I recently got the following request for information from Debra, and thought some other people might be interested in this kind of information. Debra wrote:
“Sandy, I just started reading your book and so far I am very excited. I am working with some friends that are starting a business and we want to sell our product in the gift stores. We have talked to some gift owners and some consumers and so far they love our idea. We are working on our business plan to present to the bank. However, we are really struggling with the sales forecasting part. You wouldn’t happen to have a book on how we can estimate how many units would could hope to sell? We are planning to launch our product at the Atlanta mart. We feel that we will get lots of sales, but again, have no way of estimating the number for the business plan.”
I love your enthusiasm! Please keep me posted about your success at the Atlanta gift trade show. And of course, your successes and challenges in selling to gift shops!
Unfortunately, I am not aware of a good book resource on sales forecasting I could recommend, you might scour Amazon.com… but I do have some help for you.
My husband is experienced with business plans, and I took in some of his feedback, to come up with a complete answer about sales forecasting for your loan application. And of course, you WILL need a business plan to get a loan, especially for a start-up. Plus you will need collateral, of course.
For wholesaling, annual sales are really a function of:
(A) Average Order X (B) Number of Orders/Year X (C) # of Accounts.
Since you have no sales history to work off of, you are making “assumptions” in your revenue forecast. It would probably help to visit with someone wholesaling products in your niche and see what their experience is.
(A) The size of your average wholesale order will depend on a number of things:
• How many lines or products
• How many different variations of each product (size, color, flavor, scent, shape)
• Average price of one case
• Type of stores you are selling to
• The enthusiasm and skill of your sales personality and presentation
When we first started, we were thrilled with an order of one case, for $35. Now, with all the products we offer, orders under $150 are yawners. (PS This is in Idaho, a fairly tough market, while selling to small, independent retailers. So if you are in an urban area, multiply those figures by at least 2 or 3). And of course, your first order with a particular gift store will be lower, sometimes much lower, than your AVERAGE sale.
If, for example, you offer one line with four products, and offer to mix cases on first orders, your initial order will be mostly one case (3 of each product). Future orders, depending on whether you continue splitting cases (e.g. max two products per case), will probably result in two-case orders most of the time. Perhaps more just before peak seasons (e.g. summer tourists, holidays). So you can just forecast 2 cases, and be OK.
(B) Number of orders per year varies with the size of the store, and the market you are selling to.
Since you read my Guide, you know that most areas of the US enjoy two primary gift buying seasons. You would expect a large order from your wholesale customers in the spring, no later than the week before Memorial Day weekend. And another larger order sometime in the fall, no later than a week or two before Thanksgiving. In a normal and wistful situation, you would get at least one smaller re-order mid-summer, and you could get one or two re-stock orders between Thanksgiving and Christmas. If your product offers a souvenir orientation, summer sales will be larger than the holidays. If you offer good gift basket items, or really for most everything else, the holidays will be your BIGGEST sales period of the year. And you may get a number of re-stock orders between November 20 and December 15. (So hunker down, and prepare to ship orders out ASAP!)
(C) The number of accounts you develop, is a function of many things, including – but not limited to:
• The size of your product category (e.g. salsa of any type will always outsell even the best “pickled onion” line).
• How good you are at developing your sales materials and presentation (see my Complete Guide!).
• Your success at getting new accounts (it all springs from there)!
• The “stick” rate, or how many accounts keep your line after you get product on their shelves, and for how long.
• The size and number of geographic regions you are targeting.
• The density of gift outlets in those regions.
• The intensity of your marketing program (how many accounts you call on, and re-call on, and re-call on).
• The number of marketing “funnels” you use (e.g. personal selling, direct mail, catalogs, sales reps, trade shows, wholesale web sites).
Also, remember that attrition of wholesale customers is completely natural, so understand that some stores will carry your line for years, some will carry for a year or two (or just a season), and some will never re-order after initial stocking. So you need to work with an average number of stores at any one time.
So here is how I might write up a forecast, using ASSUMPTIONS. Note that my sample forecast is based on one year… your banker will want your forecast out for three years, monthly in the first year, and quarterly or annually for years two and three. Due to the cycle of the gift industry, quarterly or semi-annually is a good fit for measuring your progress.
Let’s say I offer six variations (for example, six scents in my line of candles) of the same product, at a $4 a unit (12 units/case – $48) wholesale price point (see my Guide, for pricing strategy). And I offer to mix cases on first orders, maximum of three variations (e.g. scents) per case. After the first order, I will split cases but with a maximum of two variations (e.g. scents) per case.
(A) Most first-time customers will either order two cases (to get a sampling of each scent); or one case of your top-sellers — average 1.5 cases per new account, or $72. I will assume 75% of stores that took an initial order, will re-order at least for a season. Average re-order will be two cases (e.g. four scents). Typically, they will restock the top four best-selling scents at their store. Some orders will be all six scents, or more. Some will be one case. But I am assuming the average order over the long term is 2 cases. Two times $48/case = $96 average order.
