How to forecast a sales funnel

There are four key questions to answer when setting up a financial forecast to follow a sales funnel logic:

1. What are your different funnel stages?
2. How do your customers move through your stages?
3. What is your assumed conversion % for each step?
4. How do your customers churn across your funnel stages?

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1. What are your different funnel stages?

Your funnel stages are guided by your go-to-market strategy and decided “outside” the financial model. 

Your financial model should reflect the business model you have to acquire, retain and upsell customers.

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2. How do your customers move through your stages?

Once you’ve defined your stages, you must predict how your customers move through your stages.

Forecast models can quickly become extensive if you want to capture all possible movements, so it can be helpful to keep your model simple.

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Here are some good pointers for choosing the right detail level:

1. Do you wish to track your detailed conversion KPIs in your financial model or elsewhere?
2. Which movements do you ideally want to measure and improve to impact financial performance?
3. Can you currently or in the future track and improve the conversion values set at the chosen detail level?

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These two Francis templates include customers and upgrades per stage, respectively. As you can see, the revenue forecast quickly grows with more included movements.

3. What are you assumed conversion % for each step?

The next step is to predict the % conversion for each step. This should ideally be based on historical data.

One important thing to consider is the user base you estimate the % conversion on.

For example, when you say, “5% of our free users upgrade to a paid version every month”, do you refer to 5% of your newly acquired free users or 5% of your total free users?

Typically new users will have a higher likelihood of upgrading. If you base conversion on the total # customers, you implicitly assume that old users have the same probability of converting as new customers, leading to potentially exponential growth in conversions. 

For this reason, the Francis template is designed to distinguish between % conversion for new vs. existing users. You can modify it to other groups (e.g., 1-3 months old customers vs. 4+ months old customers) as you see fit.

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4. How do customers churn across your funnale stages?

Finally, you need to include churn in your forecast.

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Churn is a whole different beast, so we’ve addressed that here.