You're talking with a major prospect about a deal that could be worth$50,000. What is the value of that prospect? Many people would answer"$50,000." True, that is the "potential," but it is not arealistic assessment of the "expected value." The difference lies inthe probability of close.
Here is a way to place a value on that prospect that includes the element ofprobability:
A. Start by defining the key steps in your sales process
A simple sales cycle might include:
- Initial sales call
- Formal presentation
B. Determine the probability of close at each key step
This is based entirely upon the results of prior sales campaigns. Forexample, if 1/3 of prospects who reached the demo stage have historically endedup buying, your probability at that step is 33%. Your chart of sales steps wouldthen look like this:
- Initial sales call - 10%
- Formal presentation - 20%
- Demonstration - 33%
- Proposal - 60%
Most sales people intuitively feel the probabilities at each step should behigher. The buyer might be gushing with excitement after the first call, so thesalesperson feels the sale is in the bag. By using historical numbers, ratherthan looking at how individual prospects feel, you end up with more conservative - and likely more realistic - average numbers.
C. Calculate the current value of each prospect
For each prospect, multiply the potential value of the deal by theprobability associated with the most recent sales step.
Example: If you have just completed a formal presentation to your $50,000prospect, but the demo is not yet scheduled, the current value of that prospectis $50,000 x 20% = $10,000. Once the demo is successfully completed, theexpected value rises to $50,000 x 33% = $16,500.
The key to making these forecasts accurate, of course, is having detailedrecords of prior sales campaigns from which to build your probability numbers.You will need to establish separate sets of steps and associated probabilitiesfor:
- Different product lines or market segments
- Different price points
- Direct sales vs. reseller sales
- Initial sales vs. add-on sales
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