As successful entrepreneurs and business leaders know, numbers aren't everything.
That is why understanding and utilizing forecasting methods that take into account factors outside of just raw numbers is a vital part of business. When it comes to sales forecasting, using a mixture of different forecasting methods will give you a more comprehensive big picture. Thus allowing you to improve the accuracy of your sales forecasts and effectively guide your company.
But, what is the best forecasting method for sales in certain situations? In this article, we’ll break down what qualitative forecasting is and how it differs from quantitative, why you need qualitative forecasting, and some of the best qualitative forecasting methods to use. As well as which method would work best in certain business scenarios.
What Is Qualitative Sales Forecasting?
Qualitative sales forecasting is an estimation method that uses expert judgment to provide insights into future outcomes. These methods have less to do with hard numbers and more to do with experience, expertise, and instinct. This type of sales forecasting is largely based upon the knowledge and intuition of highly experienced management, employees, and consultants. These insights and opinions are then transformed into numerical sales forecasts.
For example, with qualitative forecasting methods, you can forecast how well an upcoming marketing campaign will do in generating new sales or how well a new product that you are about to roll out will sell. These methods can also take into account things like new industry innovations, changes in government policies, changes in consumption patterns, etc.
In all of the above cases, prior sales data alone will not provide a complete or accurate picture of what future sales might look like.
Oftentimes, there are scenarios where it is suspected that future sales results will vary significantly from results in prior periods. In these cases, qualitative forecasting can be very valuable in increasing the accuracy of your forecasting.
Qualitative forecasting methods include things like:
- Utilizing the expertise of consultants
- Gathering opinions of projected sales expectations from your sales reps
- Surveying customers about their upcoming product needs
- Checking with distributors to find out what other products might be selling well or poorly
How Is Qualitative Forecasting Different Than Quantitative?
To put it simply, the main difference between the two types of forecasting is that qualitative forecasting is subjective while quantitative is strictly based on objective calculations.
“[Qualitative forecasting] is sort of like discovering a “tell” in the card game of poker; it’s not statistically certain, but it can indicate present conditions and future states.”
Quantitative forecasting is solely reliant on hard numbers and uses historical data to predict the trajectory of sales and does not factor in any opinions. Using past numerical sales data, companies can spot trends that may have been occurring and may continue to occur. Then derive formulas from those trends to use in forecasting future sales. The forecasts that are created through quantitative methods have clear evident data to support them.
For example, if every year your business sales have grown 4%, you can predict where your sales will be next year based on 4% growth. It can also help businesses predict seasonal spikes, such as the holidays or during the summer.
There are many guides to help businesses understand and implement quantitative data into their businesses, but qualitative forecasting is just as important and highly valuable. Read on to find out more about why you need it for your business and the best qualitative sales forecasting methods to implement.
Why You Need Qualitative Forecasting
Qualitative forecasting methods allow leadership to understand the ambiguity in the numbers that quantitative forecasting can create. These methods are best used alongside quantitative forecasts to give a more complete picture that factors in marketing changes, customer trends, and other external factors. Quantitative methods can be used for the preliminary forecasts and then those forecasts are adjusted based on a qualitative review.
As mentioned earlier, there are instances where using qualitative forecasting is more useful than quantitative methods. For example, say that there is a record cold front coming through sooner than in previous years. If your company specializes in heaters, you can expect that sales will be higher than in years past during that same season. Quantitative forecasting does not take into account these types of situations that can impact sales, but qualitative forecasting can.
In some cases where there is no historical sales data to provide information, qualitative forecasting is often the only option available.
New companies, for example, will lean on qualitative forecasting methods almost exclusively until they are more established. Also, businesses that are rolling out new products/services or expanding into a new industry, market, or territory will need to rely on qualitative forecasting to predict how well new offerings will do.
Hard sales numbers provide a limited understanding of your business. Qualitative forecasting can help you fill in the gaps to get a big picture view and have a better understanding of where your sales are headed. Allowing you and your company to make more informed decisions.
The Pros & Cons of Qualitative Forecasting
Some types of businesses or business situations you encounter will be better suited for one type of sales forecasting over another. Or it may be most beneficial to use a combination of specific methods of forecasting. This is why it is important to understand both the pros and cons of qualitative forecasting:
- Some qualitative forecasting methods can be performed quickly and easily without having to gather elaborate statistics
- With some of the methods, the forecast information gathered can easily be broken down by product, customer, territory, or salesperson — giving you more than just one overall forecast number to work with
- An increased predictive ability based on the judgment and experience of company leadership, outside experts, and those with direct interaction with customers — you can predict the impact of shifts in sales patterns and customer buying behavior.
- Increased flexibility to use non-numerical data sources, based on intuition and expertise, to increase the quality of forecasting
- Improved accuracy of forecasting by factoring in things that will impact sales numbers that quantitative forecasting cannot account for (ie. declines in the economy, materials shortages, new competition in a market, etc)
- These methods can be extremely useful in situations where there is inadequate or ambiguous data and can help create a more broad-based view
- It can require a lot of time and resources to properly execute some of the qualitative forecasting methods
- Because you’re often relying on subjective opinions and insufficient data, the accuracy of the forecasting may not be as high in comparison to some specific types of quantitative forecasting
- Unless using the Delphi method, there is a chance that the opinion of a group will be swayed by other members or leadership and the chance for critical thought or outside opinion is reduced
- There is a possibility of a lack of overall consensus in some methods
- There is a chance for selective perception, which happens when the forecasters ignore relevant, current information that may conflict with how they view the future sales unfolding
- Sales reps or leadership can be overly optimistic or pessimistic regarding their sales predictions
A more quantitative forecasting approach may be better in situations where a significant amount of past numerical data is available to use and it is reasonable to assume that many patterns in the data are expected to continue in the future. If previous numerical data is lacking and there are more variables involved that could realistically affect future sales, more qualitative forecasting methods would be appropriate.
