Just Say No To Weighted Average Sales Forecasting
Any reasonable direct selling process involves establishing a specific set of milestones to help track how far along a prospect is on the path to making a purchase. These usually include one or more of the following steps:
- Lead found/created
- Opportunity qualified
- Prospect visited/contacted
- Product demonstrated/Eval in the hands of the prospect
- Follow-up contact
- Product selected
- Prospect has requisite financial approvals
- Paperwork completed
- Prospect invoiced
- PO/cash in hand
Of course, these steps are specific to what is being sold and what process is used, but steps similar to these can be readily mapped to most direct sales processes. In my view, keeping accurate track of where a prospect is using a tracking process like this, or with milestones that better suit your business, is absolutely critical. Tracking the process with detail is very important for new companies because gathering data about how the product is sold and adopted is critical to future planning and to adjusting the business moving forward. As your business matures, using such a process helps you characterise your sales efforts further, ultimately giving you a more accurate means for predicting your bookings, revenue and cash flow.
It’s easy, though, for this data to be misused or overused. I often see sales organizations map these steps into percentages like this, below, where the right column represents the percentage of completion of the sale.
|Product demonstrated/Eval in the hands of the prospect||40%|
|Prospect has requisite financial approvals||80%|
|PO/cash in hand||100%|
On a superficial level, there’s nothing wrong with this. It simplifies where the company is in the process of closing a sale by mapping the sales progress to a single number that everyone can understand. “We’re 80% along the way to closing a deal with customer” is much easier to understand than, “customer X has his internal financial approvals so we should close soon.”
The problem is that sometimes this simple number morphs into something that it wasn’t intended to be – the probability that the deal will close. 80% along the path to closing is different than having an 80% chance of closing. Even worse, the percentage of completion of the sales process is often used to mathematically calculate the likely booking amount for a particular deal. Say, for example, a prospect has selected your product as the one he/she wants and is getting ready to invest $50K. With the mapping above, you might say that the prospect is 70% along the path to closing. Through the magic of weighted average forecasting you would take the percentage of the sales stage, multiply it by the $50K the prospect is willing to spend and come up with a $35K forecast for that prospect ($50K X 70%).
When stated this way, it sounds absurd that anyone would do this, but itâ€™s done all the time. I frequently sit in board meetings where the Sales VP presents a list of potential customers, their sales stage percentage (from a table similar to that above), the projected bookings from a sale to a particular prospect and a forecast that is the result of multiplying the sales stage percentage by the projected bookings. These numbers are them summed to come up with the quarterly forecast.
Among the myriad of problems that this process presents is that sales just don’t work this way. They are far more binary-like events than the stages of the sales process would indicate. Even at the 80% level, there is fallout. One deal falling out at the 80% level can invalidate the entire forecast, depending on its size. Just as likely, a deal at 20% can come in quickly, similarly invalidating the forecast. Since forecast accuracy is critical, especially in small companies, using a weighted average forecasting methodology is fundamentally flawed.
There are simply too many factors involved to accurately boil down sales forecasting into simple equations. A good, experienced sales person has a gut feel for where a prospect is and the likelihood that he/she will make a buying decision in a given period of time. While a sales stage percentage is a reasonable benchmark for where a prospect stands and is an absolutely critical tool for junior sales people, it is not nearly accurate enough to base the progress of a company on.
Sales people need to be close to their prospects, knowing who the key decision-makers are with a thorough understanding of the purchasing process in the account. Once they have this, they will be able to estimate what deals will come in for how much during any given period with far more accuracy than a simple weighted averaging forecasting tool does. As always, good management and loads of wisdom trump virtually any tool that can be created.