Every company has a different sales cycle that is unique to its sales team and product. It is crucial for companies to understand their sales cycle because it will help them more accurately forecast revenues and make better business decisions. All sales forecasts are dependent on the length of the sales cycle. Companies can determine sales cycle length by using historical, pipeline, roll-up or opportunity stage data gathered from their sales pipeline. To determine a more accurate sales cycle companies can also rely on rep’s intuition or if they have the resources use other complex methods like multivariable, regression analysis and AI technology to determine sales cycle length.
Sales Cycle
A sales cycle, to put it simply, is the amount of time it takes for a sales team to close a deal. In theory, the faster a company closes a deal, the shorter the sales cycle will be and in return, the faster the company will be able to generate money.
Your sales cycle is the series of steps that all your sales reps go through to close deals. Understanding your sales cycle is vital to understanding how far along a potential deal is and how long it will be until that potential deal can close.
Sales cycles are different for every company and oftentimes even every company product but most sales cycles go something like this: Seeking, Vetting, Demo, Concerns, Closing, Referral.
Seeking
In this phase of the sales cycle, a company’s sales team will try to find prospective customers that a rep can approach.
Typically, this is done by the BDR team of a company and once the prospects have been collected, then the BDR team gives the list to account managers or inside sales representatives.
Vetting
Once the prospects have been filtered, the sales reps go and do their due diligence. This is where they do background research into the prospective buying company to understand that particular company’s needs.
Typically, this is referred to as understanding the buying company’s “pain”. At this point in time, the prospect becomes a sales qualifying lead.
Demo
After final vetting is done by the reps, the “the leads” that the rep deems as worth pursuing, the rep goes and pursues by scheduling a demo with the “lead”.
Concerns
At this point in the sales cycle, the reps and the potential lead should be in communication and the rep goes and addresses all the concerns of the lead.
Closing
Once the concerns have been addressed and all negotiations are complete, the final contracts are drawn out and signed and the deal gets closed.
Length of Sales Cycle Forecasting Summed Up
Length of sales cycle forecasting, as the name implies, is a revenue forecasting method which uses your sales cycle length to forecast your future sales.
It predicts future sales using the “length” of each individual opportunity to determine when that opportunity is likely to close.
This means that in order to use this sales forecasting method, you must know your sales cycle, how long it is, and how many steps are inside of it.
Length of sales cycle forecasting with accurate and up to date data will provide you with a very robust and reliable source of sales forecasting.
This forecasting method brings predictability to your sales forecast by allowing you to estimate projected monthly, quarterly or even yearly sales figures.
Is Length of Sales Cycle Forecasting Right For You?
The length of sales cycle forecasting should be used by a company that knows its sales cycle, how long it is, and what steps are in it.
This sales forecasting method, like any other forecasting method, requires a company to have previous data.
A brand new company that is less than a year old can set benchmarks each time its sales cycle gets shortened and use that benchmark for forecasts.
What is the Purpose of the Length of Sales Cycle Forecasting?
Length of sales cycle forecasting is a very reliable method of revenue forecasting which estimates the closing times for each deal in your pipeline.
Length of sales cycle forecasting looks at what stage in your sales cycle each of your potential deals is in. This allows for the opportunity to integrate lead sources into deals in order to make forecasts more accurate.
Length of sales cycle forecasting is objective, not subjective. Since length of sales cycle forecasting is data driven, this method of forecasting will produce very objective revenue projections.
This makes the length of sales cycle forecasting one of the most reliable forms of sales forecasting.
The length of sales cycle forecasting is robust because it allows you to add in the potential deal’s source, which only adds to its reliability.
If used correctly, this feature can increase the accuracy of forecasts.
How to Calculate the Length of Sales Cycle and Use it in Forecasts
Typically, most companies have CRM softwares that update a company’s pipeline and adjust a sales cycle in an organized fashion.
However , companies should do their own due diligence and set KPIs like sales effectiveness, customer metrics, and product pricing indicators to more accurately adjust the pipeline.
If your company doesn’t have a budget for a CRM software or you would like to know how to calculate the average length of a sales cycle, then use the formula below.
First, in order to calculate the length of a sales cycle you need to calculate the number of days for the total sales from an opportunity.
To do that, just sum up the number of days it takes from the initial contact to the point where you win the deal and the lead becomes a customer.
