Why Your Sales Forecast Is Disconnected From Reality The forecast methodology used by most companies only works for some companies. Happily, simpler methods matched to your sales process are more reliable.
By Jason Jordan Edited by Dan Bova
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Sales forecasting consumes an enormous amount of management's time, yet new research shows that few organizations are happy with the accuracy of their collective forecasting efforts.
According to the 2013 State of Sales Forecasting Research Report by Ventana, 55 percent of participants disclosed that they are not confident in the accuracy of their sales forecasts, and two-thirds say that they are not satisfied with their current forecasting process.
Does forecasting really have to be this hard and unreliable? Or is there a better way to more accurately predict the future results of a sales force?
Related: 10 Ways to Validate a Sales Forecast
To find out, we at Vantage Point Performance recently turned our research engine toward sales forecasting to shed light on the sources of forecasting failure and to identify best practices that can make forecasting less painful and more accurate. Our first major finding is that most companies use forecasting models that don't fit the way their sales force actually sells.
What Is Your Sales Process?
In our global survey of 62 business-to-business sales forces, we discovered that the forecasting model used by 85 percent of the sales forces falls into the category of "opportunity" or "pipeline" forecasting. In this forecasting model, each opportunity is slotted into a stage of the sales process, then a percentage is applied to the deals in each stage to generate a probability-adjusted revenue prediction.
This multi-stage model builds forecasts using data from four inputs -- dollar amount, stage, probability and close date. This model is certainly appropriate for companies with a long, multi-stage sales process, but different companies sell in different ways.
Maybe your company has a small number of major accounts that provide a continuous flow of deals instead of a discrete collection of multi-stage opportunities. Perhaps your company has thousands of customers providing fragmented revenue, making individual opportunity tracking a gargantuan task. Or perhaps your sales revolve around a high volume of phone calls that result in immediate, on-the-spot sales. In these cases, an opportunity-based forecasting model doesn't align with how your sales team is actually engaging with your customers.
If you're like most sales leaders, you may have sensed this disconnect already. In fact, 74 percent of our survey participants said that they should be basing their forecasts on something other than individual opportunities, yet only 34 percent claim that they are using a forecast method other than opportunity forecasting.
If you're using a traditional, opportunity-based forecasting model and suffer from erratic forecasts, you should consider a different method that more closely reflects the reality of your sales force. Our research revealed that there are at least three other methods of sales forecasting that return better results in certain situations -- account forecasting, territory forecasting and call forecasting.
Related: Creating a Sales Forecast
Account forecasting
If you have highly concentrated revenue from an account that provides a continual stream of deals, you may find it overwhelming to track each individual deal using an opportunity forecasting model. A more manageable method is to forecast at the account level, tracking the overall volume of business coming from the account. Then look for trends that may foretell future sales results.
For instance: is the volume of business growing or shrinking? Are there changes in the account that will increase or decrease demand for your products? By looking at an account in sum, you avoid getting buried by tracking a wave of individual deals.
Territory forecasting
For companies that have hundreds or thousands of smaller accounts, tracking each stage of every deal is also an unmanageable task that will consume a significant amount of sellers' time. The accuracy of anecdotal forecasts decreases when you have a high number of small accounts because the seller must make an immeasurable number of guesses.
In this case, it makes more sense to create a forecast for the territory in aggregate. Are territory sales trending upward or downward? Is the average spend per customer increasing or decreasing? Don't drive yourself crazy tracking individual deals. Forecasting at a higher level makes more sense than chasing discrete opportunities.
Call forecasting
Many salespeople can close a deal in a single customer interaction. In these cases, sellers don't have a multi-stage process to execute. What matters most is the outcome of each individual sales call.
In this case, you might forecast based on the sales call itself. How many calls will a seller make? What is the expected revenue from each call? By examining the sales call, rather than the "opportunity," forecasting is simpler and more accurate.
No doubt, sales forecasting is hard. However, we often make it harder than it should be by using forecasting methods that don't reflect our sales force's reality. Not every salesperson pursues complex, multi-stage deals, so not every salesperson should be forecasting based on a sales pipeline. Depending on the situation, it may make more sense to forecast based on an account, a territory or a collection of transactional sales calls.
If you want better forecasts, there might be a better way. In fact, for 74 percent of you reading this, there probably is.
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