It might sound like a crazy statement, however hear me out - Would you try and predict the stock market?
When it comes to trying to predict the stock market, or at least understand and model the stock market, the approaches used (note that I don't say "work") utilise thousands of separate data points, years of historical trends, and even when the models might work, they serve to scrape only the cream off the top.
Investment firms pour billions in to algorithmic trading, culminating in a race towards more data, faster computing and faster internet connections, even dedicated radio wave towers.
The amount of money that is spent on trying to model data using exclusively past data is not only incredibly difficult & expensive, but going as far as predicting the stock market it generally deemed impossible, due to the amount of variables at play.
So what can you do about it?
Forward looking data
To look forward, you need to use data that is not historical, and instead uses events that are due to unfold either happen in typically one of two ways:
Announced as news (Market information)
Insider news (You cannot trade off this information)
When news is announced by businesses, this is where algos can jump on the news, however its a game of whoever quickest to the news that wins. When it comes to "predicting" It's not about who has the most "accurate" algorithm, in fact there's no predicting at all - it's simply a case of who has the quickest access to the most information that can rebuild their models & forecasts off the data.
So why is any of this relevant?
I want to talk about Pipeline Forecasting, and the revenue tools & software platforms that create "predictions" based off trend analysis:
It is fundamentally flawed.
There - I said it.
The problem with pipeline forecast tools
Let me give you a scenario:
You cut your entire sales team
You cut your entire marketing budgets
You turn off your website
You switch off the lights
If you do all of the above, and run regression analysis on 3 years of pipeline, it will not forecast the swift inevitable: The business will die.
And if revenue forecasting platforms truly are accurate enough, surely they could use the same models towards predicting outcomes of the stock market?
These companies are still subject to the same market effects, spending patterns, seasonality that all affect listed companies, so why has noone stepped back to question if it's even works?
After all - Correlation does not equal causation, and if your models have worked purely of statistical regression analysis and not failed yet, it could simply be luck.
Over the last few years we've even seen some of these companies trim back headcount in a significant way, affected by changes and shifts in market demand, key deal metrics and ability to hit revenue at the pace they had planned - If these companies really could predict revenue beyond pipeline, why could they not predict their own?
Why you can't Run Revenue on Pipeline forecast
The challenge with pipeline forecast is that the window in which it looks is far too small - The average SaaS sales pipeline is 90 days long, meaning that outside of anomalous deals, statistically speaking your opportunities that turn into revenue in in 100 days time are not yet an opportunity for another 10 days.
This means that as a business, if relying on pipeline forecast, you're limiting yourself to seeing what will happen in only 3 out of 12 months of the year: You are running 75% of each year blind
When you look at the two approaches holistically, you realise that they have two very different uses & purposes:
Pipeline Forecast - What can we do as a business to ensure that the current opportunities in pipeline close at the highest conversion rates and deal sizes possible.
Revenue Projection - What do we need to do strategically as a business to ensure that we generate and close enough pipeline to hit our revenue and growth targets.
With that distinction in mind, when it comes to planning and board level decision making, it should be made using revenue projection, not forecast.
Revenue Projection with future data points
To really get an understanding of what revenue looks like into the future beyond your pipeline forecast, you need to be taking into account future data points:
Hiring plans
Promotions
Team moves and Changes
Attrition Risk at Individual Level
Marketing plans
Strategic future initiatives
None of this is ever entered, ingested, understood or utilised by revenue forecasting platforms, which means that the longer term projections that they make are missing critical parts of the revenue picture.
All of the above has an impact on:
The volume of inbound
The ability to effectively handle inbound
The ability to generate outbound
The ability to generate sufficient pipeline
The ability to handle sufficient pipeline
The ability to effectively service clients
Fundamentally, accurate revenue projections requires an understanding of sales capacity hooked up to vast amounts of data points, far beyond the single data point of open pipeline in any given month.
How can you better project your own revenue?
Whilst you can attempt to build your own bottom up model of revenue, and tools out there exist to link live data into spreadsheets, the baseline plan is not even half of the story.
Getting an accurate baseline of today can be done with the right skills...however...
...Building solid plans comes from understanding the bounds of possibility - Both good and bad, so that no matter what you plan it's designed in a way that can sustain.
This means not just using a bottom up revenue projection model, but having the mechanisms to scenario test, spur off different plans and scenario test them also.
Planning should be designed in a way that it doesn't take weeks to answer questions like "what happens if we defer these 3 hires?" or "what happens if we invest in doing X?"
It should also be used for disaster planning, and understanding things like:
What happens if conversion rates decrease
What happens if deal sizes decrease
What happens if sales cycles increase
What happens if Cost Per Lead (CPL) increase (and budget doesn't go as far as planned)
etc.
All of these things should be quickly and easily available, at any point in the year, giving you an ability to craft a new route to target, or manage expectations early on.
Introducing Clevenue
This is where we come in, helping Revenue Teams build and scenario test plans that are capable of withstanding change. We help businesses to establish their current performance baseline off all of the critical factors we highlighted earlier on, where they can then build scaling, investment and strategic plans that keep track with performance.
Users can build their own permutations off the plan, understanding the impact between the current baseline, and the new version in a sandbox.
No matter what businesses are hit with, they are always able to understand the impact of that that means for them in terms of what pipeline is needed on top of what is expected to be generated, and how that translates into hiring through our hiring recommendations.
Run Revenue from the Plan, not the Forecast
If you're about to start revisiting your plans, or re-building from scratch, it's might be the perfect time to take a look at how easy planning can look, all without the need for extensive spreadsheets, and the constant back and forth between teams.
It's out the box revenue projection linked with live data, that allows you to get started with your own scenario testing in just minutes. Click the button below to learn more.