As head of sales operations, Marci faces intense pressure to accurately forecast the business for the coming quarter. Without the insight that granular analytics can provide, the sales team could offer unnecessary incentives, make poor deal decisions or incorrectly forecast corporate performance.
“Sales operations leaders must forecast their broad, varied business with a high level of accuracy,” says Steve Rietberg, Senior Director Analyst, Gartner. “To meet these demands, they should divide their business into segments and select metrics that best predict future behaviors within each segment.”
Better analytics enable sales managers to recognize trends in their territories, diagnose issues and coach their sellers more effectively
By looking at each individual segment using tailored metrics, leaders are better able to accurately forecast. Segmentation enables them to look at how internal and external forces influence each part of the business.
Determine customer segmentation
Customer segmentation for sales is not new; in fact, it’s a complex but critical step when determining sales strategy, and it forms the basis of a myriad of other decisions, such as sales coverage and territory design. But segmentation for forecasting purposes doesn’t need to be based on customer attributes or mirror the sales organization design.
“Sales leaders may benefit from choosing a segmentation approach that differs from previous strategies,” says Rietberg. “This guarantees that each manager receives visibility into the performance of their business in multiple areas and can then take specific actions on their ongoing planning and coaching efforts.”
Leaders can recommend a segmentation dimension by considering the key characteristics of the business. Collaboration with finance, marketing and product development is required to ensure a complete understanding of all data available to support their selected segmentation.
Sales operations leaders and heads of sales should agree on a single segmentation dimension for forecasting. This may be difficult, as each may have differing perspectives on what primary factors drive a sales organization’s revenue. For example, a sales operations leader may suggest segmenting by sales channel based on past revenue trends for the indirect business and pipeline conversion.
Alternatively, sales leaders at that same company may suggest segmenting their forecast by customer industry based on past success. These leaders can perform “back-testing” on prior periods to help determine the ideal segmentation approach.
Determine sales performance metrics
Sales operations leaders must consider each segment separately to determine which metric provides the closest correlation with sales performance. For example, Marci’s organization decided to use revenue source as the foundation for their forecast segmentation because significant portions of their revenue comes from new customer acquisition, account expansion, royalties and renewals. Performance in each of these segments is predicted using distinct techniques.
- Sales operations can accurately forecast royalty revenue using contract data and usage trends.
- Sales operations can calculate renewal forecasts based on installed base data and historic renewal rates.
- For the new, upgraded and add-on business segments, pipeline conversion analytics can provide sales operations with reliable insight into segment performance.
Sales operations leaders must ensure that the forecasting approach is simple and evidence-based to encourage adoption. If forecast analytics calculations are easily explained, sales managers are more likely to embrace the methodology and take ownership of them within their teams. Ultimately, adoption will depend on whether contributors benefit, personally and professionally.
The benefits of segmented forecasting
“Better analytics enable sales managers to recognize trends in their territories, diagnose issues and coach their sellers more effectively,” says Rietberg. Managers equipped with segment-based analytics can use that intelligence to challenge their sellers’ forecasts and negotiate a challenging, but attainable, target for their territories.
Careful managers will also use the qualitative feedback they glean from their sellers to inform the judgment they apply to their sellers’ forecasts. Sellers’ forecast accuracy will improve but, more importantly, their performance will improve when this approach replaces conservative forecasts with challenging and attainable targets.
Companies that adopt a top-down segmented forecasting approach should maintain a bottom-up qualitative forecast process at the seller level as part of their sales managers’ regular cadence. Sellers must review their pipeline and key deals with their managers and commit to a revenue target for the period. Executing that process instills a sense of ownership in the seller that is lost if an individual’s forecast is the product of a calculation exercise.