What is top-down forecasting?
Top-Down Forecasting: Businesses use top-down sales projections to guess how much money they will make from sales in the future. It starts with a big-picture look at the market or industry trends and then breaks the forecast into smaller, more specific groups or areas. With this method, businesses can ensure that their sales strategies align with their general goals and the way the market is doing.
Synonyms
- Macro-level sales forecasting
- Aggregate sales forecasting
Steps to Perform Top-Down Forecasting
Top-down sales forecasting is a business strategy that helps companies ensure their sales plans align with overall market trends and their own goals. This method is a structured and effective way to plan sales efforts because it starts with a big-picture view and then breaks it down into smaller parts. The steps below explain how to do top-down sales forecasts. Each one helps create a complete and well-coordinated sales strategy.
Set broad objectives
Businesses must set clear, measurable goals for the whole company before they start forecasting. These goals could include making money, growing the market, releasing a new product, or getting new customers. Companies ensure that the sales forecast fits their strategic plan and top priorities by setting clear overall goals.
Look at market trends.
For effective forecasting, it’s essential to understand the bigger picture of business. Businesses must examine market trends, economic signs, competition, and how customers act. Businesses can make accurate predictions about how well their sales will do in the future by using competitive intelligence and market data to learn about possible chances and challenges.
Find out how much you can sell.
An essential part of top-down forecasting is figuring out how much the whole market or business could sell. Sales managers have to look at things like the size of the market, its growth rate, and the trends of demand. The estimate is based on the outlook, showing the business’s best chance at success.
Take it apart into parts.
Once the total number of sales that could happen is known, the forecast needs to be broken down into more specific groups. These groups could be based on locations, product lines, types of customers, or anything else that makes sense. By breaking the forecast into segments, you can take a more thorough and targeted approach, ensuring that the sales strategy considers each group’s specific needs and opportunities.
Set goals for sales
Sales reps are given specific goals based on the segmented estimate. As a result of the segmented method, these goals are specific to certain areas, products, or customers. Businesses allow their sales teams to focus on specific goals by setting clear, attainable targets. This encourages accountability and success.
Watch and Make Changes
It’s not a one-time thing to do top-down sales forecasts. The forecast must be checked and changed regularly to ensure it stays in line with actual performance and changing market conditions. Businesses have to keep track of their sales, check to see how accurate their predictions are, and make any changes that are needed. This ongoing process ensures that the sales plan stays up-to-date and adaptable to changes in the business world.
Top-Down Forecasting Method
The top-down sales forecasting formula is a complete method that uses different parts to make a precise and well-planned sales prediction. Usually, the formula includes looking at past sales data, market trends, and economic indicators. This could be a famous formula:
The sales forecast is found by multiplying the market share by the total addressable market and making any necessary changes.
Total Market Potential or Total Market That Can Be Reached
Total market potential, also written as total addressable market (TAM), is the most significant number of people who could buy a product or service in a particular market or business. To get a good idea of this possibility, you must look closely at market size, customer demographics, buying habits, and industry trends. Businesses can figure out how big of a chance they have and set sales goals they can reach by knowing the total market potential.
Share of the Market
An essential part of top-down forecasting is determining the company’s projected market share. Market share is the amount of the whole market a business wants. This choice is based on positioning in the market, brand strength, product differentiation, and the total marketing strategy. Businesses can ensure their sales efforts align with their competitors and find ways to grow or improve by looking at their market share.
Splitting up
You divide the general forecast into smaller groups or segments when you segment. You can divide your customers into these groups based on where they live, what products they buy, or any other important factor. By dividing customers into groups, businesses can more accurately predict future sales and make more effective plans for each group’s specific traits and requirements. This targeted method improves the accuracy of the forecast and makes it easier to use resources more efficiently.
Making changes
The formula for making top-down sales predictions must also consider changes that are made to reflect certain factors or situations that may affect sales performance. These changes could be caused by weather, the economy, new rules, or something else important. For instance, a store might need to change its forecast because sales will likely go up during the holidays. In the same way, if the economy or rules change, the forecast might need to be updated to reflect the new business situation. These changes ensure the forecast stays flexible enough to account for changing and often unpredictable factors that affect sales.
Examples of forecasting from the top down
Top-down forecasting is a flexible method that can be used in many different fields, each with its own needs and features. Top-down forecasting is a customized method that fits the needs of different sectors. It does this by looking at overall industry trends and then breaking the forecast into specific areas, segments, or categories. The following cases show how top-down forecasting is used in the retail and technology industries, showing how flexible and practical it is.
Technology Business
Top-down forecasting is imperative in the technology business, where things change quickly, to determine how many new products or technologies will sell. How it works:
- Global Analysis: A global tech company starts by looking at global technology trends, such as market growth, the competitive scene, new technologies, and what customers want.
