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Blindly accepting the intuition-based reports your sales reps deliver each month will lead to very inaccurate sales forecasts. It is a sales management best practice to analyze the key sales metrics that can have a huge impact on forecasting. While many sales managers are tempted to track and measure as many metrics as possible, it is a much more valuable use of time to prioritize and focus on the most important ones that can make the difference in generating an accurate, predictable sales forecast.
Here are the 4 sales metrics that matter most for your sales forecast.
(For more detailed information about sales forecasting, check out our FREE eBook: The Ultimate Guide to Sales Forecasting.)
1. Sales rep metrics
The #1 factor to consider when forecasting is which sales rep owns each opportunity in your forecast. When each of your sales reps gives you their forecast for the following month, you should think about it in the context of their…
Historical win rate – More talented reps will win a higher percentage of deals. A rep whose historical win rate is 55% will win more future deals than a rep whose win rate is 25%. Analyze forecasts from reps with a lower win rates with more scrutiny.
Historical forecast accuracy – For your reps that tend to be a little too optimistic on their forecasts, you should take their forecasts with a grain of salt. Look over their forecasted opportunities: is there a $90,000 opportunity in Stage 1 that is scheduled to close next month when your company’s average opportunity size is $25,000? Do not just take this deal out – have a conversation with your rep about it. See if there are factors that make him or her truly confident it will close next month and it belongs on your forecast. If there is no good reason to believe it will close, it is better to leave it off the forecast.
2. Stage in pipeline
Opportunity stages are important to consider in sales forecasting because the timing of each opportunity can give you clues about whether it will close in the time period of your forecast.
If an opportunity is still in Stage 1 a few days before the end of the month and your average opportunity age is 40 days, chances are it will not close the following month. Do not just remove it from the forecast – ask the rep who owns the opportunity why he or she put that opportunity on the forecast. Who knows, maybe there is a legitimate reason, like the person who reached out to your team has emailed that he needs your product urgently and he wants to close the deal within 2 weeks. You never know unless you have a conversation with your rep.
Remember, you must have a clearly defined sales process and formal definitions of each opportunity stage in the sales funnel in order to have accurate data for opportunity stages.
3. Sales Cycle
How long does it take your typical opportunity to progress through the sales pipeline from the top of the funnel to Closed-Won? Opportunities need to be close to their average age of Closed-Won opportunities for them to fit in your forecast – opportunities that are too young or too old are outliers and may not deserve to be in your forecast.
Take a look at the table below, paying close attention to the far-right column, “Total Days.” You can see that for this fictional company, opportunities that win have a sales cycle of 33.8 days on average, while opportunities that lose spend have an average sales cycle of 80.7 days.
If there are opportunities in this company’s sales forecast that first entered their pipeline on the 30th of October, chances are they are too young to close in the month of November and do not belong in November’s forecast. Opportunities that are 60 days old are likely to be closed-lost and probably do not deserve a place in next month’s forecast. Again, outliers should not automatically be removed from the forecast. Talk to your reps about opportunities in question. Was your contact on vacation for three weeks and that is why the opportunity is so old? Or does he or she keep stalling? Determine from these conversations whether seemingly young or old opportunities belong in your forecast.
The number of close date changes also factors into the opportunity age. Take a look at the correlation between number of close date changes and average win rate. In the graph below, you can see that Closed-Won deals typically see their close dates change between 1-3 times. Once that number hits 4, opportunities are mostly lost.
4. Individual opportunity size
All too often, sales managers focus on average deal size (a.k.a. average sales price) rather than individual deal sizes. While average deal size is good to measure, individual deal size is critical when forecasting.
For example, if your average winning deal value is $10,000 and an opportunity one of your sales reps is working on is for $80,000, talk to that rep about whether that opportunity belongs in your forecast. How likely is this opportunity to close? When is the expected close date? Larger deals have lower close rates and longer sales cycles than smaller deals, so consider whether that $80,000 deal belongs in next month’s forecast.
These are 4 of the most critical sales metrics that will impact the accuracy of your sales forecasts. What sales forecasting metrics do you track at your company?