Understanding the Psychology of Business Sales Projections
When you’re creating sales projections for your business, pause a moment to reflect on the psychology of the process. Sales projections are one of the most important parts of any business plan.
If your sales projections are unrealistically high, you could end up overspending or be unable to generate enough profit to survive. If your sales projections are too low, you may stifle the potential of your business and lose out on opportunities and growth.
The problem is that sales can be very tricky to predict, particularly for a new business or invention. One reason is that you’re dealing with the unknown — you can’t be sure whether your new product is going to go viral or sink like a stone —and another reason is the influence of your personality. Salespeople almost always overestimate sales, while accountants tend to underestimate; optimists think success, while pessimists think failure.
This observation of psychology probably strikes you as obvious, but you may be surprised by the extent to which personality can influence a business plan. Ask any business consultant or lender and they’ll willingly share anecdotes about meetings with optimistic entrepreneurs who present sales projections much closer to fiction than fact.
Hindsight reveals how forecasts of several million dollars in sales becomes a paltry $50,000; the forecasted growth of a new outlet every six months translates in real life to no new outlets whatsoever, and so on.
How do you think your own personality is going to affect the way you create sales forecasts? Are you an optimist and an inspired entrepreneur? Or are you a natural pessimist and averse to risk?
An ideal starting point, especially for optimists, is to take a conservative approach. For new businesses, this approach requires that you research other businesses of a similar nature and base your forecasts on their performance. For established businesses, you base next year’s sales projections on the previous year’s figures, adjusting next year’s sales figures by the current inflation rate and by any other long-term trends.
Sounds great, but this approach doesn’t leave much room for expansionary thinking. Sure, maybe you can’t sustain much more growth with your existing product or service. However, what if you add products, transform your service, open up a new location or try to create a franchise model building on what you’ve done so far?
One solution that works really well is to create three sets of sales projections: Worst, Most Likely and Best. For the Worst-Case Scenario, give your pessimism full rein (think of the miserable Eeyore in Winnie the Pooh). For the Best Scenario, imagine what could happen if you aim for expansion and everything goes amazingly well. The Most Likely Scenario should land somewhere in between.
Do you remember the pushmi-pullyu in Dr Dolittle, which has one head at each end of its body and both heads try to go in opposite directions whenever it tries to move? Like the pushmi-pullyu, you too have to manage the tension between conflicting voices. On the one hand, you want to keep your feet firmly on the ground and, on the other hand, you want to encourage thinking in a way that inspires success.
In this way, you can hopefully plan in a way that’s realistic about the possible risks of poor sales results, as well as plan for growth in a way that gets you jumping out of bed in the morning with a sense of optimism burning in your belly.