Blog Should you really decompose closing probabilities?

Let us start with a time-tested quote:

“Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” (Who wrote this? Click here for an answer.)

Practical sales consultants often recommend the use of decomposed probabilities to weigh sales pipelines:

P_closing = P_project x P_supplier

with

P_closing the probability that your opportunity will close

P_project the probability that your prospect will complete the corresponding project

P_supplier the (conditional) probability that you will be the preferred supplier for this project

Suppose for example that you are Eurofighter trying to sell Typhoons to India. Your closing probability depends on the probability that India will actually shed $10B for new fighter jets, and if it does, on the probability that it will prefer Typhoons to Rafales. [...]

B2B sales forecasting often involves the discussion of sales scenarios: “best case”, “commit”, “low case”… That is a good practice, as scenario analysis can bring notable benefits to sales management.

• It bypasses the notoriously difficult assessment of closing probabilities: Forecasts solely based on judgmental amounts, closing dates and closing probabilities are not reliable, with closing probabilities a prime culprit, since humans are so bad at quantifying uncertainty.
• It protects your forecasts against the elephants in your sales pipeline: It is easier to build various progress scenarios than to guess a single closing date and probability for the large opportunities in your pipeline.
• It links sales forecasting to contingency planning: Building scenarios is naturally conducive to discussing resource constraints, technological challenges, competitive pressure… Scenario analysis also encourages a dispassionate discussion of bad news – you are not Forecasting, you are playing with possibilities.

So wasting such a nice sales management tool would be a pity. Here are four items to keep in mind when building sales scenarios. [...]

The importance of the time factor is one of the main singularities of B2B sales forecasting:

• Sales processes are lengthy and divided into many stages
• The fiscal year itself is divided into reporting periods (e.g. quarters)
• Rep compensation is usually linked to both the sales process and the reporting period
• Sales are discrete (i.e. revenue comes in chunks), not continuous

As a consequence, bad closing dates can have a far greater impact on B2B sales forecasts than mistaken opportunity amounts.
To understand how, let us take the following example:

• Today’s date: 7 March 2012
• Opportunity amount: $100K
• Closing date: 15 June 2012 (100 days from now)

A 20% forecasting error on the amount means that you will miss your forecast for Q2 2012 by $20K. The same percentage error on the closing date means that you will close this opportunity on 5 July 2012 and miss your forecast by $100K! Imagine the impact of similar errors scattered across your entire sales pipeline…

Avoiding the time trap

Fortunately, there are a number of ways to ensure that closing dates are realistic.
 

1. Hunt expired closing dates out

It is surprising how often sales pipelines contain opportunities whose closing date has passed. [...]

Optimizing sales is a daily goal for all companies, from small start-ups to listed giants.

There are, however, 3 development stages in sales optimization:

• Storing data in Excel and Outlook.
• Moving from spreadsheets and emails to proper CRM software.
• Using CRM software not just as a database, but as an analytical and forecasting tool for the sales and marketing cycle.

Progress shouldn’t stop once the third stage is reached. Here are 3 suggestions to continue improving.

1. Keep your sales and marketing data fresh

Without up-to-date sales information, the dynamic analysis of your sales pipeline is difficult, and your sales forecasts are tainted.

This imperative has two main implications: [...]

Many companies organize their sales management around the weekly pipeline review: two hours (sometimes more…) dedicated by the sales team to the examination of live opportunities – often on the basis of reports generated by a CRM software.

 
The risk of this compulsary figure of sales management is that in reviewing each opportunity individually, the sales team loses its view of the pipeline’s general balance.

 
This will often translate into an unwarranted commitment to problem opportunities. Here is why.

• We all have a well-known psychological trait known as loss aversion. On average, to “psychologically” compensate for a loss, we need a gain that is 2 to 2.5 times greater.
• This trait is accentuated by what psychologist and economist Daniel Kahneman calls the “isolation error”: the tendency to worry about every individual risk factor without realizing that these factors can neutralize each other.
• And yet for a sales representative, what loss could be crueller, and what risk could be greater than to abandon an opportunity before the prospect has formally declined it?

We therefore wanted to suggest two tricks that may help your sales team overcome its fear of loss and rid its pipeline of the problem opportunities that suck-up resources with little chances of payback.

• Take some time to rethink your pipeline in its entirety, as if it were an investment portfolio. Selling one asset at a loss is painful but allows you to reinvest the proceeds into a more promising one…
• Remind yourself that a sales prospect that prematurely exits your sales pipeline is not completely lost: it is simply recycled to the marketing stage. You must plan specific marketing campaigns for this type of prospect.

 
Good luck!

Sales forecasts based on the judgment of sales reps have a bad press. However, behavioral economics and decision theory offer various suggestions to improve this judgment, and thus obtain better forecasts – well accepted by sales reps and directly integrated into your sales process.

 
This does not apply to companies with large sales volumes, structured and computerized value chains, and stable and significant market shares: traditional quantitative methods of sales forecasting are made for them. Such methods are well documented and supported by a large range of tools, from Excel plugins to specialised software.

 
But for other companies – read: most companies – sales forecasts are often very lightweight. The reason is clear: lacking the time series required by quantitative techniques, their sales forecasts rely heavily on the judgment of sales reps (hence the name “judgmental forecasting”). [...]

One of the founding principles of SalesClic is that sales dashboards don’t work. Sure, modern CRM tools let you build sophisticated reports, tables and charts.

But past the first weeks of enthusiasm, most companies discover an inconvenient truth: nobody ever looks at these dashboards, least of all the populations directly concerned – sales reps and managers.

The red dots

We believe in real-time, in-context, actionable insights. We are therefore very happy to introduce an exciting new feature in SalesClic – red dots on the opportunity tiles.

Starting this Wednesday, these red dots will signal in your SalesClic pipeline the opportunities whose close date has passed. (We describe the other elements of the upgrade in this article.) [...]