Why are Marketing & Sales Forecasts Usually Wrong?

Because forecasts attempt to predict the future they will always be wrong to some degree.  Problems arise with forecasts that are usually far off the mark and the resulting impact on a business.

Not that Marketing and Sales can’t or don’t attempt to produce a good forecast, but mostly because the process many companies use is the reverse of what it should it be to produce a good market-driven forecast.


“I skate to where the puck is going to be, not where it has been.” – Wayne Gretzky

The above quote from Wayne Gretzky succinctly describes the fundamental problem with the way many companies do forecasting – it’s primarily derived from what happened last year – what was sold based on where the market was, instead of where the market is going to be and what customers plan to buy.

Take the current state of business software companies as an example of this continuing wrong-headed forecasting by business, sales and marketing executives:
  • Traditional on-premises business software vendors’ license revenues are down an average of over 30% for the most recent 12 months.
  • Software as a Service (SaaS) business software vendors’ new subscription revenues are up an average of over 20% for most recent 12 months.
The announcements from on-premises vendors about their results are that the shortfall is due to the economic conditions.  But, the SaaS vendors are growing in the same economy and markets.  It seems that the on-premises vendors have deeply flawed forecasting and planning processes given the size and claimed unexpectedness of the shortfall.

Now there’s a flurry of announcements from on-premises vendors about plans to bring SaaS solutions to market.  But, marketers at these on-premises vendors have seen this trend toward SaaS coming since 2007 or earlier and many urged their companies to make investments and commitments for SaaS solutions some time ago.

So what happened?  More of the same.  The forecasting process usually starts with C-suite executives adding a percentage growth number to the previous year’s actual sales numbers.  Usually with no or minimal regard for market forecasts and changing conditions.  The Sales organization in turn is required to commit to make the number.  Sales then distributes the number through their hierarchy until everyone owns a piece of the commitment – the individual, team and organizational quotas.  After some negotiations, the numbers are locked in and marketing now has to somehow produce leads to support sales quotas produced by a flawed process.

And that’s where things begin to go wrong – right at the start:
  • C-suite executives want more revenue with minimal incremental investment and pressure Sales to commit to these arbitrary forecasts.
  • Sales want to do what they’re comfortable with and what worked in the past – sell more of the same stuff in the same manner.
  • Marketing and Sales work hard to produce leads and sales, but they’re swimming against the market currents.
  • Marketing knows that markets and buying preferences are changing, but it’s tough to get the right attention until the changes leap out and slap everyone with bad results from doing more of the same old stuff.
  • R&D has a huge backlog and can’t tackle any new projects for at least 2 or 3 years.

Producing good market-driven forecasts is not rocket science.  Manufacturers do it well with robust forecasting, planning and scheduling processes that drive the business from end to end.  B2C companies have a much more robust and statistically accurate process that starts with Brand Managers developing market-driven sales forecasts and business plans which become the playbook for all areas of the business.

Seems to me that the fundamental problem is that many B2B companies, especially Information Technology companies are not really market-driven – see the Marketing in a ‘Market-driven’ company article for more information about what it means to be market-driven.

How do you deal with this forecasting issue and do you have any recommendations on what has worked for you?  Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com

2 comments:

Melissa Paulik said...

Mike,

I’m eager to hear what others have to say about setting realistic forecasts and sales quotas. I worry most when leaders start to limit their expectations to what is realistic. To me it seems like a license to just keep doing what they’ve always been doing – something that marketing teams are every bit as guilty of as sales.

Perhaps the reason SaaS revenues are up is because they had to somewhat reinvent the sales and marketing process for this delivery model. Of course, SaaS is also becoming a much more attractive option to those who would previously only have looked at on-premise solutions.

All the best!
Melissa

Mike Frichol said...

There is an extended discussion about this post on the LinkedIn Sales/Marketing VPs & Directors - Software & Technology group at: http://bit.ly/bUvxP
You have to member of this LinkedIn group to view the discussion.