Nic Poulos, Principal at Bowery Capital, said that a well-understood pipeline is one of the best windows into whether your company’s growth catalysts are working, or if a plateau is coming.
But beware: pipeline coverage is not a one-size-fits-all metric. As Poulos puts it,
It’s critical to tailor pipeline coverage ratios not only to the specific business, but also–as historical data grows and sales ops methods become more sophisticated–to individual reps, deal types, and time periods.
Here’s a first-hand account of why that couldn’t be more true.
The Wrath of an Overinflated Pipeline
I joined InsightSquared at the end of Q1 2015, inheriting a newly formed team of mid-market sales reps, along with a strategy of how we were going to move upmarket. Because most of the sales reps had moved over from InsightSquared’s SMB unit, they found themselves on a steep learning curve, without a lot of time to get it right.
The situation was evident when we missed our Q2 bookings goal by a long shot. We didn’t know if our lack of bookings was due to sales execution, product market fit, or our pipeline. We needed to figure out where the gaps were, and close them.
I did a deep-dive into the team’s performance to diagnose the issue, looking to understand:
1. Our internal and external processes
2. Each rep’s strengths and weaknesses
3. Our general approach for going to market as a mid-market unit
4. Why the pipeline was not allowing us to hit goal
At this point, we didn’t have a way of knowing if all the opportunities in our pipeline were enough to hit our goals. And, if we missed our goals, we couldn’t pinpoint exactly why. The solution we needed was a better way to figure out pipeline coverage. We found — like many companies that were looking to move upmarket — that our old system for opportunity management wasn’t working for our new model.
While looking through my team’s data, something became clear: our pipeline was grossly overinflated.
Reverse Engineering a Solution
The first step in addressing this issue was shifting our pipeline management cadence from monthly to 90 days.
A monthly cadence can work for short sales cycles, but it wasn’t translating well to the longer sales cycle of mid-market buyers. Historically, when we were working off of a monthly cadence, reps had a tendency to park opportunities that didn’t have clear timelines or good momentum far into the future. They became out of sight, out of mind.
It was like driving a car without a gas gauge — we had no idea how much fuel was left in the tank 60-90 days out.
It was like driving a car without a gas gauge — we had no idea how much fuel was left in the tank 60-90 days out. By switching to a 90 day cadence, we were able to gain much better visibility into the pipeline and empower reps to manage their opportunities more realistically. As sales managers, you should always insist your reps show their real pipeline, as they honestly believe it exists, according to a well-defined sales process.
The key to successfully adjusting our cadence was the exercise of reverse-engineering pipeline coverage. Through this, we were able to give reps a better understanding of their pipeline and build a discipline of self management. This is a good exercise to do with your team as a whole, but I find it even more effective when your reps do it on an individual basis.
By taking your reps through calculating pipeline coverage, you help them self-identify if they have enough pipeline (both by value and count) to achieve their own bookings goal. If they don’t, they know in advance and can work to create more pipeline.
Here are the steps and necessary data points that are involved:
- 1. What is my bookings goal, forward 90 days?
- 2. What is my average sales price, trailing 12 months?
- 3. What is my average open opp value, forward 90 days?
- 4. How many opps do I have in each stage of my pipeline?
- 5. What is my average win rate by stage, trailing 12 months?
- 6. What is my sales cycle by stage, trailing 12 months?
- 7. How many days remain until the end of the chosen time period?
First, find for the Ideal Value in Each Sales Stage
Ideal Value in Each Sales Stage = Quota x ((Avg Sales Cycle / Days Remaining to End of Quarter) x (Sales Cycle by Stage/Average Sales Cycle)) / Win Rate from Stage
Then, find for the Ideal Number of Opportunities in Each Sales Stage
Ideal Value in Each Sales Stage = Divide Ideal Value in Each Stage by Average Open Opp Value (Forward 90 Days)
You can download the Excel worksheet I used to calculate my team and my individual rep’s pipeline here.
I’ve formatted it so that you can plug in your own data, and get the ideal count and value of opportunities needed in your pipeline to hit goal.
The idea is that by having both pieces of data, a sales rep is then able to compare the results to the value and count in their current pipeline. If they are “long” on value and count by stage they are in good shape, if they are “short” on value and count by stage, then they can take corrective action.
We found this method so useful that we actually turned it into an real-time Pipeline Coverage report. It automates this logic so that you can know, at any point, how much pipeline you need to add in order to to hit your bookings goals. If you’re interested in checking it out, let us know.
What We Gained
This all sounds great in theory, but what concrete results did we achieve? After going through this exercise with the team, quarter over quarter, we grew bookings by 22%. In addition, we increased our average new business value by 24%.
A Better Way to Coach
Additionally, we found there was a big variance in the number of opportunities among reps. Some reps needed 20 opportunities to reach their goals, while other reps needed 50 or more. This was a direct result of the differences between each rep’s win rate and average sales cycle. When reps can see this, and understand why it’s happening, it becomes a hugely valuable coaching opportunity.
With this information, your reps are able to come to your 1:1 meetings with a breakdown of the exact number of opportunities they need by stage. You’re able show rep A that the reason he might need more opportunities than rep B is because rep A is moving more opportunities from discovery to evaluation, and has a shorter sales cycle. Being able to have these sort of specific and focused conversations allows for objective sales coaching, and is one of the most valuable things you can do for yourself and your team.
As a manager, you should always be striving to get your C and B players as close to your A players as possible. By reverse-engineering your pipeline and understanding pipeline coverage in detail, your team will be better prepared. Devote training and resources to the specific pain points that are causing your reps to lose opportunities in between interacting with prospects and getting them to sign deals, and you will see a dramatic increase in the efficiency of your team.
Overall, this simple exercise gave my team an increased sense of focus on the opportunities in our pipeline. We’re more confident disqualifying opportunities at the top of the funnel to prevent them from taking up our time further down the funnel, and able to channel that saved energy into the last two stages. Because of this, we increased our conversion rates from Stage 3 to 4 and 4 to 5, with an overall increase in win rate from the evaluation stage of 19% to 35%, an improvement of 82%.
A tighter pipeline with higher conversion rates is vastly superior to a huge but unfocused one, and demonstrates a true understanding of how your product sells.
Let me hear from you. I’d welcome the opportunity to compare notes on how others are achieving pipeline health and sales rep focus. I can be reached directly at email@example.com or via my Twitter handle @rouxdimestore.