(Number of Days From Initial Contact to Winning a Customer)
= Number of Days for the Total Sales
Once you have the total number of days for all the sales that occurred within the company, take that number and divide it by the total number of deals that were closed/win and that will give you the average length of a sales cycle
Total Number of Sales/Total Number of Deals Won
= Average Length of a Sales Cycle
Implementing Length of Sales Cycle Forecasting
Now that we’ve gone over the length of sales cycle forecasting and how to calculate it, let’s get into the steps that will allow you to successfully implement the length of sales cycle forecasting into your company.
Figuring Out Your Sales Cycle
The first step in implementing length of sales cycle forecasting is figuring out your sales cycle.
This is definitely the most important step in implementing length of sales cycle forecasting since this step provides you most of the baseline information to start creating forecasts.
Figuring out your sales cycle is just determining each of the steps you have to go through, from start to finish, in order to close a deal.
This can be accomplished by thinking back to previous deals you have closed and determining the steps you went through to close that deal.
Using a spreadsheet can make this process easier. A CRM can also aid you by streamlining your sales cycle and tracking each of the steps in it.
Measuring the Length of Your Sales Cycle
Measuring the length of your sales cycle is the next step in implementing length of sales cycle forecasting. This step should be fairly simple considering that you already have your sales cycle process broken up and written down.
All you have to do is look back at your previously closed deals and find out how long they took to close from start to finish and also how long they took to progress out of each step of your sales cycle.
This step can also be made easier by using a spreadsheet or CRM software.
Figuring Out Your Stage Weightings
Next, you will have to figure out your stage weightings. Perfecting your stage weightings will ensure that you have an accurate revenue forecast, rather than one that is too big or small.
You can calculate your stage weightings using your historical sales data. You should keep this data on a spreadsheet or a good CRM software.
You will also need to figure out at what stage of your sales funnel each lost deal dropped out of your pipeline.
Using this data, you can then find your win rate at every point of your sales funnel.
This information is necessary in order to produce an accurate length of sales cycle forecast.
Generating a Length of Sales Cycle Forecast
After figuring out your stage weightings, you will want to actually create a length of sales cycle forecast. Since you already have all of the necessary data at hand, this should be fairly simple.
Once you have all of the sales in your pipeline and what stage of your sales cycle they are in written down, you just need to add on your stage weightings to every separate deal.
Moving Forward
Great job! You have just completed all of the steps necessary to complete your first length of sales cycle forecast. However, it is now time to look ahead to the future and all the steps you will need to take in order to maintain your newly created forecast.
After you have completed your initial length of sales cycle forecast, you will want to begin modifying the information in it. This will ensure that your forecast stays accurate and time relevant, since most forecasts are only good for anywhere between 2 to 6 months.
In order to keep your forecast time-relevant, you will want to consider readjusting a number of different factors including but not limited to your new conversion rate, number of deals, and deal size.
Calculating Length of Sales Cycle Forecasting
As previously mentioned, typically companies will use spreadsheets and/or CRM softwares to determine length of sales cycle forecast
Common Problems and Solutions With Length of Sales Cycle Forecasting
Even though length of sales cycle forecasting is a very good way to forecast sales that comes with some big positives, this method of revenue forecasting certainly comes with its distinct problems.
One of the downsides that comes with length of sales cycle forecasting is that deal size isn’t always considered with this forecasting method.
Since this forecasting method uses the length of your sales cycle, it can produce forecasts that are inaccurate when forecasting a deal far outside of your average deal size.
The other main downside that comes with length of sales cycle forecasting is its need for precise data.
Although length of sales cycle forecasting is typically pretty accurate, without precise data, its forecasting accuracy will decrease significantly.
Nevertheless, any problems involved with length of sales cycle forecasting can be conquered.
The two main issues involved with length of sales cycle forecasting, being unusual deal size calculation and data reliance, can be overcome by keeping your data up to date and by using a simple, user-friendly CRM software.
Refreshing your data when necessary will keep your forecast relevant and stop it from becoming useless and outdated, while a sales forecasting CRM can help you manage your relations, store your data, and predict your sales.
Conclusion
The best way to have accurate forecasts of any kind is to automate the process. This can eliminate human error and allows for more accurate data.
By automizing the length of sales forecasting process, a company can have access to objective data that can be used to build out sales reports. Companies can also use this forecasting method to plan for scenarios like global pandemics. Like with any sales forecasting method, there isn’t a universal method that can be used as a forecasting tool for every company.
Each company needs to find what works for them and tailor their forecasting methods to best accommodate their needs.