In our last blog post, we identified five key pipeline metrics that you can use to create accurate sales forecasts. Today, we will discuss how two additional concepts, baselines and trends, can allow you to improve forecast accuracy, compare your performance to industry benchmarks, and gain insight into how and where your sales process may require fine tuning.
The techniques we outlined in the Improve Forecast Accuracy with Five Key Pipeline Metrics post are an excellent starting point for leveraging the data contained in your CRM system to project future performance. We concluded by asserting that forecasting is an historical science – the more you look to the past, the better you will become at predicting the future.
In order to best use historical data to improve forecast accuracy, we must first establish baselines that average each metric over some extended time period – typically a year or two. You can do this by asking questions such as:
- What has been the conversion rate, by stage, over the past two years?
- What has been the time-in-stage for a typical opportunity?
- What has been the average deal size?
- How well have opportunities adhered to our top-tier prospect definition?
Establishing baselines for each of the five metrics allows you to understand the fundamentals of your particular pipeline. For example, knowing the lead-to-close conversion rate will allow you to determine how many leads you need flowing into your pipeline in order to produce a given sales result. Similarly, knowing how quickly opportunities flow through the pipeline will help you gauge how quickly you can expect to see sales results from a lead generation campaign.
For the two metrics we said needed to be tracked by stage, conversion rate and velocity, a baseline for each stage will allow you to see where your sales process may require some fine-tuning. For example, if you are seeing a low conversion rate during early stages (i.e., the number of opportunities drop off sharply), it may be an indication that opportunities are being poorly qualified by marketing. If opportunities are spending too much time in later stages, it may indicate that the quoting and contract negotiation processes are too onerous and may require streamlining.
Finally, establishing baselines allows you to compare yourself to industry benchmarks. Knowing how your metrics compare to your competitors (thanks to industry analysts, you’d be amazed how much of this information is available over the Internet) will help you assess your competitive position and know where you may need to make improvements.
Once you have established your baselines, you will also need to understand the trend for each metric. Questions here should include:
- How has the conversion rate changed over the last 8 quarters?
- How has the time-in-stage changed?
- How has the average deal size changed?
- Has our top-tier prospect definition changed and have we incorporated that into our CRM data entry practices (particularly as it relates to what qualified an opportunity to be in a given stage)?
Understanding how your metrics are trending over time, particularly in comparison to industry benchmarks, will give you insight into whether your sales process is improving or in need of need of additional refinement. Knowing how they are trending by stage will help you understand where to focus your fine-tuning efforts and gauge the success of your sales process improvement initiatives. To use our earlier example, improved conversion rates during early stages are a good indication that your lead qualification practices are improving. Reducing the time-in-stage near the end of the sales process will indicate that you’ve successfully streamlined your closing processes.
Trend data can also be used to assess the impact of external events and inform where you might need to make some changes – either to your sales process or your forecasting model. For example, if your conversion rates drop during an economic downturn, you may want to ask marketing to increase lead generation activities and get more opportunities into the pipeline. Similarly, if your time-in-stage goes up during the quoting process, you may want to partner with marketing to develop a strong ROI story that increases prospect urgency by clearly articulating how your product/service will save them money.
Another common use of trend data is to track the seasonality of your business. By looking a how each pipeline metric varies on a quarterly basis, you can vary your forecast formula to accommodate seasonal fluctuations in the business and produce a more accurate forecast. Alternatively, you can use it to build a seasonal spiff/promotion strategy that might smooth out the ups and downs of your business.
As we noted in our previous post, it is important to view the development of your forecasting model as a process and not an event. By establishing clear baselines and then tracking how your pipeline metrics trend over time, this process can move you on a continuous path toward improved forecast accuracy – truly, one of the holy grails of sales management and operations.