Why your sales forecasts are wrong (and what to do about it)
Lucid Content Team
Reading time: about 6 min
“Prediction is very difficult, especially if it's about the future.”
—Nils Bohr, physicist and Nobel laureate
When you’re in sales leadership, delivering a sales forecast to your executive team, VC investors, or company shareholders is nothing new. Yet, the most predictable aspect of the typical sales forecast is how wildly inaccurate and off-the-mark they can actually be.
Case in point: Warby Parker famously disrupted the eyeglass industry, but not without a few missteps. Their initial $45 price tag per pair was deemed “too low” to be considered credible by consumers. Upon launch, they forecasted that e-commerce would comprise 10% to 20% of the eyeglass market. Seven years later, that market share was around 3%.
Yet, their faith that retail stores would boost profits rather than cannibalize online sales ultimately paid off. Those outlets have now increased annual revenues by roughly 50%.
Whether based on current industry trends, perceived market share, or the existing sales pipeline, sales forecasts are meant to predict what will happen (not what you hope will happen). Given the difficulty of making sales forecasts, are they really worth the bother?
The short answer is yes. And here’s why.
The importance of sales forecasting
Why are sales forecasts important? Despite the inherent challenges in producing them, B2B companies often find sales forecasts particularly valuable when it comes to arriving at more informed, introspective, and strategic decisions about their sales methodology.
Sales forecasts can take many forms. Some are based solely on projected unit sales in a given timeframe. Others take indirect cost variables like marketing spend into account.
In his book, Cracking the Sales Management Code, sales guru Jason Jordan reveals that 85% of B2B companies frame sales forecasts around their pipeline of opportunities, the stage they’re at in the sales process, and their likelihood of closing in the future.
Still, 74% of those companies want sales forecasts based on something more accurate; a valid concern as independent research indicates 60% of forecasted deals never close.
Before discussing how to improve forecasts, let’s look at why so many are inaccurate.
Why your sales forecasts are inaccurate (and how to improve them)
In today’s interconnected, data-driven world, sales leaders are under constant pressure to provide specifics on how they’ll achieve their quarterly numbers or bring in additional revenue. In response, sales forecasts can quickly become inflated and overly optimistic.
Some other reasons for inaccuracy decidedly fall under the category of human error.
Tracking the deal
According to a recent sales operations optimization study by CSO Insights, many of the barriers to accurate sales forecasting involve how sales professionals fail to review their sales pipeline in a consistent manner with one another. Some of those barriers include:
- Salespeople being too subjective about their close possibilities
- Managers failing to investigate salespeople’s commits closely
- Fear of telling the truth about the quality of current opportunities
- Counting unqualified opportunities to boost a pipeline’s volume
One method for improving your sales forecasting accuracy is to institute a standardized exit criterion at each stage in the sales pipeline. For example, before moving from lead nurturing to marketing qualified lead, a lead’s likelihood to close can be measured by:
- The presence of an existing need your solution can solve
- Their willingness to offer more contact information/details
- Their ability to authorize decisions (or to identify who can)
It’s also important to know how much your prospect is likely to spend or budget toward your solution, giving your team an accurate starting point to prepare bids or proposals.
As a lead’s status changes throughout the pipeline, sales professionals must proactively track those changes. Failure to do so can misdirect a team’s sales forecasts by perpetuating false assumptions about the actual progress of their leads becoming sales.
Leveraging account maps
Adding to the confusion is the complex reality of most B2B sales. They are the result of not one, but several decision makers. Bigger deals require a consensus of informed buyers.
In those situations, account maps are a great solution. They give sales leaders and their teams a brief but helpful overview of where their organization’s deals stand at any given moment. Building these account maps in Lucidchart goes beyond the typical org chart.
Even if your CRM holds account information valuable for sales forecasting, it’s not always organized or readily identifiable. That’s where account maps can fill in the gaps. Account maps:
- Underscore critical relationships and where introductions can be made.
- Outline shared initiatives.
- Show how many people a rep has interacted with on each account.
With an in-depth understanding of the inner workings of any deal, sales reps are able to forecast with greater accuracy and confidence. Account maps also give sales leaders a basis to fact check and to quickly ascertain the veracity of a sales rep’s forecasting claims.
For example, if the account map only displays two or three interactions between a sales rep and a potential customer, the probability of the deal closing this quarter is less likely. But, if there’s evidence of more activity on the account, the likelihood to close is greater.
In fact, the common thread to almost all sales forecasting inaccuracies is the inability for sales reps to recognize (and rank) the accounts in their pipeline with the most potential.
While no sales forecasting technique is perfect, reducing the margin of error is possible with greater reliance on historical data. It’s reasonable to assume that results achieved in an upcoming quarter or year will bear equal (if not greater) results than in those past.
Of course, factors such as inflation, buyer demand, and product changes can impact such forecasts in myriad ways.
Building a sales cadence
When analyzing why some deals were won and others lost, there is always a pattern of emails, calls, meetings, and other interactions that contributed to the desired outcome.
Attempts to make those efforts repeatable (and, therefore, more predictable) build a sales cadence. A sales cadence is a systematic framework of actions for sales reps to follow for guiding a prospect along their organization’s unique sales pipeline.
A sales cadence will include:
- The number of attempts a sales rep should make to contact a lead
- The media channels and content proven effective for engaging leads
- The average time a sales rep should expect to invest to close a deal
- The amount of contact attempts to make and the space between them
A study of 8,000 companies indicated that an optimal sales cadence could improve the financial results of a business by as much as 110%. In turn, the improved performance and reliability of a sales team’s output can go a long way to increasing its predictability.
To some extent, sales forecasting will always be more of an educated guess and never an exact science. Fittingly, sales leaders should remain realistic about their expectations, looking to the sales forecast as more of a plan than a concrete prediction.
Nonetheless, sales forecasting is a valuable and necessary tool for helping companies better manage resources, make bold decisions, and address unforeseen challenges.
Now it's time to get sales forecasting right. Learn how with our quick guide.Read now
Lucidchart, a cloud-based intelligent diagramming application, is a core component of Lucid Software's Visual Collaboration Suite. This intuitive, cloud-based solution empowers teams to collaborate in real-time to build flowcharts, mockups, UML diagrams, customer journey maps, and more. Lucidchart propels teams forward to build the future faster. Lucid is proud to serve top businesses around the world, including customers such as Google, GE, and NBC Universal, and 99% of the Fortune 500. Lucid partners with industry leaders, including Google, Atlassian, and Microsoft. Since its founding, Lucid has received numerous awards for its products, business, and workplace culture. For more information, visit lucidchart.com.