Looking for a blanket, one-size-fits-all approach to sales forecasting? Bad news: there isn’t one – in fact, there are many types of sales forecasting methods that Sales VPs can opt to use. Some produce more accurate results than others, and it’s on you to choose the right type of sales forecasting method that works for your company.
But how can you make that choice?
We’re here to help! We’re breaking down two methods of data-backed sales forecasts – and choosing to ignore the sales rep intuition-based finger-in-the-win method that just isn’t accurate – to help you figure out which is right for you.
Read on to learn the differences between pipeline sales forecasting (represented by the purple dotted line below) and historical sales forecasting (represented by the dotted green line below).
(For more detailed information about sales forecasting, check out our FREE eBook: The Definitive Guide to Data-Driven Sales Forecasting.)
Pipeline-based Sales Forecast
This is a “bottoms-up” approach, taking into account the opportunities you have in your sales pipeline; after all, you can’t close opportunities that don’t exist or ones that your team isn’t working on. The way this sales forecasting method works is to go through your entire sales pipeline, opportunity by opportunity, and calculating that chance to chose.
How does it calculate that chance to close? By looking at mitigating factors and variables that play into the likelihood of an opportunity closing – for instance, opportunity valueage in stage, and effort expended on each opportunity. Your company might have found its sweet spot of opportunities to sell to; worth between $5,000 and $10,000, with a sales cycle of 15 days, for example. Opportunities that are larger or older than that will close at a much lower rate, which this forecasting method will take into consideration.
This forecasting method then rolls that data “up” to give you your monthly or quarterly forecast, based solely on the opportunities that are you in your sales pipeline at that given time period. This method totally ignores what your historical pattern is; if you’ve been on a steady month-over-month upward trajectory for the past 11 months, but suffered a sudden drop-off in pipeline, this forecasting method isn’t just going to continue that historical trajectory.
Use this forecasting method if… you have lots of variance in your sales pipeline. Some months your prospecting reps do a much better job of keeping the pipeline filled than other months. You don’t have very much consistency month-to-month on how much pipeline you generate.
Do NOT use this forecasting method if… your overall data hygiene is poor and sloppy. If you can’t get your reps to enter quality data into your Salesforce.com CRM – on fields such as close date and opportunity value – that poor data will throw your pipeline forecasting method totally out of wack.
Historical-based Sales Forecast
This is a “top-down” approach, using a regression that draws a sloped line across the top of your last 12 months of bookings to figure out how much the next month will be. If you’ve been on a consistent upward trajectory over the past year, your next month’s forecast will reflect this steady increase.
This method totally ignores how much is actually in your sales pipeline. It is merely looking at historical trends, and then plotting the next data point on this trendline. For larger companies who are merely “keeping the machine running” and have general steadiness month-over-month, this is a good method to use.[contentblock id=98 img=gcb.png]
However, companies can have a lot of natural variability in their monthly bookings. In our customers, for example, these companies have an average of 37% variation from month to month, with some as high as 92% variability. In that case, historical-based sales forecasting might not be the best choice.
Use this method if… you have limited variance month to month. Additionally, if – for the life of you – you can never get your sales reps to enter consistent data and keep that information clean, this method will be more accurate and give you fewer headaches.
Do NOT use this method if… your monthly bookings looks a little something like this example below, with lots of spikes, peaks and valleys and no real consistency.
Either method, if done right, can get you to single-digit sales forecasting accuracy. With either clean pipeline data or consistent historical performances, you can accurately predict how much business you will close each month or quarter. Now, which of these sales forecasting methods sounds like the right one for you?[contentblock id=18 img=html.png]