(B) I am going to assume my best customers (20%) will order five times a year… bigger orders prior to summer and holidays, with one smaller order mid-summer and two between Thanksgiving and Christmas. My average customer (50%) will order three times a year. And my so-so customers (30%) will order twice a year. So, times the $96 average order, my best, average, and smallest customers will generate $480, $288, or $192 dollars a year, respectively. If I use a “weighted average, based upon the percentage of customers in each category (20, 50, 30), I come up with:
(.2) x $480 + (.5) x $288 + (.3) x $192 = $297.60, which I would round to $300 a year, for ease of computation. So in my forecast, I will ASSUME, that every customer who re-orders, will create an average of $300 a year in revenues.
(C) I am going to assume that the first year, I spend an average of one week a month calling on stores, for eight months of the year. (Two weeks a month initially, then scaled back as orders and re-orders come in). I will not sell during January and February (too slow) nor December (too busy shipping orders), and will take time off mid-summer for family and burn-out. During sales periods, I will call on 10 prospects a day, and generate 2 wholesale customers a day. I need one day a week to regroup, and take care of things, so I sell only 4 days a week. That is 8 new accounts every month, times eight months, or 64 accounts the first year. Of these, 25% will be one-time orders, leaving me 48 accounts that will re-order. I will also assume an average customer will stay with me for 2 years. So, 48 accounts x $300 is $14,400 in sales. However, these accounts didn’t start buying until I made the first sale to them, which occurred throughout the year. So for the first year, I only realize about half this… or $7200. Plus the one-time orders … 16 accounts times 1.5 cases average ($72) = $1152. So I generated about $8,352 in sales through your own efforts. In year two, this starts looking pretty good, but by then, I will assume other marketing funnels are now doing most of the new account prospecting, and you are making product, and calling for re-orders, not creating new accounts.
(PS Debra…you will need to work VERY hard to get out there and do this selling. And after a few months, you will need to start calling on existing customers instead of prospects, so new account development starts to wane.)
Next assumption: my keyword rich wholesale web site (see the bonus material with the Complete Guide), will start generating new wholesale accounts, starting in 3 months from start … I will get two accounts a month for three months, then 5 a month after that. Since there is less personal connection, only 50% will re-order, instead of 75%.
To continue the progression of assumptions, but without as much detail:
At six months, I start hiring reps (see the bonus material with the Complete Guide). I target taking on one rep a quarter, but no more than three a year. (Average two reps added per year, with drop off and “firings”.) Each rep will add two new accounts per month for one year, then maintain that level. Because of the personal service levels, a whopping 80% of new accounts will re-order, and the number of good accounts is up, so I can average $400 in gross sales per customer (instead of $300), for rep-generated accounts.
Also, the first year, I will do two wholesale gift trade shows (see the bonus material with the Complete Guide), and will do four shows every year after that. At each show, I generate 20 new wholesale accounts, with a 60% re-order rate.
Word of mouth… new (and existing) gift outlets will see my wares in other stores and call me… this adds two new accounts a month starting the sixth month, up to 3 a month starting a year later, then an increase of 1 per month every year until the US market is saturated.
NOTE: ALL THESE FIGURES ARE BASED ON ASSUMPTIONS AND SPECULATION ONLY, BASED ON MY OWN SITUATION, EXPERIENCES, MARKET, and SALES ABILITY. DO NOT USE THEM AS YOUR OWN!!!
Anyway, Debra, I am just giving you a feel for the process you might go through. You will need to put all this into a spreadsheet of course.
Depending on your market the figures I give you may be way low or too high.
Also bankers like you to be conservative, so it often works best to offer a “Best Case”, “Worst Case”, and “Just Right” or Goldilocks scenario with your forecasting. Calculate your “just right” forecast first, then do “what if” and scale back or increase your average order, number of orders, and/or number of accounts.
While marketing is the most important task in your business, your financial projections are the most important part of a loan application, at least in the eyes of a banker. Explain all your assumptions in detail. Get verification by asking other people in the business. Most new businesses grossly over-estimate revenues. Make sure your financial plan allows you to grow your business effectively, without putting you at personal financial risk.
Only one last suggestion, Debra, just something to think about.
Marketing at gift trade shows is not a business for neophytes. Starting with a major financial investment, by attending what I believe is the largest trade gift show in North America, is like a new photographer trying to photograph the president for his or her first gig. While I hope you hit a home run, you are more likely to spend a lot of money for a marginal return. Be sure to read my bonus Mini-Ebook on “Wholesaling at Gift Trade Shows” you got with the Guide. While the numbers are attractive, the competition is fierce.
A more sure way to build a successful wholesale gift business is to:
1) Spend a few weeks calling on accounts yourself, so you find out what is in your prospects’ minds, and make necessary improvements in your line (e.g. ingredients, packaging, sizes).
2) Put up a wholesale-specific website, and market your web site (SEO, postcards, affiliate programs).
3) Build out your business geographically in increments, by hiring reps, then exhibiting at trade shows in their territory to get them launched, before you move on. (Or vice versa… attend a show, and hire a rep or rep group to service your new accounts in that territory).
Regardless, HAPPY WHOLESALING!
I LOVE your enthusiasm… you are on your way.