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| Sales Forecast |
How’s your sales forecast working out lately? Disappointing, probably. They usually do.
Thinking of the complexity involved in making a sales projection, it isn’t surprising really. Is it?
Somebody has to take a view, which means make a guess, albeit hopefully an educated one. – That particular customer will sign an order for this product, at this price, before that date.
Three variables, most likely independent of each other. That’s a probability of getting it wrong, to the power of three. The hard working sales manager can be 100% right with two of the factors, but is still 100% wrong without getting the third one right, as well.
There is no way of getting sales forecasts right. Right is what happened, whereas might is what’s going to happen. But there are ways of making that might more accurate. And they also help in explaining to the CEO how any individual forecast went wrong. We’ll explain those a little later, but first we should reprise what usually happens now.
Traditionally sales managers use what they describe as a confidence factor to adjust each likely sales value to reflect a percentage probability the deal won’t come in.
For example, Joe is working on a $10k sale he’s hoping to close this quarter, but he has some concerns. The competition is strong, and the buyer can be hard to reach. The sales manager asks Joe how confident he is that the deal will happen. Only 50/50 says Joe.
The sales manager takes that 50/50 and uses it as 50% confidence (or probability), applying that to the forecast sales value of $10k gives him a figure of $5k. That’s what the sales manager describes as his weighted probability.
In terms of each individual sale this weighted probability calculation is pretty meaningless – the deal is either 100% or 0%, with nothing in the middle. But in terms of a basket of opportunities, the weighted probability does have some value, as the total of all the adjusted sales values is aggregated for the team. If the total value of all the forecast sales is $100k, and the total of the weighted probabilities is $40k, the second number is much more reliable than the first, of course.
Whilst using the confidence factor to adjust the total sales values will improve the accuracy, there is one very serious flaw in the theory, which you will have spotted.
The confidence factor as expressed by the sales rep is subjective, and totally dependent on the attitude of the one doing the selling. There’s no way of getting any consistency for the same rep from deal to deal, let alone between sales reps. That’s bad enough. Joe’s 50% is pretty solid whereas Ben is a much more optimistic sort. His 75% would be a 40% if it were Joe’s deal.
The total sales forecast is still a guess, albeit a slightly more considered guess.
It’s also very easy to manipulate. When the CEO starts pushing for a higher forecast, its awfully easy for the sales manager to tweak the confidence factors. Just change it from 50% to 70% on $100k deals and the forecast goes up by $20k.
As if by magic 🙂
But of course the sale is no more likely and the sales forecast is no more accurate. In fact the reverse is true.
That can’t be the end of the story, though. There must be a better way, and there is. We have our own version which we call Sales Probability Process Management, which we’ll explain in another post.
