Play Offense When Predicting Revenue

I got an email today from an exec at a company who I was with at a recent board meeting. I thought it was a powerful summary of part of our discussion, specifically around the sales pipeline for Q4 and overall sales execution. I’ve been in something like 91,293 pipeline reviews in my life and it continues to baffle me that experienced sales execs manage to snow the CEO and the board with “probability weighted sales pipeline.” I hung in there in this case and continued to make my point about playing offense on sales forecasting.

Rather than trying to summarize it, I got permission to just reprint the email. It follows.

One of the larger take aways for me was your insight on our attitude towards how we were predicting revenue. Prior to our meeting, we thought we were doing a good job of predicting revenue. We are working on 10 deals and we explained to you that we thought that 75% of these deals would close within the next 60 days or so.

You asked specifically, “which of those deals would close?”

Our answer, was “we feel confident that each of these deals has a 75% chance of closing”.

You pushed us and asked “which of these 10 deals has a 100% chance of closing?”

Our exec team looked at each other in silence.

We were hard pressed to answer that specific question. We couldn’t answer that question.

The takeaway for me was that we need to take the offense when it comes to predicting revenue. We need to change our mentality from Defense to Offense.

Defense was: Us allowing FATE to play a large factor in whether or not a deal closed. We accepted the fact that 75% of these deals will close, but couldn’t point to WHICH 75%. We were in “wait and see” mode and allowing fate to decide our monthly revenue.

Offense is: We feel good about these 5 specific companies signing and we are going to commit to them closing as a sales team and a company. We are going to keep on top of them, be proactive, and make sure they close. Fate will have VERY LITTLE to do with whether these deals close or not.

It is a subtle adjustment, almost semantic, but one that will make a very large difference in how we act, how we talk, how we think, and ultimately how much revenue we book.

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  • Managing the sales pipeline is critically important – ‘Wait and see’ is a quarter killer. I’ve seen it happen and it has happened to me personally.

    Active, active, active.

  • Yup…snowing…sandbagging…padding…po’s in the drawer….been there back in my corporate years as a sales guy and then a sales manager. Doing just weighted averages is not the best way to project sales. There are so many subtleties because the % given is an objective measure that the sales person gives, and each sales person is different. So you need to factor that in.

    Defensive/Offensive is good way to cohort it, but at the end of the day, it takes continuous weekly reviews and adjustments, because in sales, things can change and will change on a daily basis.

    • Absolutely on the weekly reviews and adjustments – I’ve said that in a few of the previous comments but this company is now sending me their new forecast/upside/pipeline report every Monday after they review it. I expect to see it move around a lot – that’s part of the process!

  • I must admit, I find the reframed statement as meaningless as the first. While it *might* change their behavior, the idea that the new attitude and actions will undeniably affect the outcome is, at best, wishful thinking.

    If the CEO gave me the “offense position” and said, “I feel good about these 5 companies,” my response would be, “Uh… I don’t care how you FEEL, Deepak Chopra. What evidence do you have that these 5 companies will close? Similarly, I don’t care that YOU are going to commit to them closing, since YOU don’t sign the checks at THEIR company, nor do you control the weather, the economy, or the infinite number of other factors that could interfere with your desires.”

    Then I’d add, “If you feel confident about those 5, why waste time on the other 5?” And if the answer is, “Well, we expect to close 2-3 of the ones we’re not as confident about” (which would be honest), I’d say, “Is it fair to say that you might not close 1-3 of the ones you ARE confident about?” If the (again honest) answer is “Yes,” then my response would be, “So, based on your own statistics, your level of confidence is irrelevant.”

    My response to your question, Brad, would have been (if I had the data), “Historically, in a situation similar to this one, 75% of the pending sales will close. We’ve notice that, in the same way a football team can be confident about winning and yet still lose a game (and win the Super Bowl), we cannot predict which of these sales will ‘win,’ and that’s why we approach each one with the greatest resources we can bring to the table… to keep our win rate at 75% over the long-term.”

