Calculating the projected value of an opportunity
April 29, 2008 – 9:24 amEarlier, the weighted value for each project or opportunity in On2Biz was calculated by adjusting the opportunity value by the probability of closure, that was calculated at each milestone based on the historical movement of opportunities in the pipeline. This was giving us inconsistent results in many instances. In addition, the value did not account for two other factors that we usually use to assign higher priority to sales opportunities. Sales executives instinctively assign a higher priority to customers that are strategically more important to long term sales, and a lower priority to opportunities that take too long to move from one milestone to another. Our new methodology will account for both these factors.
The new method being implemented in On2Biz for calculating the projected or weighted value of an opportunity in the sales pipeline uses three components:
Weighted Opportunity Value = Effective Opportunity Value x Customer Grading Factor / Pipeline Velocity Factor
Effective Opportunity Value
The first component is the Effective Opportunity Value. This is calculated based on the value of the opportunity adjusted by the probability of closure. The probability is a configured standard at each milestone. However, the sales executive can over-ride it by an opportunity-specific probability.
Effective Opportunity Value = V x P
where:
V = Project Value
P = Probability of closure of the project assigned to the current milestone, or probability entered by the project manager
Customer Grade Factor
Customer grade factor assigns a higher weightage to an opportunity for higher grade customers - so as to reflect the projected customer lifetime value or customers with higher strategic importance
Customer Grading Factor = 1 + (C x f1)
where:
C = Customer grading factor (0 to 1) proportional to the expected customer life-time value
f1 = value between 0 and 1, used to adjust contribution of customer grade
Pipeline Velocity Factor
The pipeline velocity factor reduces the weightage for opportunities that are not moving at the stipulated velocity through the pipeline, measured by the delay beyond pre-defined lead times at each milestone.
Pipeline Velocity Factor = 1 + ((D/N) x f2)
where:
D = No. of Overdue days i.e. difference between Actual Lead time and Max Lead Time at current milestone
Actual Lead Time = time difference from project start date to current date
Max Lead Time at current milestone = Sum of stipulated lead times for each milestone up to the current milestone
N = Max Cycle Time i.e. Max Lead Time at last successful milestone.
f2 = value between 0 and 1, used to adjust contribution of pipeline velocity
The f1 and f2 are factors that can adjust the contribution of the Customer Grade Factor (CGF ) and Pipeline Velocity Factor (PVF) to the weighted value of opportunities. For example, if we feel that we want only 50% contribution from CGF, we can set f1 to be 0.5. Then for all opportunities. Similarly, if we want a higher contribution for the velocity, we can set f2 as say 0.75.
Milestone Configuration Parameters
For enabling On2Biz to calculate the above weighted value, we will need to do a one time configuration of assigning the following parameters to each milestone in the sales process:
- Probability of Closure - value between 0 and 1 that represents the chances that the opportunity will close if it reaches this milestone
- Maximum Lead Time - the maximum stipulated amount of time it will take (in days, hours, minutes) for any opportunity to arrive and stay at this milestone, beyond which it will either move ahead or get de-priotitized.
For example,
| Milestone | Maximum Lead Time | Probability of Closure |
|---|---|---|
| Lead Captured | 15 days | 10% |
| Lead Qualified | 25 days | 30% |
| Proposal Submitted | 30 days | 50% |
| Negotiation | 35 days | 75% |
Customer Configuration Parameters
In On2Biz, each customer can be assigned a grade. The pre-configured customer grades are A,B,C,D. What we need to do is to set a grading factor for each grade. For e.g,
A=0.9, B=0.7, C=0.5, D=0.2.
Data to be captured for each opportunity
When we record a new opportunity project for a new customer, the minimum data we need to capture is the following:
- Title or description
- Projected or actual value
- Milestone reached
- Customer Grade (for new customers only)
Thereafter, the only data required to be updated is the milestone reached. On2Biz automatically tracks the date and time of completion of each milestone, thereby tracking the velocity of movement through the pipeline
As you can see from above, there is no additional effort required for every opportunity.
The above methodology will be implemented in On2Biz shortly. We will create a default configuration of the probability of closure and max lead times for milestones for all accounts. We will inform all users prior to release of this new version so that you can adjust the configuration according to your specific sales process.
Meanwhile, your feedback and comments are welcome.