Let's run it back with forecasting

Part 3 of 3

Apparently there’s going to be an ArkStorm here in Los Angeles. The last two years have been filled with tons of rain. More rainfall than I can remember in my lifetime. So if the RAINpocalypse comes to fruition and you don’t hear from me. It’s because I’ve been swept away by a 1,000 year storm.

People joke that Angelenos (people from Los Angeles if you’ve never heard the term) can’t handle the rain. It’s true actually.

So instead of forecasting rain, let’s talk about sales forecasting! It’s time to wrap up our three part series. This week we'll go through #13 - 17.

As a reminder here are the 17 questions:

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Forecasting Considerations

1. How often do you forecast? Daily? Weekly? Monthly?

2. Do you use a weighted forecast?

3. If you do, what do you weight on? (Stage, forecast category, other)

4. Do you snapshot your call each week?

5. Do you use a roll-up forecast? (Each rep makes a call and you take the sum)

6. Do you allow managers to apply judgment atop the roll-up forecast?

7. Is the judgment typically a haircut or a bump?

8. Do you send a pre-communication to improve deal hygiene heading into the forecast?

9. If so, how many business days do you grant?

10. Do you have a team standard for hygiene quality?

11. If so, tell me more.

12. Do you "lock" or "snapshot" the forecast or allow a living, breathing data input for forecast?

The questions crossed out were discussed in these articles

Let's run it back with forecasting

Let's run it back with forecasting

13. Do you a Big Deals Forecast?

14. Are the big deals removed from the normal forecast?

15. Do you provide insights to your stakeholders before going into the forecast call?

16. Do you provide questions-to-consider for your stakeholders before going into the forecast call?

17. If your sales leader is out, do you run the forecast in their absence?

Awesome let’s finish these series up!

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13. Do you a Big Deals Forecast?

The flaws of Pipeline Coverage Ratios

Ask any sales manager what their preferred Pipeline Coverage Ratio (PCR) is and they’ll likely respond with 3x. In fact, here are some notes I took from a well known Venture Capitalist when discussing what growth stage funds will typically ask to see during due diligence below. I highlight #10 because it underscores the importance of pipeline.

1. Quarterly ARR ramp (beginning ARR, new ARR, expansion ARR, churned ARR, ending ARR)

2. Quarterly customer ramp (beg. logos, new logos, churned logos, ending logos)

3. Cohort data by customer count and $ spent, to get to 12-month gross dollar retention and net

4. Dollar retention + reasons for churn and mechanisms for expansion

5. Engagement figures - number of paying seats, number of engaged users, cadence of engagement (Daily/Monthly/Weekly Active users or DAU/MAU or WAU/MAU ratios)

6. Go-to-market efficiency: gross-margin burdened paybacks, CAC Ratio or Magic Number, ultimately all of these lead to payback in months.

7. Sales funnel: how leads are generated converted to paying users & annual/multi-year contracts

8. Go-to-market org: Number of quota-carrying reps, quotas, on-target earnings (OTE), time to ramp, historical quota attainment by rep.

9. General cash efficiency. How much is the company burning to add $1 of net new ARR.

10. Pipeline: probability-weighted and unweighted pipeline + qualitatively understanding sale cycle, conversion of bookings to ARR to cash + decision-making process for the buyer

11. Historical win-loss data, reasons for losing (e.g., no budget, internal development, lost to competitor X, Y, Z)

Now there are a few BIG flaws in pipeline coverage ratio.

Time changes PCR

The first is that it should become less important as you get to weeks 7 and beyond. Entering the quarter you absolutely want to have sufficient pipeline that when weighted should match every previous quarter where you reached or exceeded target. If your weighted pipeline is at 1x target then you’re in solid shape.

Opportunities reflect Seller Hope more than Buyer Intention

Believe it or not. What the sales reps enter into CRM might not reflect reality. Gasp!

