The “Weighted Pipeline” is Killing Your Sales Forecast Accuracy
Being able to forecast sales and forecast it accurately is one of the most important jobs for any sales manager.
But forecasting your team’s sales isn’t always easy.
In fact… You’re probably doing it wrong!
According to research published by CSO Insights, less than half of all forecasted sales opportunities actually results in a sales win.
Poor forecast accuracy metrics are a nightmare for most companies, as sales forecasts are one of the primary ways to predict revenue. The root of the sales forecasting problem is not lack of data – most sales teams employ some form of analytics to build their forecasts.
So what is the problem?
Simply put… The problem is bad data and bad process.
In this article, we’ll break down what the weighted sales pipeline really is and show you how, while popular among sales leaders, it could actually be killing their sales forecast accuracy.
How Does the Weighted Pipeline Method Work?
While the best sales managers are moving towards sales pipeline management and forecasting on a deal-by-deal basis, the vast majority of organizations are still relying on the weighted pipeline forecasting system.
The weighted forecast system involves a sales manager taking each deal in their pipeline, and based on its sales stage in the CRM, assign it a probability (%) to close. For an eight-stage system, the sixth stage would likely be marked as 75% likely to close. The manager then multiplies this probability by the value of the deal. The resulting value is what goes into the forecast.
Just in case, here’s an example.
Let’s say you’re a sales person working on a deal worth $100,000 in the sixth stage of an eight-stage sales cycle. At this stage, that deal would have a weighted pipeline value of $75,000 in your sales forecast.
This is an easy way for sales leaders to get a quick look at their pipeline as a whole. But when it comes to generating insight that will influence business decisions, this method is dangerously simple and ignores several fundamental elements of enterprise sales.
Below, you’ll learn the three key places the weighted sales pipeline system gets misleading.
The Three Reasons Why The Weighted Pipeline is Misleading
First Reason: The Deal Stage
“Is the opportunity in the Contract Negotiations stage yet?” – Sales Manager
“Well… Kind of…” – Sales Rep
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“Ugh…” – Sales Manager
The weighted pipeline method assigns the probability that a typical deal will close based on its opportunity stage, therefore making the opportunity stage the most scrutinized field in your company’s CRM.
This becomes an issue because sales and marketing rarely take the time to define concrete definitions for what the different stages in the sales funnel mean, and sales rep optimism or pessimism often skew the accuracy of even the most articulate stage definitions.
Determining the stage of a deal is an inherently judgemental process, so no amount of emphasis can guarantee that all reps will mark stages exactly the same. It becomes almost impossible to get good forecast accuracy metrics when basing the analysis on subjective data.
Second Reason: The Stage-Based Probability
“The opportunity is in the Contract Negotiations stage so we have a 75% chance to close…” – Sales Manager
Another problem arises by assigning simple percentages to each deal stage.
These percentages are supposed to tell the probability a deal will close once it reaches that point in the sales cycle. But every deal takes a unique path to close, and assuming that all deals have the same probability to close at the same stage neglects to account for huge amounts of data that can add much more accuracy to the probability rating of your entire forecast, most of which is right at the company’s fingertips.
Factors like the prospect company size and type, the rep working the deal, even the time of the year all complicate the win rate projection.
Third Reason: The Probability-Based Value
The number companies get when they multiply their total pipeline deal value by each deal’s probability rarely comes close to the total revenue that team ends up closing at the end of the quarter.
Sales performance doesn’t work on a sliding scale.
If a deal is lost, it is totally lost (for forecast purposes). Imagine a rep is working a $100,000 deal, and it’s rated with a 50% chance to close. Putting that deal in the forecast for $50,000 is misleading no matter the outcome. When it closes, won or lost, the forecasted value will either have been overshot or underestimated by $50,000.
Obviously, this method is meant to be applied across all deals in a company’s pipeline so that the underestimates and overestimates even out. But the number of deals that would need to be included in a calculation of this type for the result to be statistically sound is far greater than that which is in almost any company’s pipeline.
Is There a Path to Better Forecast Accuracy Metrics?
Forecasts that rely on the weighted pipeline method rarely achieve more than 75% accuracy. More frequently, as reported by CSO Insights, they’re in the ballpark of 50%. It doesn’t take long for companies to pick up on this, and the forecasts themselves become an exercise in futility that ultimately gets second-guessed or even disregarded entirely. Though it takes longer (without leveraging the Datahug platform), the only way to achieve accurate, reliable forecasts is to assess each deal on its own merits.
Looking for a better way to forecast?
You should check out Datahug!
If you’re looking for a way to increase your company’s sales forecast accuracy, get deal-level insights into your entire pipeline, reduce deal slippage, and simply close more deals? Schedule a demo of the Datahug platform. Then call your CFO to let them know your team is going to be crushing their sales goals next quarter.