Thought for the Day
Value is not what you get,
Value is what you give
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IN THIS ISSUE
The Yin and Yang of Sales Forecasting has never changed
The only function of economic forecasting, said Prof Galbraith with his signature wry humour, is to make astrology look respectable. Sales forecasting in companies isn’t very different
Typically, two approaches inform the sales forecasting exercise. One is the pragmatic, ‘what’s possible’ approach, where the sales likely to achieved given the potential of markets and capabilities of sales people is arrived through a process of aggregation. The other one is the aspirational, ‘audacious goals’ approach that decides the sales numbers to be reached and then figures out ways of getting to them
It becomes the responsibility of the top management, often that of the CEO and the Head Of Sales, to marry these approaches to find a happy middle path where aspiration meets pragmatism. Herein lies the Yin and Yang of sales forecasting. An uncompromising, audacious approach to goal setting may be blindsided to constraints and risks.
This could also bring enormous pressure on the sales force resulting in demoralization and eventual attrition once the targets fixed are perceived to be unreasonably ambitious. On the other hand, a weak, ‘as the traffic will bear’ sort of goal setting passes up opportunities, makes poor use of market and human potential and gives the sales team an under-achiever complex. Sales forecasts, to be purposeful, should challenge the sales force with a grand vision, raise hopes of achievement and inspire them to give off their best
To serve the strategic interests of a business, sales forecasting must have 2 qualities:
- Dependability – Sales forecasts should tell the story as it is and not under or overestimate the projected numbers. Lesser the gaps between projected numbers and actual numbers, more dependable the forecasts are and that adds enormous strategic value to the forecasted sales figures. On the other hand, if actual sales are way off the mark, there is loss of credibility in the information provided by forecaste
- Discipline –. Through a right blend of aspiration and pragmatism, sales forecasts must foster execution discipline. The sales team must be motivated to achieve the targets assumed by them every time
Are these new challenges? Not exactly, as these are among issues discussed over 3 decades back in a Harvard Business Review article Manager’s Guide to Forecasting authored by David M. Georgoff and Robert G. Murdick (HBR Jan 1986) . While the article covers a wider canvas of economic forecasting, the ‘tricks of the trade’ it lists on some of the key considerations in forecasting and tips offered could be of immense value in projecting sales scientifically. Here is a quick listing:
- Pick the right time horizon to forecast
- Assess and adopt the right degree of sophistication for the forecasting methodology (Not simplistic but not complex either)
- Keep the forecasting costs in mind especially the initial investment
- Take data availability into account
- In using data for forecasting, reckon variability and consistency
- Build the required and feasible degree of detail and accuracy
- Watch out for turning points representing periods of exceptional opportunity or caution and their associated impact
- Use a form that helps managers with strategic insights
The article offers a ready to use Manager’s Guide to Forecasting Brief descriptions of methods complete with a Forecaster’s Chart and tips on improving and combining forecasts, simulating outcomes and applying judgement. A side bar on Forecasting Strategies deepens our appreciation of the 3 basic strategies in use
Like most timeless lesson of selling, the Yin and Yang of forecasting hasn’t changed after all
Why Sales Forecasting Is a Lot Easier than You think
“What will be your sales numbers for 2019-20?”
Does that question make you anxious? Or squirm secretly?
It needn’t, says Tim Berry in his blog post How to Forecast Sales. The answer isn’t in some magic formula you ought to know. Or a training you should have taken or a spread sheet model you cannot do without. It’s about something lot more uncommon – Plain old common sense
Sales forecasting isn’t about seeing into the future argues Berry. “Instead, it’s about assumptions, expectations, drivers, tracking and management” he says. If forecasting seems hard, running a business without forecasts could be a speedway to failure. That’s because, a business is measured by its growth in sales. Forecasting sales, therefore, becomes the starting point to estimate expenses, profits and growth. Having a sales forecast helps tracking planned sales against actuals. This tracking in itself can kick start formal business planning.
Where do you begin then? These pointers, with some tips and tricks shared by Tim Berry can be your sales forecasting GPS:
- Start with your revenue streams – What are your revenue streams? List them all. Pick the right unit to measure revenue that matches with your accounting. A restaurant, Berry points out, should forecast sales not by each item on the menu but by breakfasts, lunches, dinners and drinks sold. A bookshop, similarly, shouldn’t project sales by each book or author. Book types, like hard cover, soft cover, magazines or categories such as fiction, non-fiction, self-help and the like would be more helpful revenue units. The advantage in this approach is that comparison between projections and actuals become easier
- Forecast sales by revenue units – Once the revenue unit is chosen, you can project sales in revenue terms, using one of the following methods (illustrative):
- Unit sales – Here Projected Sales = Units expected to be sold X Price
- Service units – Billable service units (Ex: Consulting hours) X Price
- Subscriptions – Expected collections from existing clients + Collections from new sign ups – Collection from exited clients
- Pure play revenue – Businesses unsure of revenue units prefer to take this approach
- Take a hard look at your price assumptions – Be mindful of possible price movements, if your forecast is going to be in absolute revenue terms
- To make the forecast, draw on your prior business experience and past trends – Questions to ask could include: Going by last year’s numbers what will we do this year? Any new opportunities on the horizon? Promos, marketing activities? Those could improve the estimates. Fresh competition, new constraints could bring them down
- Look for the sales drivers – What are the drivers that impact sales in your business? How are they likely to behave in the period we are forecasting for?
