May 30, 2024

Deal Close Probabilities: Swag vs Zero Latitude


121Silicon Valley

One of any sales forecasting systems critical tasks is estimating just how much business the sales organization will actually close. That is, you're trying to boil that (hopefully) giant pile of suspects and prospects down to a single, critical number. By far the most widely-used method for doing this is to assign a close probability to each deal, and the total forecast is then the sum of each deals size, times its close probability. But how should you assign a probability to each deal? You have two basic choices:

  1. Sales management uses its best judgment to assign a probability to each deal.
  2. The forecasting system assigns a probability to each deal, based on which of a series of predefined stages that deal is at in the sales cycle. (e.g., face-to-face meeting = 15%, delivered proposal = 35%, in contract negotiations = 90%, etc.)

Many argue that Method 1 (management judgment) is the more precise, since we all know sales is a complex, subjective process. Some bluebirds that arrive over the transom at the last minute do close, while some in the final stages of a months-long campaign don't. That observation is especially true since the object of all this computation is to estimate how much business will close in a given period.

Even so, my strong recommendation is to use Method 2 (the system assigns the probabilities), for the following reasons:

  • Motivating behavior. Under Method 2, sales people know that the only way to make a deal seem nearer to closing is to complete a specific action (like having a meeting, delivering a proposal, getting something in writing from the customer, etc.).
  •  Reliability. Its asking a lot to require every sales manager to review and update the close probability of every deal in his or her territory every time you run the forecast. Is this really how you want managers to be spending their time?
  • Consistency. Personality, style, and even cultural differences among sales managers may cause variations in how different managers will assess exactly the same deal.
  • Personal agendas. One of the risks of Method 1 is that managers may alter probabilities to attract or deflect corporate attention, or simply to get the calculated territory forecast closer to the managers gut feel number. (Note that this is not always conscious behavior!)
  • Relevance. Does all this really matter? Remember that the object of a sales forecasting system is to provide a consistent view of sales organization progress from period to period, and to motivate effective sales management. These are not quite the same as demanding that the weighted forecast halfway through the period exactly matches the eventual actual result.

I suggest that Method 1 is the better approach only if (a) your company typically has a relatively small number of relatively large deals in your pipeline, (b) sales managers typically get personally involved in the close process, and (c) the ways deals get closed in your company are so diverse that a standardized view of deal stages just doesn't make much sense anyway.

In my last post, I observed that trying to improve systems and processes sometimes causes us to forget that better is the enemy of good. Inputting close probabilities into a sales forecasting system is not only an example of that dynamic, but also shows that moderate precision that serves a real purpose is better than extreme precision thats pointless.