Cloudy Crystal Balls: Why CSOs Have Limited Visibility into the Future
CSO Insights reports in their 2010 Sales Performance Optimization survey that 51.4% of companies say their ability to accurately forecast revenue needs improvement, and only 5.1% say their ability exceeds expectations. Why are sales forecasts so inaccurate? Common reasons include lack of clear processes and methodologies, over-reliance on error-prone spreadsheets, and limited incentives for accuracy.
These are all valid reasons, but perhaps the largest and most overlooked reason is that sales forecasting is inherently a “bottom-up” calculation, dependent on making gut-based or statistical predictions about which active deals will close. Given the law of large numbers, this can be accurate – but it completely misses the role of new opportunities that have not yet entered the sales pipeline. In other words, it ignores the deals that will close in the forecast period but are not yet active.
For example, take a company with a win rate of 34% and an average sales cycle of 120 days. (By sales cycle, I am referring to the portion of the revenue cycle that spans from when sales engages, until the deal closes.) This is an average of some deals with short cycles and a long tail of deals with much longer cycles. This means that in any given quarter as much as 50% of the closed deals will be “fast movers” with sales cycles under 90 days – meaning at the beginning of the quarter the CSO did not have any visibility into them. The shorter the sales cycle, the worse the problem.
Modern buying behaviors are making the problem worse, not better.
In the days of “information scarcity” (aka before Google), the main way a buyer could get the information they needed was to engage with an account executive from a company. This meant that sales reps engaged with buyers early in the buying process, and had better visibility about what was coming down the road. Today, however, information is abundant and readily accessible over search and social media, so buyers want to educate themselves before they engage with a sales rep. As a result, buyers today are much further down their buying process – making it harder than ever for sales to forecast future periods accurately.
This is why marketing forecasting is so important. In cases where the CSO lacks “bottom-up” visibility into future periods, highly accountable CMOs can fill the void with marketing forecasts.
In my next post, I’ll define marketing forecasts in more detail and will introduce a new methodology any CMO can use to build a successful forecast.