If you’ve ever carried a sales bag, you know about rolling up a forecast. If you’re hitting your number, it’s the easiest meeting of the week. If you’re missing, you’d probably rather be at the dentist.
Stepping back from the forecasted number itself, let’s first talk about the methods to the madness. Despite the incredibly high amount of time spent on forecasting in nearly all sales organizations, there is very little training for reps or managers on how to actually do it. Instead many companies leave the teams to develop their own forecasting playbook. And until a forecast is missed, few do any due diligence on that approach.
But forecasting shouldn’t be a sausage-making process. Here are three approaches to get it done that sales leaders can use to develop a playbook that will stand up to stress testing.
The most common method of forecast is one that leans on the rep’s gut feel around a deal. Reps in this method get to call their shot on a deal-by-deal basis, and managers are there to serve as a referee and keep them honest. Excelling at this forecasting method shows a strong grasp of the individual opportunities.
Pros: This is the easiest, most common, and quickest to implement forecasting system. Most reps you hire will be familiar with it. You get deal-by-deal specifics (“Is the Acme deal in the forecast still?”) with minimal training. The reps get a forecast they can control, which reps typically like. It does not require depth in systems nor sales methodology. It’s ideal for small pipeline volume (roughly 10 or fewer opportunities) and the really big deals.
Cons: This method is highly subjective. When it’s wrong, it’s hard to pin-point why or to do anything that will prevent it from happening again. And it’s often wrong. Additionally, different reps have different tendencies: some have happy ears and thing everything will close while others are pessimistic until the contract is signed. Managers need to know each rep well to understand how to adjust their forecast accordingly, a process that will take a few iterations. So while it’s quick to get started, it will take a very long time to perfect.
Assign a likelihood of closing the deal based on its opportunity stage. The later the stage, the higher the chances of winning. This puts the focus of the forecasting exercise on understanding where the buyer is in their journey. Excelling at this forecasting method shows a strong grasp of the sales process.
Pros: This method is much more quantitative than the deal-based approach, but still allows reps to control the outcome since they control the stage of an opportunity. Once setup, it’s quick and easy to run. If the percentage chances of winning are assigned based on historic values and updated quarterly, this is likely to be a very accurate forecast.
Cons: To forecast this way, an organization needs to have a solid sales methodology. The entire team needs to be focused on the buyer’s journey. Stages need to have clear, auditable entrance and exit criteria which define what moves an opportunity to Stage X. For example, to be in “Propose and Negotiate” the customer must have requested a quote and agreed the tool solves the pain point they have, and the rep must have identified the economic buyer. The method is based on the idea that a deal in a certain stage is going to perform like (i.e. have the same win rate as) all the other deals in that stage, so homogeneity is key. This requires strong process adherence, or you’re actually just doing a concealed deal-based forecast.
Bottoms-Up Model Forecast
Marketing generates leads, which are converted to opportunities, which are won as deals with an average sale price. Re-write that sentence to accurately describe your business, and fill in the numbers to generate this forecast, starting with last month’s actual lead volume. Excelling at this forecasting method shows a strong grasp of your company’s go-to market approach as well as the overall market dynamics.
Pros: Your Finance team or CEO likely already has built one of these, as they probably used it to set your annual number. So why not pressure test it on a more frequent basis to see how it’s matching up to reality? The formulaic forecast doesn’t leave any room for reps to game the system or hide deals. Anyone with access to the data can roll it up any time without bothering the reps (and taking them off the floor). The best part is that it is very linear and mathematical, allowing leaders to explain exactly how they made or missed the number. While it may sound obvious, those answers aren’t always so clear. Having them allows an organization to surgically attack issues that are slowing growth.
Cons: While the science of this method is its greatest strength, it’s also the biggest weakness. Companies spend big money to have sales teams talk to their prospects and gather a lot of great qualitative information, all of which is summarily ignored in this method. Not only can a rep not control the forecast, they don’t even get a vote. This forecast is very disconnected from the battles at hand, and as a result is especially inaccurate in the final stretch of a forecasting period.
It’s worth noting that while these methods are very different, they are not mutually exclusive. You can have art and structure. I personally recommend finding the right balance of deal-based and stage-based for your company, having a structured approach yet allowing for reps to over-ride the system when needed. Then take that forecast and smash it up next to the model forecast, which you can run in the background. How do they compare? Can you explain the differences?
Remember, forecasting isn’t just about calling your shot. It’s about understanding your business so you know what adjustments need to take place to continue driving growth.