Lead forecastingThe ability for marketers to forecast the number of new leads to be generated is essential for any analytically driven B2B organization. There are two different methodologies to forecast leads, each with its pros and cons. In this post, we will explore both so you can adopt the one that makes the best sense to your business.

The two methodologies are:

1: Financial plan-based

In this methodology, the starting point is the Total Sales $ forecast for the organization. Then, using various conversion ratios based on historical data, the required number of new leads is estimated.

2: Sales headcount-based

This methodology is based on the lead consumption pattern of sales reps, and planned sales rep head count. This methodology can be simple or complicated based on the analytic resources available and the accuracy desired.

The deeper dive:

1. Financial Plan-based Lead Forecasting

This methodology is more widely used because it starts with the organization’s financial goal, which gets the marketing department in sync with the broader organization. The key steps are:

  • Start with the Total Sales $ goal
  • Identify how much of this Total Sales $ should come from new customers (“New sales $”). For this, use the historical ratio of New-to-Total sales
  • Next, estimate the New sales $ that should come from marketing leads (“New Sales $ from Marketing”) – this is based on the historical ratio of New Sales $ from marketing to Overall New Sales $
  • Then, calculate the number of new wins needed from marketing leads. Derive this by dividing New Sales $ from marketing by Average Sales Price $
  • Finally, estimate the number of leads using the historical ratio of marketing leads to win

Make sure that all the ratios used in the above methodology span only the duration for which the forecast is made. An an example, if the forecast is for the quarter, the ratios should be for the span of the quarter as well.

Pros of the Financial Plan-based forecast

The main advantage of the Financial Plan-based approach is that it’s consistent with the organization’s financial goals. This approach is always helpful, especially when marketing is striving to increase its credibility

Cons of the Financial Plan-based forecast

The main drawback of this methodology is the inherent assumption that leads generated in the period will close in the period. In fact, for the majority of companies, most leads generated will usually close one or more quarters down the line. Thus, this approach has a weak foundation from a timing standpoint.

2. Sales Headcount-based Lead Forecasting

This methodology is based on the premise that each sales person consumes a specific number of new leads per period. One merit of this methodology is that the framework can be simple or complicated based on the analytic resources available in your organization.

In the simple approach, look at lead consumption per sales rep (the rep responsible for closing deals) in comparable periods in the past. Then look at the number of sales reps in the forecasting period and multiply by the average lead consumption amount and voila! – You have your lead forecast!

The complicated (and more accurate) approach looks at nuances of the sales organization’s composition, such as:

  • New vs seasoned sales rep. New sales reps consume more leads because they need to build their pipeline, whereas the seasoned rep has an established pipeline and therefore consumes fewer leads. Keeping this in mind, estimate the following:

o   Average lead consumption for the period by seasoned rep

o   Average lead consumption per new rep. From this, identify the incremental lead consumption for new reps and how long they generally need this incremental consumption. Six months to one year is very likely.

  • Consider the structure of the sales organization. In many organizations, there is an inside sales team whose job is to call on leads and prime them for a contact with the sales rep responsible for closing the deal. To complicate things further, some organizations send the high quality leads directly to the closing sales rep, bypassing the inside sales team. Here are some ways you can model this:

o   Estimate the average lead consumption by closing sales rep (direct high quality leads)

o   Estimate the average lead consumption by inside sales rep. Also estimate the number of appointments set by inside sales rep and the corresponding lead-to-appointment ratio

o   Articulate the lead consumption equilibrium between inside sales and closing sales reps. One straightforward version is “X number of Inside Sales reps for Y Closing sales rep”.

Considering the above factors, come up with lead consumption forecast with all (or a subset of) the following components:

  1. Lead consumption by seasoned closing sales rep (direct lead allotment)
  2. Lead consumption by new closing sales rep (direct lead allotment)
  3. Lead consumption by the inside sales team (for generating appointments)

Pros of the Sales Headcount-based forecast

The advantages of Sales Headcount-based forecasting are that it:

  • Is based on the reality of actual lead consumption during the comparable periods
  • Enables scenario analysis based on headcount projections and efficiency variations

Cons of the Sales Headcount-based forecast

The disadvantages are:

  • This estimation can get very complicated, requiring committed analytic resources
  • In some organizations, lead consumption history is difficult to get from sales organizations.
Forecast: sunshine

Your forecast: blue skies, green lights, and enough qualified leads.

Concluding thoughts

While we explored the two different methodologies, the main takeaway should be – Start with something to forecast your lead requirements. Forecasting (and the subsequent analysis of results) is essential for building up marketing’s credibility in your company, aligning sales and marketing, and evaluating how well marketing’s programs and campaigns are working. Select the methodology that is easier to implement with the resources and information available to you, and add layers of complexity over time to make the forecasting more accurate.

If your situation permits, we recommend doing the forecasting using both methodologies. This will give you a range in lead-requirement forecasts that will make you extra confident. You can then translate that confidence to your future marketing budget and resource asks.

What’s your experience with either of these methods?

Joju Mangalam, Director of Marketing Performance Management for Act-On, leads the company's marketing performance initiatives. His expertise includes marketing analytics and strategy, loyalty marketing, and product management for organizations including eBay, Wells Fargo, and Kana. He holds an MBA from the University of Chicago, an MS in engineering from the University of Washington, and a BS in engineering from the Indian Institute of Technology.