If there were some magical way to predict swings in sales fortune, you might imagine that sales people and sales managers would take advantage of it. After all, according to most of the sales managers I meet, sales people’s forecasts are rarely better than 50% accurate. Sales forecasts provide important information regardless of how accurate they are. In some businesses, 50% accuracy may be the best that can be achieved. People responsible for supply of the forecasted sales, need some sort of indication that allows them to plan. Some company’s aggregate sales forecasts so that the raw data is available to executives. In others, sales managers interpret the forecasts and use a fudge factor to modify each sales person’s input, before supplying a team forecast to management.
Intuition may be the source of a fudge factor and this may unnerve those executives who thrive on precision, however; a little investigation would reveal that the fudge factor takes into account the sales manager’s knowledge of individual sales people. Paying close attention to a sales person’s forecast, even only for a few months, reveals much information about that person’s style and habits. Fudge factors make allowances for the personality, character, and record of accomplishment of each sales person.
I have found that sales people are reluctant to forecast sales in case they are held to account if they don’ t happen. Because all deals that are expected attract a high level of scrutiny, most sales forecasts show only those opportunities that are virtually certain to happen.
As a rookie, I didn’t understand the vulnerability of showing everything on the forecast and merrily filled it with every possibility. Fortunately, Rapid Recall, the company I sold for then, had a sensible forecasting system. It had an ‘ A’ sheet, which was to show the serious stuff, and a ‘ B’ sheet, that you could use for suspects if you wanted to. My naivety didn’t lead to any difficulties, perhaps because I tended to focus on keeping the forecast full of opportunities. In effect, I used the forecast to manage my pipeline.
The magical monitor is a simple way to use the same principles that sales managers use, consciously or otherwise, to come up with fudge factors. At Silicon graphics, my teams forecast sometimes represented less than half the business that we needed to reach the quarterly target. An inquisition wasn’t necessary. Based on trends and past results, I knew that we were likely to make the numbers and forecasted accordingly. I used this approach with good results for seven years at the company.
Putting the magical monitor to work requires a few numbers that you should have easy access to.
First, find out your average order value. All that you need do is divide your total order value for the previous measurement period by the number of orders taken. You can do this as a sales manager or as a sales person. If you are new to the job, you won’ t have any team or personal records to base it on. Call on your accounts department and ask them for the company average. If this isn’t representative, ask for their help to work out a sensible number, just to begin with. Next, divide your target for the next measurement period by your historic average order value. This will tell you approximately, how many orders you must win to achieve your target in the future.
To make the magical monitor work you need another vital piece of information – your conversion rate. Knowing how many suspects, leads, and prospects it takes to win an order gives you the power to look into the future. It is no use guesstimating your conversion rate. For accuracy, you must measure your average over a period. If you don’ t have enough history in your current role, measure the average for the company or your team and begin with that. Count the number of leads that were awaiting follow up at the beginning of each period. Of those leads, count how many became prospects and how many turned into orders. Calculate the ratio for prospects and orders. Make sure you use your definition of a prospect consistently. You should end up with three ratios – one for leads to prospects, one for leads to orders, and one for prospects to orders. For example, leads to orders might be 1:12. This would mean that you need twelve leads to get one order. Prospects to orders may be 1:3. This would mean that you need three prospects, on average, for every order that you need to win. For this example, your lead to prospect ratio is 1:4. Working out your current conversion ratio accurately, is the most difficult part. Once you have numbers to work with, it takes only a few minutes each week or month to collect the new information and update your ratios. All you need is the number of new leads, the number of new prospects, and the number of orders since you last updated your measurements.
It is worth the effort. Armed with your ratios and average order value, you can predict your future performance as far ahead as your average sales cycle. If your prediction indicates that you will fall short of your target, you can identify your vulnerability early, in time to do something about it. Perhaps you don’t have enough leads or prospects to reach your target. It may be that your conversion ratio has slipped. Your numbers will reveal the reason and your will have time to take corrective action.
We call this approach to forecasting, pipeline management. It puts you in control of your results. You will still need a sales forecast that identifies the specific opportunities however; you won’ t be so vulnerable to the uncertainties inherent in predicting individual sales.
This is a simple and effective idea. As ever, action is the key to taking advantage of it. Oliver Cromwell put it this way, “Make the iron hot by striking it”.
If you want to predict the future, find a prophet. To make your future, face the reality of your present.
Questions and comments to Clive Miller
Telephone +44 (0)118 933 1357
www.salessense.co.uk for free ideas to increase business