    As an example, I am currently committed to closing a sale that I felt highly confident about because the CEO of the other company had taken actions to make a life-changing purchase from our us. Unfortunately, in the intervening time and without any consideration of MY feelings or commitment, the company has become embroiled in a highly public scandal which is taking all of their time, capital, and attention. The odds of my closing the deal, regardless of my intention, commitment, or offensive/defensive position, have fallen to next-to-zero. Oh, well… time stop wasting my time beating a dead horse (we tend to hold on too long to losers to which we are committed) and move to the next one. I hear a rumor that there are other fish in the sea.

    • I don’t have a problem with trying to predict a % win rate, but I think it’s a crappy way to manage a sales pipeline. I think you should have three categories for a period of time that is long enough to be interesting, but short enough to be manageable, which for most companies I’m involved in is a quarter (90 days).

      I then prefer to see three categories: (1) Forecast, (2) Upside, and (3) Pipeline. Forecast are the ones you BELIEVE are going to close. Upside are the ones that could close. Pipeline are the ones that are not going to close this quarter but that you are working on.

      Then, you should revisit this list every week. It’s totally fine for something to fall out of Forecast into Upside based on new info, like the example you gave me above. Last week you thought there was a 100% it was going to close (forecast), now you no longer have certainty but there’s still a chance. And, if there’s no way it’ll close this quarter, it should go in Pipeline.

      This helps focus on where you should be putting most of your short term energy (Forecast), some of your short and some of your long term energy (Upside), and the balance of your long term energy (Pipeline).

      I realize this is more nuanced than the email I posted – this was a big part of the discussion in the meeting.

      Giving me a list of 20 companies with $ amounts and saying “historically 75% closed so we think 75% of these will close” is a losing strategy over the long term for managing a sales pipeline, especially since exogenous factors always show up an interfere, the sales organization grows and people have a different understanding of what should be in the category that “75% closes against” means, and it takes focus on the ones you really think, at least for this moment, will close.

      I do strongly agree that one of the common mistakes is to hold on to opportunities too long with false hope they will close. When you segment it into the way I describe and use 90 day (quarterly) measurement points with weekly “reallocation” you pretty quickly get rid of both the ones that aren’t going anywhere, along with the sales people who don’t actually know how to close something.

      • I can understand your rationale for dividing your prospects into categories, and I’m sure the “philosophical” part of the conversation was more nuanced than what we got to see. What would be most interesting is to track the close rate (and value) of the accounts in the different categories, especially the ones “you really think will close.” Any deviation in close rate from random and from the other categories would certainly be interesting to examine. And for any positive deviation, I’m willing to bet that the cause is some set of identifiable factors out of which attitude is the least important among them.

        I could be wrong 😉

        I guess the point I was aiming for is that in addition to holding on to losers for too long, another 2 highly common cognitive biases are: 1) where we think that we have more control over situations than we do, and the related; 2) Where, by not accurately tracking results, we give undo weight to the value of holding certain beliefs or attitudes.

        I know that another thinking error is comparing sports to business, but I’ll do so for a moment knowing that I’m not comparing apples and apples: I’ve surveyed thousands of athletes and asked them if they’ve ever set personal bests on days where they were ill or in some other way not confident in their potential performance. Without exception, the response has been Yes (in fact most people say “Almost every time, that’s how it happens.”).

        Conversely, I’ll ask if they had bad performances on days where they believed they would win, felt good and confident. Again, without exception, the answers have been Yes.

      • This response was bugging me yesterday during the hurricane and it crystalized some of the things I’ve been thinking about recently, so I blogged about it a bit more.

        • Glad you took this on – I’ll read the blog post later and comment thoughtfully on it.

  • As usual you make the point I’ve been trying to make easier and simpler.

    That is why I go on some sales calls. I have been fighting the weighted average sales pipeline funnel for twenty years. Yes if you have a thousand deals a quarter that are going to close weighted average works. But then if you have that you are using a different metric other than salespeople assigning a percentage, because you aren’t selling with a direct salesforce. In this case visits, proposals, etc.

    If you have a sales person working on a deal, controlling a deal. That means you are dedicating a ton of effort on a deal. That means deals are binary. They close 1, they don’t close 0. There is no 75% close. The only thing I have seen work is commits. You salesperson commit to a deal. If the deal doesn’t go through I want a postmortem. The few commits that miss get made up by the “upsides”.

