This week on Mythbusters, our crack team of scientists and specialists looks to shatter more conventional wisdom, old wives’ tales and perpetuated myths and lies. Does a goldfish’s memory REALLY only last for 3 seconds? Can mirrors REALLY be used to make a death ray? Do you REALLY need a 3x sales pipeline-to-quota ratio?
Wait. What? You DON’T need a 3x sales pipeline-to-quota ratio?
While we might not be an elite mythbusting team with our own show on the Discovery Channel (yet), we are determined to help sales managers overcome the traditional biases and conventional sales wisdom that insist a 3x (or more) sales pipeline-to-quota ratio is absolutely necessary for any team to realistically hit its targets. This archaic line of thinking suggests that in order to produce X amount of revenue, a rep must have a sufficiently filled opportunity pipeline of n(x), where “n” is the multiple of pipeline to quota. Traditionally, this “n” has been 3. If sales managers were to subscribe to this axiom and expect their reps to close $10 million worth of deals this quarter, that means they must provide a pipeline that is valued at $30 million.
The question is whether this 3x ratio is a data-backed rule or simply the product of a “that’s how it’s always been done” mentality that is pervasive throughout the sales industry.
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Many sales organizations reflexively apply the industry standard of a 3x sales pipeline-to-quota ratio. Since this number has been bandied about among sales organizations for decades, many companies unthinkingly adopt it, treating that ratio as a one-size-fits-all blanket solution. By looking at historical conversion rates, companies can gain a clearer picture of what their true sales pipeline-to-quota ratio is. A sales manager looking at this report, in conjunction with the overall won/loss report for each quarter, can determine how much revenue resulted from the corresponding pipeline value that quarter and with some simple division, come up with an accurate sales pipeline-to-quota ratio that is more accurate than a blanket 3-to-1.
For instance, if a rep is converting extremely well through the first 4 stages of the sales funnel, only to see a dramatic fall-off at the end, perhaps he or she is negotiating poorly. If the inverse is true – where a rep has poor conversion rates at the beginning but is able to close a majority of opportunities that make it to the end – perhaps that rep isn’t qualifying leads well enough. Studying the sales funnel intently is the key to finding salient points for analytical sales coaching.
Sales managers need to start thinking outside the box in order to keep up with increasingly innovative competition. A great way to start is by ditching archaic business practices and philosophies, such as the blind faith in a 3x sales pipeline-to-quota ratio. Shatter that myth by looking at your historical conversion ratios and coming up with a truly accurate ratio, while finding new ways – instead of more! more! more! – to improve on your sales pipeline conversion rates.