Types of Qualitative Forecasting Methods
There are multiple qualitative forecasting methods for companies to choose from. Many successful companies use a mixture of techniques to make sure that they have a complete picture that takes all sides of the business into account.
Some of these methods include:
Best for businesses that have limited resources but need insight from different areas of the company to determine future demand of products
This qualitative forecasting method is often one of the easiest to implement and is based on the opinions of the company’s leadership. Bringing the opinion of all of the leadership together can help give a great sampling of each part of the business, including marketing, accounting, sales, etc.
Since each person is an expert and has an overall understanding of their department, they can weigh in with helpful insights and opinions to create a more comprehensive big-picture perspective.
In the case of a large company, outside analysts can also be brought into this methodology. Alternatively, in the case of a small business that has limited resources, the owner can meet with the department supervisors individually to hear what is happening on the ground and create a sales forecast based on their information.
In either case, by using this method either monthly or quarterly, the participants can update their forecasts to accommodate changing market conditions.
The group approach to this method can be done in two ways. One is to bring all of the leadership members together in one meeting, open up the discussion and allow everyone to offer their subjective opinions, and then come to a consensus. This information is then used to generate a forecast for future sales.
The other approach is where the leadership members who are part of the forecasting group can submit their independent estimates without a discussion to the CEO. These estimates are then averaged into one forecast.
With the Leadership Opinions forecasting method, each leader can provide valuable insight and expertise. This will give you a more realistic method to compile your sales forecasts and make long-term business decisions. There are so many aspects to business decisions that each part has something relevant to add. While launching a new product may sound great to your sales department, for example, your accounting department might be able to point out that it is potentially a loss.
By meeting either monthly or quarterly, the forecasters can update their forecasts to accommodate changing market conditions.
The Delphi Method
Best for a company looking for long-range forecasting in a market/industry that is expecting significant changes or external events that will impact sales
There are some times in meeting situations where the opinion of the group can be swayed by the influence of the leader or other strong members. If participants in your panel of experts are afraid to contradict the owner, or the excitement of leadership is so infectious that panel members forget to be critical, your forecasting could be in trouble.
The Delphi Method seeks to eliminate this factor and often improves upon the leadership opinion or expert opinion methods.
The Delphi Method works like this: a panel of experts completes a questionnaire individually and anonymously with their feedback. Because the experts are not meeting as a group, the chance that consensus is reached because of dominant personality factors is significantly reduced.
The responses are then aggregated by an outside Delphi coordinator and shared with the group, with answers still kept anonymous. The same group then completes the questionnaire again and has a chance to change their answers based on the responses provided. This is usually completed 2-3 times until there seems to be a consensus.
This process results in a gradual reduction of the variability in the sales forecasts to create a more accurate median forecast.
Only the coordinator knows all the members of the team who are participating and the coordinator is the only one who will have access to all the responses. Because of this, group members can give their insights without fear of reprisal, and still find out what other people think as well.
Sales Field Opinions
Best for a company in the industrial equipment industry who is trying to determine how many pieces of equipment to produce for the next year (or a similar industry where expensive equipment is the product being produced and sold)
Also called grassroots forecasting, the sales field opinions method can provide valuable insights by getting a composite of the opinions and predictions of your sales team. Your sales reps are, in most cases, the ones who are closest to your customers. They are on the ground, prospecting and communicating with potential customers as well as checking in with recurring customers and getting their feedback.
Your sales team hears the objections firsthand and any relevant news regarding demand and knows better than most why your product is or isn't selling. As well as the anticipated volume. Sales reps often have a bigger understanding that is more than just what the numbers can provide. They can also see any shifts in the customer or their opinion before it is reflected in the numbers most of the time.
Each salesperson can give an opinion on the future of sales, their estimated number of future sales, and how customers will likely respond to a different product or service. These responses can then be averaged to develop your future sales forecasts. You can also get insight into projected sales within specific territories individually.
Customer Surveys (Market Research)
Best for a company looking for a realistic gauge on how well upcoming new products or product features will be accepted and purchased by the customer base
Customers often know what they want and can give you a valuable outlook into your company and brand. Using customer surveys as a forecasting method can help you identify key trends and changes in the market and shift your business to align with customer needs.
These customer surveys can be conducted online, over the phone, or in person. It should allow them to say what they think of your product, your marketing campaigns, and their impression of your brand, as well as what their upcoming product needs might be. The results then go through statistical analysis to create total sales demand forecasts. You can also use the survey results to test hypotheses regarding consumer behavior.
If you want to know what your customers think of you and what their future buying intentions might be, the best way to find out is by asking them directly. Customer surveys can allow you to do just that.
Utilize Qualitative Sales Forecasting Methods for Better Insights
Whether you lack hard numbers or just need deeper insights into your quantitative forecasting, qualitative forecasting methods can serve your company well. By using these techniques, (don’t be afraid to use more than one!) you can better direct the future of your sales and company as a whole with a complete picture of what you need to do.
Give these qualitative forecasting methods a try today, and get the awareness you need to make informed decisions and create a stronger company!