    I agree this makes you concentrate like hell on the commits instead of spreading time in a thin layer across all deals hoping some close.

    There is nothing worse that sitting on a board watching a revenue miss with a weighted average funnel. I’d almost rather not forecast just keep track of where deals are and see what happens and act on that, but that is heretical.

    • The notion of commits is right on the money. If the company above commits to 10 deals and only closes 8 of them, that’s clear data about 2 and your notion of going deep on a post-mortem is super important. It’s not “2 didn’t close – you are bad, you are fired”, rather it’s “2 didn’t close that you thought were going to close – WHY didn’t they close and what should we be doing differently that is under our control.”

  • Andy Blackstone

    As you say, closing sales is binary – ones and zeros. The only way I’ve found to forecast is to have everyone working a well-thought out sales process, so the questions are about what steps have been accomplished, what remains to be done, how long will that take, what could keep this deal from happening.

    • Yup – and if the ones you believe you are going to close are front and center on a daily basis, it’s hard to hide from the data about which direction things are moving.

  • Imho sales management is the hardest job in business. Ironic that there are so few courses on it in business school. Fairly recently I checked out the curricula of the top ranked schools on precisely this point. I was wondering whether things had changed since I did my MBA and whether this critical function was taken more seriously. The answer was a resounding ‘no.’ Endless classes on every flavor of marketing but precious little on sales management.

    • It’s completely ridiculous that there isn’t an entire sales track in every MBA program. I’ve been ranting about this at MIT Sloan for 20+ years to little avail.

      • Me too at Wharton. They think it is a dirty word. As I’ve always said its like sex. Super important. But nobody wants to talk about it or discuss it. The time to learn is not fumbling about during the most important deal (and closing a round is a sale). If you look at the top people in almost all organizations its those that bring the most/best business to the firm. That goes for iBankers, Lawyers, VC’s and Accountants as well as entrepreneurs.

      • Completely agree. It’s absurd. My suspicion is that (certainly until fairly recently with sales force automation products for example) sales was just seen as a black art that didn’t warrant academic study. Marketing lent itself to analysis somewhat similar to economic analysis (although ROI was very weak until search). But sales? V tricky. And tricky means ‘not very good for my career’ if you’re an academic.

        • I’ve had long discussions with two deans about this. They really do see it as a dirty word. They say how would we teach it?? How would we grade it?? I said that you could read a book each week and have a salesperson come in and discuss the premise of the book. They say this is not really a class. Actually at Penn they do have a class but its in the education department. I think the problem in general is that if you use any method discussed with blind obedience its stupid. I.e. asking a question about a question, getting a commitment each time you provide information, all methods of building rapport, etc. However if you have each of these in your toolkit and use judiciously it makes a difference.

          • I solved similar problems at Caltech by setting up regular lunch seminars for interested students. We had a bit of a student uprising about the school’s finances related to the board program, which the VP of Business and Finance tried to push off with “the finances of this school are hard to explain.”

            So after the uprising, I led a delegation to his office to let him know that there was student interest in hard problems, and we’d be delighted to learn from him about the finances of the school. Turned into a 10-week lunch seminar understanding educational endowments, academic auxiliaries, and the enlightened madness that is Yale’s David Swensen.

            Definitely encourage the entrepreneur club at MIT to get some directed endowment from one of your many brass rat alumni towards hiring guest lecturers and providing foot, then go for a student-run session.

            Once the school looks bad enough for ignoring it—assuming it’s a useful thing—administrators tend to adopt it for inertial reasons.

            It’d be very useful for me 🙂 My great failing as a non-technical cofounder was in sales, as I handled the bizdev and fundamental market research decently well.

  • I’ve been thinking a bunch about this as I’ve been building software to help answer some of these questions.

    1. In Brad’ post, the team was coming in with one objective: set board expectations on how much they’d book. What they came back with (over the email) was an execution plan for prioritizing which deals they’re going to focus upon. Commenter Steve (below) says that “we approach each one with the greatest resources we can bring to the table” which is unlikely to be possible. You almost always need to prioritize your efforts. Pick the 5 you feel the best on and go like hell on them. the other five are going to be a coin flip.

