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In Part 1 of Forecasting, we discussed the
importance of providing an accurate forecast, why
we might sometimes knowingly provide something
less than accurate, and the ramifications of doing
so. In this issue, we tackle what constitutes "best"
when it comes to forecasting business.
Most sales people are trained (or not trained) to
simply apply a number or letter when a deal gets to a
certain stage - after the initial conversation, 10%,
after the first meeting, 20% after the presentation,
50%...and so on. I've never liked these methods,
because simple movement through the sales cycle
doesn't necessarily translate into probability of
closing. Many other factors need to be considered in
order to provide an accurate, meaningful, and
actionable forecast. What, then, are those
factors>
There are three elements that need to be considered
when forecasting a piece of business: The likelihood
that the deal will close at all ("Win"),
when you project it to ("Timing"),
and in or near the amount you
project ("Amount"). Let's explore each of these in
turn.
Amount
Likelihood
This is your estimate of how confident you are that
you will win the deal - period - irrespective of the
amount or the timing. Factors you consider in
determining this include:
- Feedback from the prospect ("Love what you've
presented here - best we've seen so far!" or "You
seem to be missing a capability your competitor has")
- The number of competitors and the relative
strength of their offerings in the eyes of the
prospect
- How well you have qualified them (confirmed a
need, budget, the authority to buy, and an urgency
to do so)
- Historically, what percentage of deals at a given
stage eventually close (e.g. of 40 deals that got to a
second meeting, if 32 died after those meetings,
then the Win likelihood today of a given deal
at that stage - all things being equal -
should be 20% (40-32=8; 8/40 = 20%)
- The presence or absence of factors out of your
control (a pending merger, or an adverse legal
judgment)
Timing
Likelihood
You may feel good about a deal, but Management
also wants to know when they can expect -
and
count on - the revenue (cash, actually) from your
deal to show up. They're going to want a high
confidence that your projected close date is
accurate.
Factors you consider in determining Timing include:
- How long is your typical sales cycle, and is this a
typical sale?
- What are the stages of your sales cycle, and how
long do they typically last?
- Are there any extraordinary factors that could
speed up or slow down this deal (exceptionally large
size of deal, or number of committee members; a
customer-imposed deadline)?
Amount
Likelihood
Lastly, you need to project a dollar amount for your
deal. Once you've assembled a quote based on the
prospect's requirements, factors you consider in
refining the Amount include:
- Does your company permit negotiation from list
price?
- If so, how much leeway to you (or your boss)
have?
- How hard - and successfully - do you anticipate
the prospect will negotiate for a better price, or
better
terms?
- Who's the more skilled negotiator - you, or the
prospect?
- Who has more negotiating power in this deal?
- What discounts or current promotions do you
have in place that you may be compelled to offer?
While I've always advocated for reps to report the
quantitative details of each deal - prospect name,
Win likelihood, Projected Close Date, and Projected
Amount - I've also always had them include 3 fields
or
columns of qualitative comments: one each for
Win, Timing, and
Amount. This allows the rep to provide a
more complete and accurate picture than the best
guess numbers can. For example, a
rep projects an 80% likelihood of a deal to close
for $40,000 this month. His comments in each field
or column might be:
Win Likelihood
comments: "Well positioned
with champion and key influencers. Been told we're in
the lead!"
Timing Likelihood
comments: "Could slip to
Feb. Gut tells me it won't but haven't been given
sufficient assurance this has to be done in Jan"
Amount Likelihood
comments: "Pretty solid -
because we're perceived as best solution, don't think
we'll need to budge much, if at all, on $"
As a manager reviewing forecasts with your
reps, these comments provide you with a more
realistic picture of the landscape. It also provides
probing points to explore with them, which often lead
to brainstorming and ways to improve the various
likelihoods. In fact, in working with a client last year,
we applied this discipline and saw this very
phenomenon happen: a significant improvement in
the quality of the forecast, and ideas that helped to
shorten the sales cycle and maintain the forecast
amounts.
One further note for managers: when reviewing
forecasts, in addition to analyzing the numbers and
the comments, you need to develop an intuitive feel
for what looks right (and what doesn't), based on
your own experience.
For example, if a rep submits a forecast with a deal
that looks too optimistic (75% probability to close
this month, it's the twelfth of the month, and the
prospect hasn't even seen a presentation), you need
to push back on him or her to justify that forecast.
ACTION
ITEM
Forecasting has always been, and always will be, an
inexact art. But that doesn't mean there's nothing
we can do to improve the accuracy of the process,
and of the output. Reps,
take a look at your own forecast. Do you feel
comfortable that it gives your manager - and
yourself - a complete picture of each deal? If not,
add the qualitative comments fields I've presented
here. It will not only give management a truer
picture of what's going on, but it may
also help you and your manager discover ways
to improve the odds of closing, closing sooner, and
closing for more. Managers, have your reps
include
these fields in their forecasts, explaining the benefit
to them of doing so. Then use this additional
information to both explore ways of closing deals as
forecast, and to provide your own senior
management with a clearer picture of when funds
can be expected to be available for their use.
Good Selling
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