Winning new business is great. It feels great. It motivates and inspires us and our team and our business. It helps protect our business for the future, allow us to plan for progress and future success, and gives us renewed hope and confidence that we are doing the right things.
But I have lost count the number of times that expectation, when it comes to new business sales forecasting and the reality of the outcome, just doesn’t add up. I have witnessed too many occasions when new business is being secured, and everyone should be rightly celebrating and proud, but it’s falling short of the mark we had set or hoped to achieve, and it can quite easily turn into a demotivator.
The gap between ‘expectation’ and ‘reality’ is commonplace when it comes to brand new business forecasting, but just as much of an issue when you are talking about new business/products/services wins from your existing customers.
Here’s some examples that I see and hear all the time.
1. The new customer said they spend £100,000 a year but it’s nowhere near that and they went live 3 months ago.
2. We’ve landed an extra £20,000 from an existing customer but their spend has only gone up £3,000 pa.
3. We’re converting new business wins but nowhere near the volume or value we expected (needed) it to be.
Why is that?
Here’s some basic examples I’ve experienced of why that forecast is often wrong:
New Business
1. The customer fibbed! It was never £100,000
2. It was £100,000, the salesperson didn’t over-egg it, but that was before you saved them £20,000 with your solution, and it wasn’t factored in – I have seen this so many times.
3. The customer’s dynamic/needs has changed since you started the process.
4. The transition from previous supplier to you was drip-fed/split for the initial period
5. It wasn’t a mandated deal so there are some locations who haven’t bought in to the deal …yet!
6. The customer had old stock (at their previous supplier or on site) they are working through first!
Existing business
1. That extra £20,000 you have secured was a new line but wasn’t an additional line – it has actually replaced £15,000 of existing lines you already had so was only ever going to be an extra £5k (I see this happen quite a lot! Salespeople get excited by the win and omit the 'consequneces' of the win. Even worse is when that £20,000 'win' replaced £25,000 of existing business!!
2. The customer is working through previous supplier stock etc. so full ‘go live’ will be X weeks/months later.
Conversions
1. You underestimated the volume of conversions
2. You overestimated the average value rate of conversion
3. You overestimated the conversion rate against the time it takes to convert it.
4. You underestimated both the volume and value of conversions you want/need.
I think both the new business and existing business reasons for mis-forecasting are self-explanatory. More often than not, it’s just missing intelligence or knowledge from the customer and/or salesperson dealing with the customer. This kind of information should be established at ‘discovery’ stage of the sales process, and throughout on-going discussions/negotiations, but that’s not always do-able – salespeople sometimes get nervous whe it comes to drilling down into the qualifying (discovery stage) criteria out of fear of upsetting the customer or prospect; so my general rule of thumb is to under-forecast these kind of ‘wins’ by 25% (at least).
(If you are a sales manager reading this, it is a safety net way of managing your salesperson, yours and your boss’s expectations. Many a time I’ve heard “we’ve just landed £X win…woohooo!” and, before you know it, the re-forecast has been set (maybe even targets), and the salesperson is congratulating themselves on knowing they will hit target for the next 3,6,9 months. Maybe even you are thinking the same!)
Setting Expectations - The Foundations
When it comes to conversion rates, the mis-match between hope and reality starts at the planning stage.
“Right, last year we landed £1m of new business so we will go for the same again this year…so our target is £1m of growth; we know we can do it as we did it last year, and and and….”
Before you know it, the targets are set and £1m extra it is.
There’s a bunch of stuff in here to consider first:
• What was that £1m made up of? Was it one big £500k win or 50 x £20k wins?
• Do you have a £500k opportunity in the pipeline already?
• Actually, do you have several £500k opportunities in the pipeline already (as you are very unlikely to win them all)?
• What is your current pipeline value that you start the new period off with? And what stage are they at in the current cycle?
• How many 'live ones' do you have in the pipeline already and, again, what ‘stage’ are they at?
• If they are all at a base level, how long will to take on average, to progress them to won stage (based on last year say)? If they are all at Stage 1 and it took you 3 months, on average, to close last year, and 3 months from there to Go Live, you ain’t seeing any of that until the second half of the year.
• What was your win rate last year? Was it better than the year before? What did you do differently last year? Can you do the same again...or better?
• What was your average win value last year (taking out the one-off nice surprises)?
• Do you have the same amount of available time/resource to do another £1m? £500k of that £1m win came from Penny (she’s a star), and Penny has another bunch of customers to hold on to and develop that she didn’t have last year. Will she have the time to do it again?
And so on.
We all make mistakes
One of the more common mistakes that I see are around the mis-match in forecasting ‘win value’ and ‘in-year’ benefit.
Simply put, that £1m is not likely to be won on January the 1st. It will be drip-fed throughout the year, let’s say in 12 equal periods. Even if this all lands equally throughout the year (it won’t), £1m of win value will only deliver £500k (ish) of ‘in-year’ value.
Add in to that the reality that it will take, what, 3 months from ‘won’ to ‘go live’, then the in-year value will be around £300k. And that’s if it spends to 100% of its expected value…from the date it goes live.
