Hello there and welcome (or welcome back) to The RevOps Show! A lot is happening this episode as Jess has a new phone number and can’t seem to remember her Twitter handle. (Which by the way if you’re reading this, tweet her @JessDCardenas and ask her if she made it to 2022.) BUT, that’s not what we’re really here to talk about today. Today Doug and Jess are focusing on sales forecasting, a topic that has hot takes and gets Doug riled up.
- [Blog] The Problem with Forecasting: Why Sales Isn't Working Today
- [Advanced Course] How to Update Your Growth Models to Build Predictability & Impact to Your Strategy
- [Blog] 2 Simple Things To Do To Dramatically Increase Your Sales Forecasting Accuracy
- [Book] Thinking in Bets by Annie Duke
What is sales forecasting?
Jess did a lot of research on this topic and got some conflicting information. The one thing that she came across more than anything else was that it was really about being able to predict what sales are going to be for the coming year. And by doing that you could use them to drive your plan for your sales team.
Doug jumps in for a second as sales is one of those words that means many things and wanted to point out that sometimes when people say sales, they mean revenue. So when it comes to sales forecasting the question comes down to what are you forecasting and why? When you think about our sales forecast, ours is not a revenue forecast. Ultimately a sales forecast all depends on what you’re using the forecast for and what you’re forecasting.
Doug is a big believer that every sale should be forecasted. One of the things he is a big fan of is forecasting confidence. For us there’s a 1, 2, 3, 4 & 5. A 1 is 5% confidence, 2 is a 33% confidence, 3 is a 50% confidence, 4 is a 67% confidence, and 5 is a 95% confidence.
For example, say you have a hundred thousand dollar opportunity rated a two, and a hundred thousand dollar opportunity rated a four. Which one do you spend time on? The four. Now say you have a hundred thousand dollar opportunity at a two and a twenty thousand dollar opportunity at a four, which one do you focus on? The two.
When we make a forecast confidence, we’re making a bet (which if you haven’t, you need to read the book Thinking in Bets). By having a rep choose the forecast confidence, you’re making them figure out what the probability is they’ll win the sale. Forecasting is probabilistic, and one mistake that gets made with forecasting is that we treat it deterministically.
What’s the difference between a top down approach vs. a bottom up?
Top down tends to look at total sales/total revenue. Doug would say it’s the most common form of forecasting. With bottom up you look at it on an account by account basis, and this tends to be more around revenue.
Are you a fan of one over the other?
It depends on what you’re doing. To some degree, Doug is a fan of doing both. What you’ll find is when you do top down and you do bottom up, they’ll never add up. What we find is that top down leads to a higher number than bottom up and that helps you to identify what your gap is.
Who should be involved in putting the forecast together?
Again what is the job to be done and what are you forecasting and why? For example, if we’re forecasting capacity for the service team, but also want to predict revenue, does that mean sales should be involved and whoever is running the success team? This might shock some people, but there are businesses out there that actually have real operations, so those who should be involved vary to some degree.
Along the same line, who should be paying attention to it?
The underlying job to be done is going to dictate who should be paying attention.
How much attention should be paid to it?
This is a really hard question. Why are you forecasting, what are you forecasting? Doug feels like he’s on repeat, but in order to figure out the importance you need to have a focal point/a target.
Specifically for Imagine, do we pay attention to our forecast? Yeah, we do. Is it the most important thing? No. Rather we look at it and ask if we’re on or off course. What has to change? What works and what doesn’t work? Do we have the capacity to handle these opportunities?
Taking a look at Imagine’s numbers this past year with our sales forecasting, this is how 2021 turned out:
- 6 opportunities rated 1; we closed none
- 12 opportunities rated 2; we closed one
- 17 opportunities rated 3; we closed 9
- 24 opportunities rated 4; we closed 22
- 9 opportunities rated 5; we closed 9
Looking at this you can see very clearly that if we rated an opportunity a 1 or 2, we weren’t winning. If we rated it a 4 or 5, we are. Doug could look at this and say, what we need to do is lower the 1 and 2 numbers and raise the 4 and 5. Or he could ask why are we rating things a 2 when really they should be a 1?
Ultimately when was the last time you looked at your sales forecasting confidence, and what has changed since the last time you set that confidence? These are questions not many people are asking.
One thing you have to realize is that you have to normalize your forecasting. One reason that companies don’t do this is they’re trying to create artificial performance; they’re trying to create a pressure on reps to drive various behaviors that work in the short term. In some cases, this has a high cost associated with it.
So, if there’s one thing you should take away from this conversation it’s that you need to ask yourself why are you forecasting and what are you forecasting?
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