We missed our forecast again! Why?

Last week I was speaking with the CEO of a vertical SaaS company about sales. He was concerned that they had been missing new sales forecasts the past couple of quarters and what he could do about this issue.

This is not uncommon, particularly for earlier stage companies (less than $10M in ARR). Start ups by nature have discontinuous growth. And, forecasting is only as good as the cleanliness of your opportunity pipeline which for many companies is a challenge.

Forecast or Target?

But in conversation, the first step was to determine if it was the forecast they were missing and not the targets (as set by budget). Forecasts are based on what your Opportunity pipeline is showing whereas targets are often determined by the budgeting process. I have a lot to say about targets and how precision in revenue targets is a pipe dream, but will save that for another article. Regardless, the causes for these are often very different.

Once we established the issue is missed forecasts, we reviewed a few opportunities that were forecasted to close in the past quarter and have not yet closed.

For the record, I don’t think looking at a few opportunities and magically coming up with a solution is realistic but I did want to create hypotheses of what they should be diving deeper on to get to the root.

There were two glaring issues in the opportunities we reviewed and I would hypothesize these are causing their miss on forecast. And these two issues are ones I see over and over in growing SaaS companies.

Cause #1: Sales process doesn’t mirror buying journey

I’ve written about this before. Customers have a process to procure high consideration purchases. They don’t care about your process.

This SaaS company sells at the enterprise level. Their product is a high consideration purchase. A product which requires companies to commit resources (time, money, people) to the buying process. There is a DMU (decision making unit) and DMP (decision making process). Their stages did not reflect this. They had three stages, which were basically Discovery, Proposal, and sit and wait (the last stage is sarcasm but the real stage title was just as obscure).

The reality is that there was no way to understand what stage the deal was at in the prospect company’s buying process. So, by default, there was no way to forecast it.

Cause #2: Lack of objective pipeline criteria

Accurate sales forecasts begin with a clean sales pipeline. That means no “bloat” — i.e., dead or stalled sales opportunities clogging up the pipeline.

A critical first step in avoiding a bloated pipeline is developing objective “exit” criteria for each stage of your pipeline. The idea is that before an opportunity can advance from one stage to the next, it must meet specific criteria based on the customer’s behavior, not just your sales activities.

The customer-focused criteria should be objective, active, and tangible.

For example, consider a typical stage in most sales pipelines: Identify Customer Needs.

Common seller’s action would include “identifying the customer’s business problem” and “quantifying economic consequences of the problem.” The corresponding customer’s actions could be “Customer acknowledges the problem and has confirmed the economic consequences.”

The good news is that they had exit criteria on each of their stages. The bad news is that it was a laundry list of sales activities. They would be better off with less criteria overall and have that criterion based on customer behavior.

For example, the litmus test I use to validate an opportunity to move out of “Discovery” is to ask the rep, “What problem did they agree they have?”. This simple question will reveal both if we have identified an actual problem, which we solve differently than alternative solutions, and the customer has agreed that this is the problem we need to work together on solving. If you cannot answer this question the deal should never have moved from its initial step in the sales process.

Salespeople and their managers moved opportunities through the pipeline based on subjective judgments in those cases. Not surprisingly, without objective criteria based on customer actions to check the salesperson’s natural enthusiasm, these teams had bloated sales pipelines with many opportunities languishing in the funnel and missing forecast date.

A thorough audit

I’m sure a thorough audit of their sales process can reveal more hypotheses they can then test against in order to find the challenges and start having more predictable forecasts. Achieving your forecast is a huge mental lift to the team and organization.

While making accurate sales forecasts is always challenging, it’s essential. As you develop your sales pipeline methodology, consider incorporating customer-focused exit criteria in each pipeline stage. Also, pay attention to essential activity metrics, starting with the number of new sales opportunities added each month, to ensure that your forecast doesn’t have a math problem. Ensure that you understand and are mirroring the buyer’s journey. Finally, pay attention to the quality of meetings your salespeople are having.

Thanks for reading. I’m John McAuliffe and I help companies accelerate growth more consistently and with greater predictability.

I am a learner. I find myself constantly reading on a variety of topics with an insatiable appetite for continuous learning. My thoughts on business have been influenced by many. You may feel a bit of déjà vu in reading some of my thoughts because of this. When it comes to strategy and business management systems I follow the likes of Jim Collins, Roger Martin, Gino Wickman, Verne Harnish amongst others. On consumer insights, marketing and sales I am influenced by the likes of Adele Revella, John McMahon, Geoffrey Moore and many others. Thanks for reading.