(This gets diminished further if you start the new period with bare cupboards to begin with).
So again, as a general rule of thumb, I will assume 20-25% of total ‘win value’ delivering an ‘in-year’ benefit, especially so if my pipeline at the start of the period is at Stage 1 or 2.
The second common mistake I see is the reality around the conversion rates themselves. This is always a variable from salesperson to salesperson; skill set, available time etc. If we assume that every salesperson is the same and converts at the same rate, then they will all see their opportunities move through the various stages at the same time (again…they won’t). The mistake occurs with underestimating both the volume and value of opportunities that needs to be maintained to hit that £1m.
IF your conversion ‘win rate’ is say 1 in 3, you will need £3m being worked on (at closing stage) to win £1m of it. Simple. If your conversion rate is higher or lower then, well, obvious isn’t it.
But take a step back to those deals being worked on that don’t reach closing stage. The ones you lose before you get the chance to try and close them (decision making stage). If your secondary conversion rate (let’s say the stage that takes you from ‘final quote’ to ‘decision making’ stage) is, again 1 in 3, you will need, yep, 3 times as many again. £1m of ‘win value’ will need £9m of business at ‘final quote’ stage.
And so on for each level based on your conversion rates…..!
And that brings me to the 3rd common mistake I see - I call it The Rolling Pipeline.
If you have a pipeline of £1m and you have a conversion rate of 1 in 3, then you ‘win’ £340k and you ‘lose’ £660k. That £660k of potential has gone. So you have to replace it. Constantly. Keep it topped up. The whole process starts again.
The Rolling Pipeline therefore is the value you need to keep it maintained at, at every stage, to give yourself a solid chance of landing that £1m over any period of time.
What I also see is salespeople who view pipeline activity as something they turn on when they have to. And if it doesn’t land as quicky as hoped (or to a lower value than sought) then the pressure increases and you start chasing the deal; margin sacrifice, additional concessions, aggressive tactics. Or they start chasing bigger deals to chase the value.
And then you start wandering into different territory. I call this The Diminishing Likelihood Of Success, where your value proposition becomes more of a financial one...but that part of the new business story is for another time.
The simple fact of The Rolling Pipeline is that if you have or are a salesperson with a new business expectation, it really should be a constant feature of your/their day-to-day. You need that bank topped up.
And, if I may say, feeding the Rolling Pipeline needs to be constantly supported by marketing activities, lead generation, customer awareness activities.
But this part of the story really is for another time!!
My final observation on the subject of erroneous sales forecasts is two-fold.
I often see businesses take ‘last year’s’ numbers and build from there. The assumption is that last year will repeat, therefore we know how much additional business we want to win.
That base line is often wrong. Last year’s actual results will include losses. You will have likely lost business. You will likely lose business this year too.
And I’m not talking about known losses; that business you know have told you they are (mistakenly) off to pastures not you.
No, I’m talking about attritional losses. Losses that will occur through no fault of yours or your salespeople. By doing absolutely nothing wrong you will probably lose business. The buyer who loves you will move on (hopefully taking you with them, but that always takes longer than you think), the business will be acquired, merge, cease trading. A new CEO/CFO will take over and want to make changes. A whole gambit of things really. Any customer change is a huge opportunity indicator for new business, but not so welcome when it’s already a customer of yours.
So what is that attritional value? 5% 7%? 10%? Let’s say 5% to be kind.
A 5% loss of existing business needs to be replaced. With new. That means the Rolling Pipeline value has just gone up again. For every 5% of business you lose, you need 3 times that value in ‘win value’ to replace it.
And 8-12 times that value in ‘final quote’ stage on your Rolling Pipeline.
It never ends does it!?
New Business Sales Forecasting - What Are The Takeaways?
1. Base your forecast on solid ground – the same as last year, less the lucky break win – then add in any additional resource (people and/or time) you can dedicate to it.
2. Factor down the ‘win value’ to 75% of its expected value and forecast the lower value.
3. Over-egg what you think you need and want in new business wins. If you seek £1m, then set up to go for £1.5m. Maybe even £2m
4. Make new business behaviour a constant feature, not turn-off-and-on-able; it often takes longer than you think to fire up those new business engines.
5. Factor in attritional loss of existing business to your new business objectives
6. Coach and educate your salespeople to the reality of new business ‘hope versus reality’ numbers. They won’t like what they hear but will thank you for it in the end
7. Get comfortable with the ‘Rolling Pipeline’ as a key metric of success and progress – and include those required/desired values and volumes for every stage of the process.
8. Track your conversion rates at the various stages and review – you may well find that your win rate, or that of an individual in your team, is an impressive 1 in 2 but your /their Stage 5 to 6 (‘final quote’ to ‘decision making’ stage) ratio is only 1 in 5. What’s that telling you? What can you do about it? Learn from your losses.
Gary Naphtali
With a 30-year career in sales leadership and senior leadership roles at a regional, national and international level, Gary has worked with, advised, coached, mentored and trained salespeople, sales leaders and sales teams from over 100 different businesses across a variety of commercial sectors, from start-up to recognised market-leaders.
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