- Product Focus: The prediction is based on specific goods or services, like a fresh software platform or tech gadget.
- Regional Breakdown: The estimate is further broken down by region, considering the size of the regional market, the rules and regulations, and the competition in that area.
- Customer Segmentation: The forecast could also be broken down by types of customers, like businesses, individuals, or specific sectors.
- Adapting to change: The tech business is known for making changes quickly and developing new products. The forecast stays in line with how the tech world is changing by being checked and changed regularly.
The Retail Sector
In retail, both top-down and bottom-up forecasting are helpful, especially for predicting holiday sales or making plans at the store level. This is how it’s used:
- Consumer Spending Trends: A store chain looks at overall consumer spending trends. This includes looking at economic data, seasonal patterns, and people’s actions.
- Holiday Sales: To estimate holiday sales, the forecast looks at past sales data, marketing campaigns, and market competition.
- Store-Level Segmentation: The forecast is broken down by store location, taking into account things like the store’s success, the people who live in the area, and the state of the market there.
- Focus on Product types: The forecast can be broken down further by product types, which helps plan and track inventory.
- Able to adapt to changes in the market: The retail environment can be affected by things like the economy, customer tastes, or competition from online stores. The forecast stays in line with these changes by being updated regularly.
Overall, top-down forecasting is a flexible and strategic method that can be changed to fit the wants and traits of various industries. Businesses can make better choices and use this method more effectively if they know its pros and cons. The pros and cons of top-down forecasting are discussed in more depth below.
Why aligning top-down forecasting with business strategy is a good idea
Top-down forecasting is a business strategy that ensures sales goals align with the market and general business goals. This method ensures that sales efforts support the company’s mission, vision, and strategic priorities by giving a broad picture of the market and tailoring the forecast to particular goals.
How Effective
The top-down method is more efficient because it starts with a big-picture look at things and then gets more specific by looking at particular groups, areas, or goods. This hierarchical method makes forecasting easier and faster, so businesses can quickly spot chances and problems and decide how to use their resources.
Keeping up
Another benefit of top-down forecasting is that it helps different parts of the company be consistent. This method ensures that all departments and teams work together toward the same goals and use the same approach by giving a broad picture of the market and then breaking it down into smaller areas.
Cons of Top-Down Forecasting: It might not be accurate
One problem with top-down forecasting is that it might be wrong if the original assumptions or macro-level analysis are wrong. Mistakes made at the start of the process can affect the whole plan, leading to bad decisions or missed chances.
Risk of Making Things Too Easy
Top-down forecasting can also make things too easy, especially if complicated market factors are boiled down to broad statements. This risk is significant in varied or changing markets, where it’s essential to understand different customer groups or how they act sincerely.
Not as much help from sales reps
Top-down planning starts at a higher level, so salespeople who know what customers want and need from their own experience may not be able to contribute as much. This lack of input can cause a gap between the estimate and the actual sales situation, hurting performance.
Forecasting from the top down vs. forecasting from the bottom up
Top-down forecasting starts with a big-picture view of the market and the company’s general goals. It then breaks the market down into smaller segments or areas. It’s often used for strategic planning to ensure that sales goals align with the company’s overall strategy. This approach gives you a big-picture view, which makes planning your sales more organized and effective.
Forecasting from the bottom up
Bottom-up forecasting, on the other hand, starts with detailed predictions for each person or object and then adds them all together to get a complete picture. This method focuses on operational planning by looking at specific sales actions, how customers act, and how well the product works. Bottom-up forecasting is a more responsive and flexible way to plan sales because it starts with detailed observations.
Forecasts in detail
Bottom-up forecasting starts with detailed predictions for each person or object. This detailed method lets you see individual sales activities, how customers act, and how products work.
Planning for operations
Bottom-up forecasting is used for operational planning, while top-down forecasting is used for strategy alignment. It helps allocate resources, track supplies, and make short-term sales plans.
View All Together
Bottom-up forecasting puts all the individual predictions together to get a complete picture of the sales landscape. This collection gives a complete picture of how sales change over time by combining different factors into a single forecast.
Ability to adapt to changes in the market
Bottom-up predictions might give you more specific information and help you adapt to changes in the market. Focusing on individual sales activities and customer meetings, this method can quickly change to fit market changes or what customers want.
Top-down and bottom-up forecasting are two different ways to plan sales that work well together but are used for different things within a company. Bottom-up forecasting gives you more specific information and a focus on operations, while top-down forecasting gives you a strategy and a broad view. By knowing their differences, businesses can choose the method that best fits their wants and goals. This ensures sales success and organizational alignment.
