Many people use the terms “pipeline” and “forecast” interchangeably when there are real differences between the two. Mixing them up has specific impact on your sales and selling.
Pipeline speaks to all the opportunities you are currently pursuing or have definitive plans to be engaged with. This often needs to be separated into an active pipeline and a “leads funnel.” A leads funnel is where you manage and nurture your leads, either new leads that are not ready to be engaged by sales or those prospects that did not close but show potential of re-engagement.
The active pipeline reflects those opportunities that are moving through the sales process in a timely and predictable manner. All too many sales professionals don’t create this separation and put everything into one pool they call the “pipeline.” You can see the serious issues that arise if you use this common pool as a basis for forecasting. Forecasting based on active prospects can be difficult enough, but when you add leads (of all levels of qualification), it is a recipe for disaster.
There are a number of reasons people are reluctant to break their sales into three groups: what is ready to be forecasted; what is a prospect; and what is a lead. Active opportunities are prospects; anything else is either a lead or a client. As a result, by calling someone a prospect, it means it is active, progressing through the cycle in a timely way, while conforming to specific attributes; and there is a clear next step that both the rep and the prospect are aware of that is designed to move the sale forward. Anything else is a lead and is relegated to the leads funnel.
This still leaves the question of how much of your pipeline can or should be forecasted. Forecasts by nature have short-term visibility, with certainty declining the farther out the time frame is. As a result, the longer your sales cycle, the less precise it is to accurately predict or assess which opportunities may go through to close. So assuming you have a sales cycle longer than 60 days, the value of a forecast longer than 30 days becomes questionable, even while the same opportunity is active and viable from a pipeline perspective.
Despite a desire to have quarterly forecasts, anything more than a month out is there for decoration and ego rather than any practical utility. Just look at the experience of those companies that use the 90-60-30 day approach (or variations such as 180-90-30). First, how many times have members of your team committed to a prospect in the 30-day category before it actually closes? Usually it is at least three times. It shows up, then slips for any number of reasons. Then it is there, and then it stalls for some other reason before it actually does close.
While we can talk about the rep’s role in this, the reality is that reps are encouraged to play this game to satisfy the needs of their manager. The other is that the closing ratios are all thrown out of whack because reps are trying to please unrealistic expectations set by their organizations. Never mind that these should be presented as guidelines, and expectations should be based on actual conversion ratios; they are just an invitation for a disastrous forecast. The rep is trying to please the manager by having a whole bunch of names and numbers to cover the 5-to-1 “spread.” Therefore, if you know that half of the names are there for decoration, and you have a closing ratio of 1 in 5, your forecasts will always be off.
The most effective way to navigate this is to focus on executing the sales in your pipeline, including having a clear understanding of how long something should be in the pipe before it should either close, be deemed dead, or put back into the leads funnel. This will ensure that those within 30 days of your average close can be forecast with a degree of certainty and those over 30 days with much less certainty.
What you will find is that when you first adopt the discipline of forecasting based on actual sale cycle points rather than an arbitrary 90-60-30, your forecast will come up short. This isn’t because it is not accurate; on the contrary it is, but because you have fewer things in your pipeline. Realizing this and working on filling the pipe with real opportunities will increase accuracy and reduce stress and workload.
The discipline comes in how you decide to fix this. Some will work hard to bring in more real active opportunities; others will work on selling and improving their closing ratio to make up for the shortfall. Unfortunately, most will just add some more names to the short end of the pipe, increasing the numbers and improving the optics around the ratio, and in the process throwing the forecast further out of whack.
Tibor Shanto is principal with Renbor Sales Solutions Inc. A speaker, author, sales trainer, and all-around sales geek, he shares on his blog his insider’s perspective on how information can be used to shorten sales cycles, increase close ratios, and create double-digit growth.