For example consider the following situations:

• Deals with zero or few contacts but already in proposal or negotiation

• Company has no sales playbook for sales reps to follow. Sales stages are left to the eye of the beholder

• There is no such thing as deal hygiene. Sales reps do not fill out Next Steps.

So what to do with a pipeline suffering from any of these three? Reps will talk about, and only discuss, the deals that make them look good. In fact, they may even talk about a bad deal in a good light to take the heat of management inspection off them.

Seller hope in this case may exceed buyer intention. Forecasters beware!

Deal Value may not be actually reflected

Have you ever seen this magical creature called the Forever Shrinking Deal? He often starts off as a GIANT! Then as the deal matures from a baby monster to an adult it starts to lose its baby fat. Ultimately a $300,000 deal ends up closing for $75,000. Have ever you seen it before? It’s a sight to behold. Truly.

Deal values in the CRM without proper guidance will showcase extreme examples of value shrinkage. Revenue Operations professionals will typically take a “stage weighted” approach to forecasting. But what about taking the additional step of anticipating shrinkage?

There are obvious solutions to this but you can see where I’m going with the difficulty in forecasting.

Segments blended together may obscure the normal distribution of your deals. Outliers can throw your coverage ratio off

This is where Big Deals come into play. Imagine you have a sales team that’s not exactly well segmented. The following situations may occur:

• “Enterprise” reps have SMB deals in their pipeline

• “SMB” reps have “Enterprise” deals in their pipeline

This is a massive no no. Segment the business!

Even when you do segment appropriately a sales rep may have one or two MASSIVE deals in their pipeline. Simply taking a stage weighted approach could be a seriously flaws approach to your forecast. These deals are big swings. They will either come in or they won’t.

And you will not have the buffer of multiple, similarly sized deals to soften the blow if they don’t come in. The law of averages will not help you here. In a world or normally distributed deals if you had 30 deals and forecasted 10 to win it doesn’t matter which deals win because you can reliably predict that 10 deals will come in.

In a world of 1 or 2 bluebirds you don’t have that luxury. A reasonable modus operandi is to separately review these deals and consider them “upside”. Instead of a bread and butter exercise, they become icing on the cake.

I can't tell you how many times I've seen sales managers hope and pray that this one whale of a deal would come in to save the quarter.

Hope is great but it can also be a dangerous game to play.

14. Are the big deals removed from the normal forecast?

The weekly forecast tends to myopically focus on the big deals and the deals marked as committed. You know a forecast is going off the rails when the center of gravity shifts to the Big One. A ruinous one hour forecast plays out like this:

• Five minutes of shooting the breeze

• Forty minutes on the largest deals

• Fifteen minutes of really really fast talk through the deals that look-and-feel like the typical deal

Instead, how about treating the Big One as any normal deal. Give it the same amount of airtime as any other deal. Then carve out a separate operating rhythm to discuss the large deals. The focus here is not to “weight” the deal. Instead the conversations shifts to a more strategic track:

• Does our product meet their needs? Do we pull in product into the conversation?

• If they become a customer, how many of our customer success and engineering resources will be pulled in to service this one customer? How much of a “TAX” is this one customer going to be?

• Do we need Executive Sponsorship? With such a high profile logo that could become a customer, is their use case a standard run of the mill customer? Or are they thinking bigger? Give the customer the confidence that where your business is headed aligns with the type of partner they're looking to get in the trenches with.

• Deals of this size typically have complicated buying committees. Multiple people on that committee may have competing priorities. How do you get a Team of Rivals to work together? To agree?

By running a big deals cadence you allow for greater opportunity to remove risk in the deal. They say that selling is a team sport and I believe that too.

I'll go through 15-17 for paid members.

15. Do you provide insights to your stakeholders before going into the forecast call?

16. Do you provide questions-to-consider for your stakeholders before going into the forecast call?

17. If your sales leader is out, do you run the forecast in their absence?

But first…

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