I read a lot about how other VPs of Sales and sales executives at SaaS companies have struggled with accuracy in sales forecasting. And every time I see that I wonder how they run forecasts.
(For more detailed information about sales forecasting, check out our FREE eBook: The Definitive Guide to Data-Driven Sales Forecasting.)
Most sales organizations typically lean on one of these three methods:
1. They used traditional sales forecasting stages like “Best Case” or “Upside” or “Strong Upside,” which makes me laugh.
I can’t help but wonder how that’s working out for them. This method is purely intuition-based, relying on the subjective gut feelings or judgments of sales reps and sometimes their notorious ‘happy ears’. This doesn’t work well and your accuracy will be very low, not only on the ratio of total dollar amount won vs. forecast but especially on the exact deal forecasted. This is not accurate sales forecasting.
2. This second approach is a bit more numbers-based.
Here sales managers ascribe percentages to each of the different sales pipeline stages in the sales funnel. Opportunities in the second stage may be given some arbitrary percentage like 30%, those in the third stage may be given a 50%, those in the fourth stage may be 80% likely to close, and so forth. This is better but it’s also a “wolf in sheep’s clothing” method – it looks like a data-driven sales forecasting approach but it really is not. How do you really know if those percentages are accurate? This is not accurate forecasting.
3. The third approach is better than the first two.
In this case sales execs run a regression analysis through historical sales data to track the % win rate of opportunities within each stage in the sales funnel all the way to closed-won over the specific period of time during which the forecast was made. In this example below, for example, opportunities at the Technical Fit stage had a 79% chance of converting. A historical probability is put on each stage, and regressed vs. time to compare to that specific time in that stage. This method is time- and work-intensive, requiring lots of data analysis in Excel but it’s better than arbitrarily placing 50% on one of your middle stages and considering that to be accurate. This third approach is the more accurate and the best of the three, but it’s missing a few key elements that are critical to forecasting best practices.
So if you really want to unlock the secret to accurate sales forecasting, you need two key elements: 1) Inspectability and 2) Clear Sales Process.
What do we mean by “inspectability”?
It means that the exit criteria for every opportunity at every stage is inspectable to show that you can move the opportunity from one stage to the next. You want to inspect that there is validation and confirmation from the prospect and the transition to the next stage is not just an intuition from the sales rep. It must be able to hold up against a Sales VP’s spot checking and scrutiny and, most importantly, a prospect who has validated. This puts the onus on the sales rep. A sales process with inspectable sales pipeline opportunities will lead to more accurate sales forecasts.
What is a clear sales process?
It’s a codification (and constant training and reinforcement to the reps) that shows how an opportunity can progress from one sales funnel stage to the next, all the way to closed-won and that at each stage it must first pass clear exit criteria before going on to the next stage. Each stage has its own defined exit criteria.
- At stage 1, it might be “Prospect confirmed and validated his problem, and has a need to solve the problem.”
- At stage 2, it might be “Prospect confirmed that after our product demo he sees our product can solve his problem and he or she has a timeline for solving this problem.”
- At stage 3, it could be “Prospect confirmed that he has a budget to solve the problem in the stated timeline.”
Of course these are selling stages and not stages of meetings. Thus it may happen that after just a single meeting or phone call your rep could get all these validations afterwards and thus go all the way through to stage three immediately.
So what typically happens in traditional sales forecasting meetings is that most sales managers will ask their reps about a specific opportunity, at which point the rep’s happy ears will perk up and they will say, “Oh yeah, that opportunity is going great. They have a real pain that we can solve and I’ve moved that opp to the next stage. We’ll definitely close within the next few weeks.” But how can you inspect that?
That positive response is enough for most sales managers to carry on…but who really knows if that opportunity has a real need or not? After all, the rep is interested in moving opportunities along, even if it means having a wealth of late-stage opportunities that shouldn’t have been there in the first place. That type of scenario will invariably lead to an inaccurate sales forecast.
To avoid that, your reps need to write an email to a prospect summarizing the call after each call to get validation of what was discussed (and this needs to be done before the opportunity can be progressed to the next stage). After the initial call, the summary email might say something like:
“Hi Mr. Prospect, thank you for your time today. As promised, I just wanted to summarize what we talked about. As we discussed on the phone, you really need to solve your XYZ problem urgently and you felt that our product can solve this problem. I believe you said that you wanted to solve this problem in the next thirty days. You also said that you need to confirm A, B and C about our product before you would decide to buy. As the next step you wanted to have your colleague Joe Smith join us to look at the product demo next Tuesday at 11am. Could you please let me know if I got this right and if there is anything you may need from me before our call next week.”
If you’re either spot checking or inspecting that opportunity for your rep, asking her or him to pull up that email is all the evidence you need that, yes, that opportunity does indeed have a pain that you can solve. With that validation, you can now confidently move the opportunity along to the next stage. Having that type of validation email at each stage will make sure that the opportunity belongs in that right stage. Of course, you don’t have to check every email on every opportunity – the system of checks and balances is enough to correct your reps’ sales process. Additionally, it’s obvious that not every prospect will reply in time or at all, but even having 70% of prospects validate this for your reps, or even 50%, is much better than zero and it creates the necessary discipline for your sales team to put themselves in their prospect’s shoes and be more rigorous in understanding at which stage each opportunity really belongs.
Implementing a clear sales process that requires inspectability of prospect’s validation from stage to stage – one allowing you to check for exit criteria on every pipeline opportunity at each stage – will not only improve the accuracy of your sales forecasts, but also strengthen your whole team’s selling effectiveness.
The benefits to implementing this process are:
Increases the statistical probability of your sales forecasts by ensuring that all opportunities are in the stage that they belong in
Puts your sales reps into the mindset of their potential buyers to get that exit criteria, which will also help them create better bonds
Creates discipline and rigor. Your sales reps know they can’t get by with happy ears – they need validation of the opportunity at every stage.
What you get with that is that each opportunity will be in the correct stage where it belongs and won’t skip stages. Then once you know the % Win Rate from each stage to Closed-Won, then you can apply those to the current opportunities in the sales funnel and get the right expected value. You’ll never need to use the outdated forecasting concept of “Commit” ever again because effectively any opportunity in the last stage (whether you call it Fulfillment or Negotiating Stage or Closing Stage) by design equates to a “Commit” without asking your rep if they are committing or not. No commitments can be guaranteed in sales, as too many unanticipated things can happen out of your control. Having an 80% probability of a win from that stage is better than nothing, giving you the accuracy you ultimately need based on the things you actually had control over during the entire process from the very beginning of when the opportunity entered the sales rep’s pipeline.
Accurate sales forecasting is all about applying a) historical data to opportunities that are in the correct stage plus b) having a clear sales process and c) inspectability of validation by the prospect. Those are the three key elements that result in accurate sales forecasting. It sounds oversimplified but it just works.
How have you typically forecasted your sales? How accurate has it been? We’d love to hear your thoughts and your personal experiences below! Additionally, to get a truly accurate sales forecast – without having to bend over backwards in Excel – give us a try!