A frequently used method to factoring into the forecast the fact that not all deals a sales organization works on are going to be won, is to assign a win probability to each opportunity in your list. If you then sum up all the expected order values multiplied by the respective win probability of all the opportunities in your list, you arrive at a weighted forecast.
An often encountered problem with this method is that there are sometimes as many definitions of what win probability is as there are people contributing to this forecast. For one sales person forecast probability might express the likelihood that a deal will close at a certain time, for another member of the sales team it might mean the likelihood that the deal will close with the currently expected order amount.
Especially managers like to make a link between the sales process (if there is one) and the win probability. An opportunity just identified will have a lower probability than a deal where you have already given a presentation. If you have submitted a bid, the win probability increases further. If you impose such kind of rules to the sales organization, you at least start to have some commonality on how probabilities are to be assigned. However your forecast might still go way off.
The fact that your customer has listened to your presentation or has received your offer, does not necessarily mean that he/she is more ready to buy than when you first identified the deal. Remember the study by Dickie and Trailer (CSOInsight) which is telling us that 20% of all deals forecasted end up with no decision by the customer.
If you only work with a short list of opportunities and/or if you have deals on your list that are so big that they cannot be balanced by other deals even if you assign a very low probability to this fat deal, the errors produced by the weighted forecast method can be enormous.
However if the law of large numbers plays into your hand, a weighted forecast might work. It could thus be applicable on the corporate level of a large global organization. For lower levels in the organization however, applying a weighted forecast will not have much practical value.
We are thus faced with the situation that everybody is to assign a probability to their opportunities they manage; however only on the highest organizational level does it start to be meaningful. On the individual level it is even counterintuitive. I remember a sales person once asking me if I could explain to her the logic of having a weighted expected order amount for her each of her opportunities she managed. She never had seen deals half won or three quarters lost. The only thing I could answer was that it helps upper management making a forecast. I could not disagree with her when she voiced her opinion that assigning these win probabilities was just an administrative burden to her.
Next time, I will start presenting you a concept, that is useful to both the individual contributors and the executives of a sales organization.