Is your sales pipeline lying to you?

Tell me if this sounds familiar.

In management meetings, sales say something like, “We have a great pipeline, with over X number of qualified opportunities, totaling 5x what we need to hit our number.”

It sounds like some good math, right?

But when you inspect it, it turns out that there are only about 8 opportunities that can legitimately close, and one of those deals accounts for 29% of the number you’re targeting. Without that one deal, you don’t have a chance of hitting a goal.

Let’s say the goal is $5 million.

Here’s what you’re hearing or being told is in the pipeline:

• 50 opportunities
• A total of $25 million in pipeline
• $6.8 million in the closable stage

Upon some further inspecting, here’s what you discover is really there:

• 8 closable deals in the quarter, representing $5.2 million in the period, on a 5mm number (cutting it close)
• 3 deals representing 70% of the quarter ($3.5 million) – if any of those fail, it’s a miss (serious concentration on just a few)

Yes, there could be other challenges, but king of them is a lack of legitimate opportunities in the pipeline. Of course “having more deals is better than fewer deals.”

But not enough companies are realistic about what’s in their pipeline, so they don’t engage in enough prospecting.

And when they do, it’s usually to people they’re comfortable calling on, not whom they need to call on.

As a result, they miss their number because they don’t give themselves a chance.
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You know this, but it bears repeating: companies MUST know their conversion metrics, and build pipeline accordingly.

Let’s look at some examples of companies in various industries. All have the same target, and same average deal size for simplicity’s sake, but different conversion rates from first opportunity to closed deal.

The conversion rate from new opportunity to closed won dictates HOW many opportunities (in this case, “Suspects”) need to be in the pipeline at some point in the sales period.

To hit 3.3 deals, some companies or sellers need 94 Suspects. Others need 40, and others need 148.

To make this even more granular and specific, it’s better to know the pipeline’s metrics by STAGE.

Here, we can see conversion rates from each stage, and it tells us how many opportunities need to be in the pipeline at any given stage at one time.

This forces the sales team to prospect for the right number of opportunities because to hit their target, they’ll know what they need at any given time.

And their prospecting activity can be treated just like this: a certain amount of activity will produce a certain result.

We found in one client that each rep needed to have 215 conversations per year with someone who could buy from them at a target account. Those 215 conversations would result in, on average, 7 new accounts per year.

It turned into an action plan of each rep needing about 1 conversation per working day per year – again, from someone who could buy. They structured their work and weeks accordingly.

The pipeline math is wonderful, because it tells us exactly what’s needed. But let’s go a little further with another example.

• A company needs to close 10 deals in a given period.
• They know their close rate of deals in the closable stage is 50%.

The conclusion?

They MUST have a MINIMUM of 20 closable deals in THAT stage to hit their target.

Why a minimum of 20, when that is exactly what the math dictates?

In short, people and organizations.

• Prospects make internal changes.
• Priorities shift.
• Legal, procurement, or finance slow things down, despite what the buyer has promised.

And all of that ASSUMES the salespeople working opportunities are the right people… with the right skills… having executed the right process. Which is a series of massive assumptions.
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A pipeline needs some cushion, especially at the finish line, to ensure numbers are hit.
Otherwise, sales and sales management reverts to discounting to get business closed.

What’s the right amount of cushion?

It’s really up to how well run the organization is. The stronger the team, the more dialed in the process, and the better their ability to identify and win over prospective customers, the less cushion they’ll need.

Ironically, those teams will be the ones with the MOST cushion because they’ll be the most disciplined in finding new opportunities.

I’d build in a 20% pipeline cushion at the end. So if we needed to close 10, I’d have 24 in the closeable stage, assuming 20% of it could just fall apart at any time. That’d still put us in position to close 10 deals.

There are requirements for this to work, though.

The first is an honest assessment of conversion rates that lays out what’s required in the pipeline.

The second is a commitment by management to hold people accountable to produce more new opportunities.

Do this, and the pipeline will be sufficient to hit sales goals.

Without that level of honesty and accountability, the pipeline becomes a lot of hope.
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Three takeaways for you.

• First, you need to inspect the pipeline. Treat every deal like an investment on Shark Tank. Beat it up that much so you can determine if you’d put your money on that deal moving forward. If you won’t, tell the manager or rep why, and what they need to do to convince you.
• Second, calculate, based on conservative conversion rates, how much you need to hit your target. Your formula? Total revenue needed = Total revenue/average deal size. That gives you Deals needed. To get to your pipeline number, take Deals needed and divide by a conservative historical conversion rate. That gives you what you need in the pipe.
• Develop a plan to put that many deals in the pipeline. Channel partners? Cold calls? Networking? Referrals? Linkedin outreach? Conferences? Let’s get to work and find out where they’re coming from, and how much we need to do to get there.

Now, how’s your pipeline looking?

Questions on forecasting? Email me at adam@thenorthwoodgrp.com.