If your Sales people work with lists of opportunities, they usually have captured the date when they expect the opportunity to close (Close Date), the expected order amount and a high level description of the solution the customer considers buying. This is essential information they need to be capable to answer the essential questions of any sales forecast: When do I expect a customer to buy what for how much. You only have to ask for one additional data element. You need to know in which stage of the sales funnel opportunities are (i.e. where they are in the buying process), based on customer evidence. Now you have all you need from your sales people to construct a rule based sales forecast.
You are actually only one step away from a Rudimentary Leaking Funnel Based Forecast. You just need to define yet how much your funnel is leaking at each of the stages. To do this, we have to refine your rule of thumb that only a fraction of the deals your people are working on will close. Let us call this the overall conversion rate. Instead of this single overall conversion rate, you now define a separate conversion rate for each transition from one funnel stage to the next. I suggest these conversion rates represent the multiplier (a number < style=""> you have to apply to express the likelihood that deals in a certain stage will end up as won deals, This actually is a complicated way for saying you come up with as many rules of thumb as you have funnel stages. Now you are ready to apply the formula in the picture to arrive at your Rudimentary Leaking Funnel Based Forecast.
Do you hate mathematics? Please don’t run. All this formula is saying is that you only sum up separately for each funnel stage the expected order amounts of opportunities with a close date within the forecast window (e.g. between today and 30 days from today if you want to forecast your sales for the end of next month). You then multiply the sum for each sales stage with the respective conversion rate. Then you add up all these weighted sums to arrive at your Rudimentary Leaking Sales Funnel Based Forecast.
Should you need to know if this method has any academic foundation, you will find the principle described in a similar fashion in Marketing Metrics: 50+ Metrics Every Executive Should Master by Paul W. Farris et al. published by Wharton School Publishing. For experts: The major difference to what I describe here is that in the book, individual close dates of opportunities are replaced by the average time it takes opportunities to flow from their current position to the end of the funnel. I hope you will see later that tracking the close date of individual opportunities, will give you some further levers to manage your sales force.
You might now wonder how to determine the conversion factors for each funnel stage transition. You might even worry that you never have collected this type of data until now and thus this method is not applicable to your situation. After all this mathematical babble you will be surprised to hear that all it takes is your best guess. Precision is not required. I would expect, at the start you will not be worse off than with your single rule of thumb. Just start. I will show you later how with one additional data element, captured for each opportunity you can later calibrate your model so the conversion rates will reflect exactly how your sales people did in moving opportunities through the funnel in the recent past. This is to say we will extend our model to a simple “learning” expert system.