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A Comprehensive Approach to Sales Forecasting for SaaS Startups

In my recent endeavor as the Head of Sales, APAC, alongside my role as Country Manager at Sendbird Korea Inc., I’ve embarked on a journey that brings me back to a sales-focused role after a hiatus of five years. Previously, as the Head of Growth at Sendbird from 2015 to 2018, I was involved in all aspects of the business except coding. Now, equipped with newfound knowledge and experience in sales forecasting, I am excited to share insights that can benefit individuals transitioning from IC (Individual Contributor) roles to the Head of Sales position at a new company, as well as founders and CEOs tackling their first forecast analysis without a dedicated sales executive.

Throughout the past four months, I have been learning on the job and applying various sales forecasting methods to my work. In this article, I aim to provide guidance and shed light on the methods that have proven effective in my role. While I don’t utilize all of these methods individually, I have found that a combination of them yields a range of estimates for each quarter. Let’s explore these methods further.

Method 1: Intuitive Forecasting Method

At its core, Intuitive Forecasting involves soliciting forecasts from each sales representative for the upcoming quarter and aggregating the numbers. However, the true value lies not solely in the method itself, but in the subsequent analysis and conversations that enable sales representatives to arrive at rational forecasts.

It is important to note that sales representatives may generate forecasts that are either too conservative or overly aggressive, influenced by their individual characteristics. To address this, conducting conversations with team members for Intuitive Forecasting should involve a careful analysis of the quota, actual results from the previous quarter, and the sales pipeline opportunities that support the forecast for the next quarter.

Method 2: Length of Sales Cycle Forecasting

This method proves effective for products that have progressed beyond the Product-Market Fit stage and can be sold through a standardized process. By utilizing the average sales cycle as a weighting factor, it becomes possible to calculate the expected Annual Recurring Revenue (ARR) from the time each opportunity qualifies to the time it enters the pipeline.

To ensure accurate results with this method, it is crucial to implement a system that rigorously screens out low-quality leads before they enter the sales pipeline. This can be achieved through thorough lead scoring in the marketing phase. Additionally, analyzing the average sales cycle by country, lead source, ARR size, or territory (Enterprise, Mid-market, Commercial) allows for the identification of unique characteristics that can contribute to a more sophisticated forecast model.

Method 3: Opportunity Stage Forecasting

Targeting B2B and SaaS startups that have progressed beyond series B funding, Opportunity Stage Forecasting relies on well-established sales processes, data accuracy, and the use of sales CRM tools such as Salesforce.

With this method, weights are assigned to each stage, and the ARR of opportunities within each stage is multiplied by these weights to calculate the ARR across the entire pipeline.

Method 4: PQR (Pipeline-to-quota) Funnel

While not personally utilized, the PQR (Pipeline-to-quota) method, introduced by renowned B2B/SaaS VC Tomasz Tungus, proves valuable in certain scenarios. Particularly suitable for products with consistent quarterly quotas and a steady flow of inbound leads through developer communities or SEO, this method may initially pose challenges in intuitively understanding the number of ARR that sales will close in a given quarter.

High-Medium-Low, So What’s Your Estimated Number?

Having conducted the necessary analysis, it is essential to effectively communicate the results in board or management forecast meetings, which often have tightly scheduled 30-minute increments. In these meetings, simplicity and clarity are key. A succinct explanation of your conservative, most aggressive, or rational forecast for the next quarter will suffice.

However, it’s important to note that the top-down analysis we’ve discussed thus far is only one aspect of the forecasting process. It’s equally vital to have a bottom-up understanding of individual deals that contribute to the overall numbers. This entails delving into the specifics of each deal and gaining insights into their potential and scale. Admittedly, understanding the intricacies of all 80 deals projected for the next quarter can be demanding. Nevertheless, as the Head of Sales, it is your role to instill confidence in the board and the company’s top management by demonstrating a comprehensive grasp of the deal landscape.

By incorporating these methods and strategies into your forecasting approach, you can enhance the accuracy and reliability of your sales forecasts. Whether you are transitioning to a Head of Sales role or taking on the responsibility of forecast analysis as a founder or CEO, a well-informed and strategic approach to sales forecasting is paramount to drive success in your organization. Embrace the insights gained from analysis, engage in productive conversations with your team, and align your forecasts with the goals and vision of your company. With these practices in place, you can confidently navigate the dynamic world of sales forecasting and propel your organization towards growth and prosperity.

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