One of our clients asked us recently: “What does an ideal sales pipeline look like for our business?”  They were looking for reliable standards that sales managers could use to evaluate future business from each of their sales professionals.

As we’ve discussed previously in this blog, the old rule of thumb for pipeline coverage — a 3-to-1 ratio of total value of all opportunities in the entire pipeline to the sales goal — doesn’t hold up very well anymore.  While the old 3-to-1 pipeline coverage ratio worked well during the extended cycle of worldwide growth throughout the 1990’s, it has become outdated today.

Evaluating only the pipeline’s total un-weighted value relative to a sales goal doesn’t tell us very much about what the pipeline contains. Consider this: if you win only 10% of your sales opportunities, then you better have a 10-to-1 pipeline value to goal ratio.  If your win rate is 50%, a 2-to-1 ratio will do the job.  If all of your opportunities are in the early stages of your sales process, then you will need many more opportunities than if they are all in the final stage of your sales process (…assuming that you have a defined sales process, of course).

If aggregate evaluations of pipelines produce distorted views of sales potential, then what criteria should sales professionals use to determine the health of their business development?  After working with hundreds of clients, we’ve found an approach to defining an “ideal” pipeline that incorporates the following key elements:

• Sales Cycle Complexity (Quality)
• Days in Stage (Speed)
• Yield Probability (Volume)

By understanding each of these elements, salespeople can determine what their optimum pipeline should look like, and then adjust their selling behavior relative to how well their pipeline conforms to this standard.

Understanding Sales Cycle Complexity

In general, the more complex the sales process, the longer it will take to develop and close business.  Strategic products and services that deliver high value to customers, are mission-critical to customer operations, and which require multiple evaluators and decision-makers in the buying process almost always have longer average sales cycles than products and services that are simple point solutions and which require only a single decision-maker.  Understanding how your customers buy is therefore the first step in defining your ideal pipeline, as this indicates how many stages buyers must complete before coming to a buying decision.  Each stage represents a milestone in their decision process, the completion of which can be determined by identifying an appropriate verifiable outcome - a customer-exhibited behavior that tells sellers if they are in alignment with the buyer - for each stage.

For example, your buyers might go through five stages in their decision process, in general:

• Develop Business Strategy
• Determine Needs
• Evaluate Alternatives
• Select Solution / Evaluate Risk
• Resolve Issues / Finalize Contract

Your sales process should align with each of the stages in your customers’ buying process.  So, using the above buying process as a guide, your corresponding selling stages might be:

• Create Opportunity
• Qualify Sponsor
• Develop Power Sponsor
• Prove Capabilities
• Negotiate and Close

Of course, your sales process could have more or fewer steps, depending on how your customers prefer to buy.  And you could have different variants of sales process, depending on your portfolio of solutions and the kinds of customers you serve.  However, settling on a standard process that conforms with the majority of your typical sales opportunities will help define the ideal shape of your pipeline.

Understanding Days in Stage

Once you’ve established a buyer-aligned sales process, you can then determine the average time in cycle that your typical prospects take to move through each stage.  For example, if your average sales cycle is about four months, and if you generally engage with customers in the Qualify stage, then your average time in selling for each stage might be:

• Create Opportunity - complete
• Qualify Sponsor: 15 days
• Develop Power Sponsor: 25 days
• Prove Capabilities: 45 days
• Negotiate and Close: 35 days

Total number of days in a typical sales cycle: 120 days

The number of sales process stages and each of their average durations tells us the length of the total pipeline, and a general level of effort required at each stage.

Understanding Yield Probability

As opportunities move through each stage of your sales process, they get closer to a buying decision, and therefore, have a higher probability of closure.  We can therefore assign a yield probability to opportunities that complete each stage of the pipeline, to represent the likelihood of winning.  (This assumes that you are qualifying opportunities at each stage of the sales process, and that unqualified opportunities are being filtered out.) 

Your yield percentages for your sales process might look like this:

• Create Opportunity: 0%
• Qualify Sponsor: 25%
• Develop Power Sponsor: 50%
• Prove Capabilities: 75%
• Negotiate and Close: 100%

Ideal Pipeline Volumes

With a well-designed buyer-aligned sales process, you can develop standards for the ideal volume of opportunities flowing through the pipeline that take quality, speed and volume into account.  The following formula determines the ideal amount of opportunity potential that should be in each stage of the pipeline:

(Goal x (Average Sales Cycle / Time Remaining to Goal) x (Average Days in Stage / Total Days in Average Cycle)) / %Yield in Stage = Ideal Amount for Stage

Sounds simple enough — but don’t worry, a well-designed CRM system should be able to calculate this for you!

Using our example sales process and yield percentages above, the ideal amount of value that should be in our pipeline for the Qualify Stage, assuming that it is January 1st and our goal for the year is $1.8 million, would be:

($1.8 million x (4 months / 12 months) x (15 days / 120 days)) / .25 yield = $300,000 Ideal Amount for Qualify Stage

Using these assumptions and applying the formula to all remaining stages results in an ideal pipeline of:

• Create Opportunity: n/a
• Qualify Sponsor: $300,000
• Develop Power Sponsor: $250,000
• Prove Capabilities: $300,000
• Negotiate and Close: $175,000

Total pipeline: $1,025,000

Note that the total pipeline in this example does not equal the desired goal - isn’t that a problem?  No, because this formula takes into account the average sales cycle length and the amount of time left to attain the goal.  In the above example, this total amount of unwieghted pipeline value is less than the annual goal because there are at least three sales cycles remaining before the goal deadline (4 months average sales cycle / 12 months remaining until goal = 3 sales cycles).  When the probability of winning for each stage is also taken into account, the total projected revenue on this idealized pipeline is equal to the desired goal amount.

This formula is most useful for determining an ideal pipeline for a rolling period forward — in our example above, a rolling 12-months forward.  If you choose to look at pipeline management for a shorter period, then you will find that the formula will recommend increasingly large total pipeline volumes as you get closer to the goal deadline.  That is because it is including volumes from stages that cannot be won before the goal deadline - as a result, you should discount any pipeline volume for stages that are outside of the time remaining.

This perspective on pipeline management replaces the old “3-to-1” coverage rule that once served managers well.  This approach assumes that your sales process is aligned with how your customers want to buy, and that you are qualifying opportunities rigorously throughout the sales cycle.  As you can see, you can have total pipeline volume to goal ratios of less than 1, and still achieve your goal.

Good luck and good selling!