- Watch out for strategic milestones and changes in business offerings – Major strategic initiatives planned and changes in business offerings could positively impact sales. Forecasts should factor their impact in arriving at final estimates
- Realizations matter too – For any business, no sale is complete till the billed amount is collected. So, good sales forecasting should keep in mind the timing of billing and realisation in the average collection cycle
Tim Berry sums it up this way – “Sales forecasting is not about accurately guessing the future. It’s about laying out your assumptions so you can manage changes effectively as sales and direct costs come out different from what you expected. Use this to adjust your sales forecast and improve your business by making course corrections to deal with what is working and what isn’t.
I believe that even if you do nothing else, by the time you use a sales forecast and review plan versus actual results every month, you are already managing with a business plan. You can’t review actual results without looking at what happened, why, and what to do next”
There are opinions. Everyone has plenty of them. And then there are facts. Facts are inviolate, unchangeable. Not so with opinions. Often formed with no basis in facts, opinions contribute to a range of human follies, some bordering on tragic. These include, prejudices, poor decisions, suspicion, fear or even plain hate. Into this opinion-driven, post-truth world, enter Factfulness, the new best seller book that reminds us how “fighting ignorance and spreading a fact-based worldview (is) .. sometimes frustrating but ultimately inspiring and joyful”.
Hans Rosling, the book’s principal author, lived a rich life of many parts, a physician, teacher, a highly acclaimed Ted presenter, statistician, passionate public health crusader and even a sword swallower! The world lost a campaigner for better global understanding, climate awareness and poverty eradication when Rosling passed away in 2017.
Rosling lived his message of a fact-based approach in all situations, sometimes even ones threatening his own life. Like the time, when Rosling was surrounded by a suspicious, machete-waving mob in an African country, where he had gone to find a solution for frequent instances of paralysis in the population. Not knowing the local language and completely defenseless, Rosling turned to his favourite weapon – facts. Producing pictures of paralyzed patients, Rosling used sign language to plead his case that he wanted to find a cure. Inspired by the ring of sincerity in his plea, a woman in the group appealed for peace and rolled up her sleeve to offer a blood sample. Others followed. Soon enough, Rosling identified the real culprit – poorly cooked cassava root that had cyanide like residue leading to paralysis. Rosling’s campaign eliminated cassava induced paralysis
Factfulness lists 10 Instincts or mindsets that prevent a fact-based world view. In each, there is a sales parallel we can draw. Here are the 10 instincts that blind us to facts:
- The Gap Instinct – Extremities don’t define the world. Yet the easy option is to instinctually divide up everything we see into two neat opposing categories. Example – “us’ Vs “them”. Or another Rosling favourite – “developing” and “developed”. The problem with the gap instinct is that it focuses on extremities and ignores the middle categories
Possible Sales Example – Seeing sales performance in the binary of quotas reached or not reached. In forecasting and fixing targets, we should in fact be mindful about the gap instinct and look for the shades of grey in between and the factors behind them. That contributes to a richer understanding of the sales force and its various constraints and strengths
- The Straight-Line Instinct – Assuming past to be a sure predictor of the future and extrapolating past trends into the future without considering the other new variables that may impact these trends
Possible Sales Example – The temptation to do ‘base plus percentage’ forecasting is irresistible in sales. Ignoring other facts that could influence sales, vitiates the projected numbers
- The Negativity Instinct – We are presented a gift horse. And what we do? Of course, look it in the mouth! This is an instinct that expects bad news even if positive trends are evident
Possible Sales Example – Economy is slowing says the pink press and most businesses are cautious about their expectations. We buy into this negativity and forecast lower numbers even when our products are poised do well because they are in good demand
- The Size Instinct – Allowing ourselves to be seduced by big numbers seen without a context, and ending up with erroneous conclusions
Possible Sales Example – Failing to look for the facts behind big numbers. Example: The sales of a peer company have grown 20 percent faster than ours, so we conclude our team is inadequate, when in truth, their sales would have been 10 percent less than ours, without a large a one-time order landed by them through sheer luck
- The Fear Instinct – Ignoring the real risk, focussing exclusively on the perceived risk that feeds our fears
Possible Sales Example – Market uncertainties may be worrying us when in fact the sales competencies of our team may be getting rusty. Business plans based on such fears, are apt to go awry
- The Generalization Instinct – Jumping to conclusions using averages and generalizations
Possible Sales Example – Two products in a category fail to fire and the sales team decides to junk the entire category in its annual business plans. A competitor with a more fact-based approach identifies the profitable ones in the category and moves into the vacuum to make a killing
- The Destiny Instinct – Becoming impervious to slow, progressive changes only to be overwhelmed later, not unlike the slow boiled frog in hot water
