Report
Nov 29, 2022
Top-down vs. bottom-up sales forecasting: Which is the best choice for your business? The truthful answer is that it depends — on your current business situation, leadership preferences, and priorities for the future.
One thing, however, is for certain — accurate sales forecasting is critical for every business. In order to reach revenue goals and plan appropriately for the future, you need to be able to choose the correct forecasting method. The top-down and bottom-up methods each provide a different view, and the best method often depends on the time and data you have available to use for your forecast.
In the sections that follow, we’ll explore what’s involved in each forecasting method, their business advantages, and how to choose the right method for your organization.
Quick Takeaways
- Top-down forecasting looks at the larger market and competitive landscape to forecast the market share and revenue a company can potentially achieve.
- Bottom-up forecasting looks internally first at factors like historical performance, marketing and sales budgets, and production capacity.
- Advantages of top-down forecasting include room for variability and time savings, while bottom-up forecasting is considered more realistic and accurate.
- The best forecasting method depends on the current situation: a company trying to achieve cost savings or fix a problem would likely choose bottom-up forecasting, while a pre-revenue startup would choose the top-down approach.
Top-down vs. Bottom-up Sales Forecasting: A Quick Overview
What is top-down forecasting?
Top-down forecasting starts with the widest perspective possible and works its way down to predict how it will impact revenue results for an organization. To make a top-down forecast, start by assessing the entire size of your market. Focus on factors that will impact your ability to capture part of that market, including:
- Entire market size
- Current available market
- Market trends
- Competitive landscape
Top-down forecasting requires market research and competitive analysis work — in order to gather insights in the above bullet points, it’s necessary to spend time researching and learning about your existing market first.
Top-down forecasting gives companies a holistic view of how their company and offerings fit into the larger industry picture, aligning their goals and sales execution strategies with what the total market demands and has available at a given time.
More specifically, companies use the top-down approach to predict the share of buyers and potential revenue they can earn (total and per sale) based on the current state of the market.
What is bottom-up forecasting?
Bottom-up forecasting, on the other hand, starts with a granular approach to sales forecasting and looks inward to the product, service, activities, budget, and capacity the company currently maintains. Using this information, bottom-up forecasts aim to assess how well the company is performing against the larger market, make realistic sales predictions, and determine what the company needs to do in order to achieve them.
Specific factors a bottom-up forecast may assess include:
- Inventory flow and production capacity
- Marketing and sales budgets
- Human resource capacity and hiring plans
- Historical sales performance data
Bottom-up forecasting gives companies a detailed internal view of its capability for competing with other market players and a realistic understanding of what benchmarks it could realistically reach in a given forecast period.
What are the advantages of each?
Top-down forecasting advantages
Variability
For pre-revenue companies or companies with irregular revenue, top-down sales forecasting can be the better choice thanks to its variability. Less rooted in business data and real numbers, variability can occur within a forecast period without impacting top-down forecast accuracy.
Optimistic view
Many salespeople feel that top-down forecasting is a more optimistic way of viewing future sales performance. Again, a lower focus on hard numbers allows companies to look favorably at their current and future position within the market, emphasizing future opportunities rather than current capacity (and even limitations).
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Time savings
Top-down forecasting is undoubtedly the faster method of the two. Time savings are important to sales leaders and company executives, and using the top-down method avoids much of the tedious and detailed data analysis that can slow the process.
Bottom-up forecasting advantages
Realistic goal setting
While top-down sales forecasting leaves room for subjectivity, bottom-up forecasting focuses on actual performance numbers. It might be harder to forecast with rose-colored glasses using the bottom-up forecasting method, but you can be more confident your forecasts are realistic and likely to be accurate.
Item-level forecasting
Bottom-up forecasting is granular. Unlike top-down forecasting, which takes a comprehensive view of revenue and sales performance, bottom-up forecasting lends itself to item-level predictions related to specific products or services, customer segments, or geographic locations.
Employee participation
Employee buy-in is important to any organization as it works to achieve sales goals. Bottom-up forecasting takes historical and current sales data into account, meaning sales employees contribute to its collection and provide context around it. When employees are involved and engaged with the forecasting process, they’re more motivated to work toward achieving forecasted outcomes.
How to choose the right method for you
Some companies may choose to use both methods for a complete 360-degree view of their sales performance future. More often than not, however, one method is chosen depending on the situation and/or preferences of the people involved.
Large organizations, for example, have historically tended to lean toward top-down forecasting due to the sheer amount of data that would need to be collected and analyzed for a bottom-up approach. Of course, modern demand planning software and other platform tools have eased this challenge.
Companies for which budget and cost savings are the top priority and/or companies trying to solve sales performance issues will likely take a bottom-up approach, which allows them to see exactly where performance gaps exist and where change needs to happen.
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Finally, pre-revenue and startup companies often choose top-down forecasting because they have limited historical data and want the flexibility to craft their future performance outlook for potential investors and customers.
To choose the right method for you, consider three main factors: your forecasting goals, the data you have available, and your stakeholder audience. Doing so will help you determine which approach will work best.
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Sales success starts with sales planning, but without a command of your data you’re basing those plans on intuition, estimates and guesses, leaving you vulnerable to missed numbers and poor performance. With the tools to bring your data into focus, Xactly can help your planning become more accurate, more informed and more agile.
Learn more about our Sales Planning Solutions or schedule your demo today!
