How to guarantee a missed forecast

missed_targetThe sales managers I speak with tell me there is only ONE thing worse than not making your revenue target and that’s to forecast that you were going to make your number and then miss it. I am sure most that are reading this will agree. The problem with forecasting however is that most companies look at sales forecast in the macro and use the law of large numbers. The law of large numbers as defined by Wikipedia is a theorem in probability that describes the long-term stability of the mean of a random variable.  Therefore, when we look at a sales pipeline through the law of large numbers we can see why percentages are applied to forecasting.

 
If a VP of Sales commits $10,000,000 of revenue but historically only realizes 50% of that commit, then he weights his forecast accordingly to $5,000,000. Some companies get even more granular in that they apply a percentage to a deal when it is in a certain stage in the sales cycle. 

 
Discovery Stage                       15%     x          $1,000,000      =          $150,000
Qualification Stage                 35%     x          $1,000,000      =          $350,000
Demonstration Stage             45%     x          $1,000,000      =          $450,000
Proof of Concept Stage         70%     x          $1,000,000      =          $700,000
Negotiation Stage                    85%     x          $1,000,000      =          $850,000
Close Stage                            100%   x          $1,000,000      =          $1,000,000
Total Pipeline Value                                                                          $3,500,000

 
If you are using either one of these methods to forecast, then I have some very bad news. When you live by percentages you will die by percentages because no one wins a piece of a deal.

 
To forecast by the law of large numbers means that you are surrendering any insight into why you are going to win or lose a deal. After all, a forecast is merely the sum of every deal predicted to close. Every one of those deals has its own story and should be committed to close based upon the manager’s understanding of that story – not a coin flip. To take that concept even further, forecasting by stage in the sales cycle takes no account of the competitive nature of an opportunity. If you are in the negotiation stage of a deal and have 85% probability of close, wouldn’t your competitor also be in the same stage? You both are not going to get the deal, much less 85% of it.

 
At The Complex Sale, Inc., we recommend having qualitative deal review based upon objective criteria to forecast an opportunity. To view a recorded webinar on these 11 questions – please follow this link: https://www1.gotomeeting.com/register/794796552

Will it close on time?
 Do we know when they can no longer go without a solution?
 Do we know the decision-making process?
 Do we know the approval process?

Will we win?
 Have we linked our solution to solving enterprise-level pain?
 Do the decision-makers acknowledge our differentiation?
 Do we have enough votes of the decision-makers to win?

Will it close for the amount forecasted?
 Have we quantified the value based upon their criteria – not our ROI?
 Do we understand the political risk associated with this decision?

Have we prepared for the political nature of the decision making process?
 Are we anticipating counter-attacks of the competition?
 Are we aligned with powerful people to break a deadlock?
 Have we outlined the steps needed to get the deal signed?

Your confidence in winning should be based upon objective questions like these. The more you can answer “yes,” the more confident you feel that you can win and vice versa.

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