The Sales Metric That Sends Companies Broke!
Many companies use this sales metric, and it seems practical. It is a case of simple math being applied logically to solve the problem of delivering quota or sales targets. It is how many companies manage their pipeline but still complain that the sales results are not delivered.
Through our sales reviews, we have seen many pipelines or sales funnels with explosive numbers and sales forecasting built on bad sales data. We remember one in particular, in New Zealand. A company selling engineered materials in the construction industry that was expanding off-shore. They continually missed their numbers each quarter despite having a large value in the pipeline, which was made up of many opportunities.
The company revenue was $25m, and the pipeline report for just one quarter was $17m, with an expected closing ratio of 35%. They experienced a pipeline report of over $110m but failed to meet their number.
The company is left with the belief that opportunity is abundant in the market, but no one can sell properly. The board of directors became frustrated with the sales leader because the deals were not closing. The company is not on its own. We have seen this hundreds of times, and companies’ results were heading south fast.
The approach is referred to as coverage. You must know your average win rate to calculate your pipeline coverage ratio. This is easily worked out by dividing the number of opportunities uncovered by the number of deals won.
The coverage philosophy is to aim for a 3x or 4x pipeline-to-quota ratio. It seems like common sense to measure this way. If your team closes 25% (4x) or 33% (3x), then having enough deals in the pipeline should do the trick. This coverage philosophy is founded on a belief that has governed many sales teams since the beginning of the profession: Bigger is better.
So why is this the worst sales metric to use?
Sales are no longer considered a ‘numbers game’; measuring pipeline coverage only drives the wrong behaviours. When salespeople are managed to focus on building pipeline size as a priority, then the quality of the pipeline suffers. The pipeline becomes filled with deals that should never have been entered, and companies receive an erroneous forecast that affects the health of their business.
Here are five common problems often seen when companies utilise pipeline coverage ratios to assess if they have an adequate stream to meet revenue goals.
- The stages of opportunity, or the purchasing cycle, are overlooked. For example, a large pipeline might contain numerous early-stage prospects with a small chance of successful closure. In this case, a high pipeline-to-quota ratio can lead to unwarranted optimism.
- The pipeline size is bloated by wishful thinking rather than customer intent or action. The sales team is pushed to expand the pipeline size due to the emphasis on the perfect pipeline-to-quota coverage ratio.
- The probability factor is relied upon as the cleanser of pipeline size. The probability factor swings in the wind depending on the pressure on the team and their desire to keep the pipeline full. The saying goes, ‘If you rely on the probability factor, you are probably going broke!’
- Upon thorough examination of the pipeline, it is evident that there are deals that have been unsuccessful in the past and are unlikely to be completed successfully. These deals contribute to an inflated pipeline.
- The total size of the pipeline does not take into account the variations in opportunity types. It is important to consider that new and existing clients, different business lines, and territories may have different success rates. Additionally, there may be opportunities that are currently unavailable. Therefore, the pipeline coverage ratio is a broad measure that encompasses these factors.
The sales metric of pipeline coverage may have some potential value only at the beginning of a reporting year. For example, at the midpoint of the year, after closing multiple sales, it is important to analyse your remaining quota in comparison to ongoing deals to assess your likelihood of achieving your target.
This sales metric of pipeline coverage for business health is misleading and too simplistic. Pipelines are more complex and require more measurement and validation than this philosophy presents.
To determine your pipeline’s health, you need to consider many contributors. The sales pipelines that salespeople consistently deliver are, in fact, much smaller. They may be a ratio of just 1.5 x may be just 2x.
Higher-achieving salespeople have smaller pipelines because they are experts at disqualifying bad deals early in the sales cycle. By eliminating those deals they didn’t want to win or knew they couldn’t win, they were free to pursue fewer, more desirable deals with greater attention and focus.
A smaller pipeline of active qualified opportunities enables salespeople to make more prospecting calls, conduct more qualified meetings with prospects, and close more deals than those focused on pipeline size. The sales metric of pipeline volume is proven that bigger is not always better.
The validation of the pipeline is the core focus of top-performing sales leadership. Like their team members, they understand that they are measured on pipeline performance and the reliability of the numbers presented to the company. The numbers are used to guide the company’s operational and financial decisions.
To support sales leadership, we apply the Sales Focus Money Ball principle, where pipelines are carefully managed through sales metrics that contribute to sales performance. The principle is the same as the now well-renowned film Money Ball, based on the performance of the baseball manager Billy Beane. Managing the statistics and performance ratios of players to deliver outcomes.
Sales Focus Money Ball establishes important sales metrics, the right sales KPIs and measurements to identify improvements in the sales team’s performance and where they need to focus their efforts. The principles can be applied to most CRM systems to track sales metrics in real-time. They provide sales leaders with a clear understanding of individual sales behaviours and the validation of pipelines.
The pipeline report can transition from 10-20% accuracy to 90% accuracy, providing more assurance about the health of the report for company management.
To learn more about pipeline validation, reach out to our office.
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