For many companies, the holiday season is also the “create next year’s forecast” season. And often times, the exercise of creating that forecast can involve even more emotion and energy than battling mall crowds to find the perfect gift for a loved one. Unfortunately, there’s no magic bullet to developing a forecast that is 100% accurate. However, most companies can produce significantly more accurate forecasts with less negative energy surrounding the exercise.
Let’s take a look at why forecasts matter, why they are so often inaccurate, and a few approaches that can help dramatically improve the result.
Why Do Sales Forecasts Matter?
Every company wants a way to predict results, drive performance, and promote accountability, which is why creating a forecast remains an important activity despite the pain and suffering. But when the sales forecasts are perpetually inaccurate, several groups are negatively impacted:
-
Investors and senior leaders can’t plan
-
Managers and sellers expend time and energy for nothing
-
Customers suffer because they’re pressured by sales reps trying to hit the forecast
To put it simply, most companies need to improve their sales forecasting ability.
Forecast or Target?
Before we talk about common forecasting methods and ways to make them more effective, a quick word about what may be the most significant challenge to developing an accurate forecast – confusing an aggressive sales target with a sales forecast.
While it is certainly true that organizations across the spectrum face pressures to achieve targets that will please investors, building a forecast by having leadership pick a number that will appeal to investors is arguably the most fundamental reason for inaccurate forecasts. When sales leaders are given a number and told to make it happen, or that forecasting anything lower than this target would be considered failure, bad behaviors often ensue. This isn’t to say leaders shouldn’t challenge the sales organization to produce better results by establishing aggressive target.
However, goals and forecasts are not, and should not be the same thing. It is entirely acceptable to set an aggressive sales goal and work our way backward to see what we need to produce in terms of our predictive metrics in order to achieve a given target. (More on this below.)
We just don’t want to confuse what we want to accomplish with what we know we will accomplish. Since the sales forecast often drives a variety of other decision including the expense budget, we want to predict as accurately as we can, not as optimistically as we can.
Forecasting Methods
So, how do we create accurate forecasts without exhausting the organization? Here are three of the most common approaches to sales forecasting. None are completely right or wrong, but a given organization may need to apply more than one method to increase their accuracy.
1. Weighted Funnel
The Weighted Funnel is used when organizations have no way of knowing with 100% certainty when a sale will close. Therefore, a sales rep selects deals that are supposed to close within a specific timeframe and have a particular value. A “win probability” is used to create a weighted value.
The Pitfalls:
The close dates are often guesses and missing the close date by just a few days can result in missing the forecast by thousands or even millions of dollars.
The win probability isn’t determined using any metric that’s related to how the customer makes decisions. Often the win probability is based on the sales stage, such that later stage opportunities automatically have higher win probabilities. However, this can be wildly inaccurate for a given opportunity.
The Fix:
-
Base the win probabilities for each unique opportunity on the confirmed knowledge of the customer’s business issues, their decision criteria, their alternatives/options, and the compelling reason the customer must act.
-
Test the customer’s evaluation and decision timeline and the date they need to commit to determine the close date.
-
Don’t add a sale to the forecast unless it has a win probability of 35% to 50% and the decision timeline has been validated.
2. Rep Generated Forecast
This is the most common forecasting method, but it’s hard to manage. Typically, with this approach, each sales person provides their manager with a number they will “commit” to closing in the current period. Often times, they are also expected to provide an “upside” and/or “best case” number that represents what they may achieve if things go their way.
The Pitfalls
There are three perspectives to consider when sales forecasting: The sales rep, the sales manager, and the customer. Which one of these is usually left out of the forecasting discussion? If you said the customer, you’re exactly right. Too often, forecasting problems occur because there is too little consideration given to when and how the customer will make their decision.
Another challenge occurs when the sales rep and the manager aren’t in alignment on the objective of the forecast. The sales reps may think the objective is to provide an accurate forecast and therefore provide numbers they believe they can close in the forecast period. Meanwhile, the sales managers think the objective is to hit the previously established goals and pushes reps to commit to more sales because “it’s unacceptable to forecast failure”.
Finally, sales reps, especially those who are NOT achieving their objectives, can be notoriously optimistic. Meanwhile, some star performers can be well accomplished sand baggers. The combination requires a level of interpretation from sales managers that borders on divination as they try to balance their experiences against what reps have submitted.
Overtime, these challenges can produce a variety of dysfunctional behaviors and perpetually inaccurate forecasts that often get adjusted down dramatically in the final weeks or days in a given period.
The Fix
-
Reward accuracy in commitments.
-
Solicit input from sales reps using anonymous surveys to boost accuracy, objectivity, and credibility.
3. Mathematical Model
Sales is ultimately a production business. Performance can be predicted, and it can be predicted mathematically using five predictive metrics. The formula is simple: Activity X Proficiency = Sales.
Activity is measured in two ways:
-
The number of NEW opportunities required
-
The number of NEW proposals required
Proficiency is measured by:
-
The proposal ratio: The % of new opportunities converting to proposals
-
The close ratio: The % of proposals that turn into closed sales
-
Average sale value per opportunity
As discussed here, these predictive metrics can be used to create more attainable sales goals, something we refer to as the Sales Success Plan. However, they can also be used to predict future sales results. In order to achieve a given sales target, the appropriate combination of predictive metrics must be achieved. If they are not, the sales target cannot be achieved … mathematically impossible. Put another way, any miss in sales performance will be preceded by a miss in one or more of the predictive metrics.
Using these predictive metrics to generate a forecast can be particularly effective in an environment where we have a very large number of sellers and opportunities as the law of large numbers will ultimately help improve the mathematical accuracy of the forecast. This is also helpful in scenarios where the sales cycle is so short that sellers have difficulty delivering a forecast based on defined opportunities as they haven’t even met with some of them yet.
The Pitfalls
Many companies make the calculation too complicated with many variables, and the data set is insufficient.
The Fix
-
Keep it simple. Don’t use too many variables; continuously improve your model as you gather more data.
-
The mathematical model is an excellent choice to pair with another model to ensure forecasting accuracy.
Next Steps
Armed with an understanding of some of the most common approaches to effective, accurate sales forecasting, teams can begin to transform the exercise from one of frustrating fantasy to a consistent and effective business process that improves profitability and efficiency. One final thought if you work for an organization that needs to make this transformation: you are about to align on a change initiative and there are a few keys to making the change stick:
-
Management must align their objectives to the initiative
-
Objectives must be tied to rewards and consequences
-
You must demand data integrity!
Select the forecasting method that meshes with your values. If you value accuracy, the rep-generated method is not a good choice since sales reps tend to overestimate their future performance. Continuously improve whatever method you choose with new data as it is received, then use that data to drive salespeople and managers to better results. With the correct approach, you can develop more accurate forecasts with less overall effort.
Want help creating more accurate forecasts and better sales performance? Axiom provides a unique alternative to traditional sales training. Unlike traditional sales training events,we embed our methodologyinto your sales cadence, delivering dramatically better results. To learn more about our Mindful Selling Methodology, Kinetics Sales Effectiveness Platform, or our unique, guaranteed approach, please visit us at www.axiomsaleskinetics.com.
Add a Comment