Possible Sales Example – Week on week small declines in sales volumes are ignored till they all add up to a gap that can’t be bridged and the forecast goes out of the window
- The Single Perspective Instinct – Simple solutions may actually be simplistic solutions, especially when complexities underlying a problem are ignored
Possible Sales Example – If forecasts are not met, withdraw or hike the incentives
- The Blame Instinct – This can operate in two ways – Looking for villains when something goes wrong and for heroes if we are doing exceptionally well. Sports history is replete with examples of blame instinct
Possible Sales Example – Fire or promote the territory managers solely basis failure or success in reaching quota numbers
- The Urgency Instinct – We’ve all heard it crisis situations and we still do – “Do something, anything!” Actions thoughtlessly taken to urgently ‘fix’ issues never produce happy results
Possible Sales Example – After 3 consecutive months of big gaps between forecasted and actual sales, we decide to scale down targets, taking them to be unachievable. In reality, seasonal factors may have led to the lack luster show
This New Year before you plan your sales for 2019, pick up Hans Rosling’s book. Treat yourself to a helping of Factfulness
My Certainty is My Own
- I dream of the Golden Harvest
- I prepare the field-sunrise to sunset
- Sweat on my brow and hope in my heart
- I choose the seeds, lovingly sow them in their beds.. neat and even
- I nurture the saplings with water and fertiliser, on a wing and a prayer
- Weeds and worms - I pounce on them and off they go
- Nothing escapes my eagle eye
- Gently I coax the weak shoots, bowing with fatigue, into wellness
- The capricious weather God challenges and taunts me at every bend
- I lose my nerve and then The Wind Whispers… you can
- Get up and start again.. and again and again, rain or shine
- Your harvest yearns for your head, heart and legs..
- And then one bright morning …. a carpet of dazzling gold
- So golden, my eyes hurt , my soul is drenched in joy
- I pause and then I get ready to plough… another day.. another time
- I am wiser now- A series of good things done and the prediction is accurate
- Well almost..
- "An unsophisticated forecaster uses statistics as a drunken man uses lamp-posts - for support rather than for illumination. " - After Andrew Lang
- " It is often said there are two types of forecasts ... lucky or wrong!!!! " -- in "Control" magazine published by Institute of Operations Management
- “The most reliable way to forecast the future is to try to understand the present”. - John Naisbitt
- “I think that intelligent forecasting (company revenues, earnings, etc.) should not seek to predict what will in fact happen in the future. Its purpose ought to be to illuminate the road, to point out obstacles and potential pitfalls and so to assist management to tailor events and to bend them in a desired direction. Forecasting should be used as a device to put both problems and opportunities into perspective” - Peter Cundill
- “The Company Forecast is the expected level of company sales based on a chosen marketing plan and assumed marketing environment” - Philip Kotler
- “Sales forecast is an estimate of sales during a specified future period which estimate to a proposed marketing plan and which assumes a particular set of uncontrollable and competitive forces” - Cundiff and Still
- “The best way to forecast the future is to create it” – Peter Drucker
- “Test fast, fail fast, adjust fast” – Tom Peters
- “For smart business decisions, compare your current sales with your assumptions, your expectations and your projections. Are you on track?” – Brian Tracy
- “If you aim at nothing, you will hit it every time.” – Zig Ziglar
Tired of unreliable sales forecasts? Look for the bug in deal commitments, says Donal Daly
“Let’s start here. The ‘Commit Theory’ of sales forecasting is completely broken. Committing that a deal will come in does not make it come in.
Accountability is good – but the misguided use of commitment is dangerous. It can be the enemy of good sales practice, and has the potential to alienate
For sales managers to get accurate sales forecasts there are four basic things to get right:
- Know your team’s quota and current closed and projected (don’t like using the term forecasted) achievement against quota. Should be easy, but I am often surprised by how few companies do this well
- Don’t allow for subjective forecasting. Implement a sales process across the sales team based on customer verifiable outcomes that indicates whether a deal should be forecasted based on specific evidence
- Avoid Surprises! Make sure you have automated visibility into what changed in your key deals since last week’s forecast call, so you can spend time talking about what to do – not finding out what happened. Build in an early warning system to spot risks, highlight inactivity, deal slippage, or factors that might indicate that some of the key deals might be hard to win
- Determine where to focus. Not all deals are equal and unless priority is given to the ‘must win’ deals to make the forecast and the quarter, the risk is that all deals will slip. Each deal in the forecast should be categorized as a ‘must win now’, ‘must develop for next quarter’ or ‘qualify out’ – so that you are laser focused on the deals in your forecast”
Donal is CEO of The TAS Group, author of Amazon #1 Bestseller Account Planning in Salesforce. His latest publication is Winning Sales Performance Management – No Analytics Needed. Follow him on Twitter, LinkedIn and on The TAS Group blog
Mercuri Mail is a thoughtful compilation of meaningful articles drawn from Mercuri India archives, and from timeless management literature. Edited by Jaishankar Balasubramaniam & Sridhar Srinivasan of Mercuri Goldmann (India) Pvt. Ltd. This publication is for private circulation only.
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