    2. Personally I think building forecasts based on “commits” should be used only if you have to. It makes the forecasting far more subjective than objective. If you have sufficiently short sales cycles and a minimal volume of historic data for calculating your probability to close, you should rely upon it to build a forecasting method. Incidentally, this is why I love working with inside sales teams.

    For those on this thread interested in helping me as I build analysis tools to solve this kind of sales management problem, I’d love to talk more: @joshpayne on twitter or josh at insightsquared dot com.

    • Good stuff Josh – totally agree with the notion around prioritization.

  • Kyle

    “which of these 10 deals has a 100% chance of closing?” A great question for the Omniscient Executive.

    • Obviously the 100% was to make a point. The logical answer is 0, but you could just substitute 99% for 100% and the point is the same.

  • I don’t know if the problem was the method. It’s the right method if you have 100 $2k deals in your pipe. It’s the wrong method if you have 10 large deals. Top 5 deals should have 1 slide each. Maybe the BOD guys can help close too with connections/knowledge.

    • Yup – there are different approaches with different sized pipelines, but interestingly I’ve found that unless you are in a self-service model, the weighted-average pipeline approach doesn’t predict well and generates lots of bad habits. And yes, when the deals that are the ones most likely to close are front and center, the board, as well as everyone in the company, can help with connections and knowledge.

  • One of the things that career sales people do is double count the revenue.

    For example: A realtor might get a great lead…and brag about it.

    The same lead might look at houses or list.

    The same lead might go into contract.

    The same lead might clear hurdles (closing, etc)

    The same lead shows up at the closing table.

    Those are 5-6 events. All feel like a sale. Only one has a check involved. A lot of pipeline management is centered around staying upbeat but only counting the SALE itself as a sale. It’s hard, but if you can defer the good feeling till later, you stay frosty you stay hungry.

  • A lot of companies would rather live with a trumped up version of their economic future than a more realistic one than requires “this deal is bullshit and will never happen”.

    • Denial of reality is a powerful negative force.

  • I hate probability sales forecasts. They’re going to close or they’re not. For an early stage company, it’s critical for the CEO to be able to distinguish between which is which. In a board meeting, he needs to be able to make those judgments and present them to the board. Over time, the CEO will gain the skills and experience to do a better job of forecasting and the board members will learn how to interpret the CEO’s statements. In addition, the CEO will lead the organization to deliver on what he has told the board, thereby sharpening execution. Ultimately, transparent communication among the board members yields better board meeting and company performance.

  • Really good discussions on this post! My summary is that Brad’s model of dividing up into forecasts, upside and pipeline is a good way to keep the focus on the prioritization as @twitter-15635395:disqus mentioned. Getting this done in a weekly manner is also another huge point.

  • Good piece. Sales isn’t about Probabilities its about Behaviors. Too often leaders spend their time trying to guesstimate the revenue numbers rather than having the important discussion about what Behavior is required to advance the customer relationship and demonstrate enough value for that customer to be motivated to act. All of this said…I’m still a fan of using numbers as a basis to that discussion and to understand where each deal is in the sales process. ie….10% = We’ve identified a Customer Problem that we can solve, 50% = We have given the customer a proposal that they can say yes to . 75% = The customer has responded with a price or product demand and Negotiation has begun. 90% = They have given us a verbal YES. 100% = Deal signed and in house. Teams that cram on this subject for board meetings are already on the path to failure. However…for those who make running the pipeline a weekly endeavor and really commit, coach and champion the most successful behaviors there can be much success.

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  • Anthony Bodin

    I re-read this and reflected…

    After moving from Australia to London, the sales culture was different.. CEOs allow themselves to be snowed..
    We sat in a meeting and explicitly explained who/what/how/why exactly was the process to get the order. Who signed it? Were they there? How we got it? Did they have our email address? etc. etc.
    It was called the order acquisition process (OAP) which is different to the sales process.

    Hope that helps.