lot to do with what your competitor offers. Therefore, it will be wise to analyze your competition now and then to understand what is working in the market.
See what marketing strategies they are adopting, what innovations they are making, and how they approach their consumers. This can help you learn a lot about the market. While formulating your strategies, you can plan while referring to your competitors’ tactics as a base for comparison.
Market seasons and variations also play a vital role in determining your sales potential. There are often specific times in a market that sees high and low demands for a particular product. This is called seasonality. Various factors influence these seasons in the market.
Say for a recruitment software, they are most likely to be purchased at a time of the year when the recruitment drive is high. For example, fresh graduates are more likely to be recruited after announced results. If their results are announced in spring, companies are more likely to purchase or upgrade the tool during this time to manage the bulk recruiting procedure.
This factor plays a vital role in determining your sales potential. You will get a fair idea of the time or seasons of the year the value of your sales potential rise and be prepared for the same.
Market Potential vs. Sales Potential - What are the Differences?
Though many people use the two terms identically, they are strikingly different. Let's learn about them.
The size of the market for your product is the market potential. It represents the possibility of the maximum number of sales you can bring to a market. The market potential is the total combination of the sales potential of all the competitors in a specific market. It is generally measured by total sales volume or the number of sales made by all the competitors in a specific time, say a year.
Determining your market potential requires expert analysis. You have to conduct market research backed with reliable data and analyze them. You also have to consider the factors of competition, seasonality, and various market influences that may affect your market potential.
On the other hand, sales potential means the total expectation of sales businesses have in a particular period after considering all the factors like competitors, market variations, etc. Sales potential happens at the product or company level; however, market potential happens at the broader level of the market. Or in other words, sales potential is a part of market potential.
Let’s try to understand it with the help of a simple example.
Brand X and Brand Y are two competitors in the market. Consumers in the market who are loyal to Brand Y, will come under the market potential estimate of Brand X, but they will not come under its sales potential estimate. Likewise, while calculating the market potential of Brand Y, the consumer base of Brand X will come into consideration but not while calculating the sales potential.
It is important to understand that most of the value of sales potential is derived from market potential. Therefore to estimate your sales potential, you must first calculate your market potential.
The market potential is generally used to consider when you want to penetrate other territories, to see if it is a feasible option or not. For example, you want to enter a new demographic location where the product is not yet sold. To mark your decision, you have first to estimate the market potential of the zone and see if your product will work there.
Sales potential is an essential estimate for businesses to base their sales strategies on. It also serves as the reference point for companies while setting their sales quota and formulating important sales functions.
Therefore you must know the correct ways of estimating your sales potential. We have discussed the 7 important metrics for determining sales potential. We learned that the estimation of sales potential is typically based on market research and surveys which require various intelligence tools to enhance the process.
We also tried to highlight the subtle differences between market potential and sales potential that confuses most people. You should now differentiate between them and refer to them well in your business practices.
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