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Performance Metric Friday–Ideal Pipeline Volume

by David Brock on August 11th, 2011

For those regular readers, you know I’m a bit obsessive about metrics.  I measure everything.  I look at my business goals, my day to day activities, I measure my performance on my various athletic endeavors.  Performance metrics are very powerful management tools, but I tend to focus on Personal Performance Metrics—things that help me manage my own performance, constantly improving.

I’ve had a lot of requests from folks on various types of measures, and how they work.  I’ve decided, until I run out of ideas (or until I bore you too much), that on Friday’s I’ll choose a different metric and focus on that.

Most metrics in sales have great applicability to both individual performance and for managers to understand performance–of individuals and teams.  I’ll try to be clear about the personal and management perspective on these metrics.  Some metrics are more useful to managers–but I think it’s important, as individual contributors, to understand what managers measure and why, so you’ll see my advice to managers, as well.

Before I jump into this week’s metric, I have a request.  I’d love to build the discussion around these, so please join the discussion with your comments—pro/con/alternative measures, whatever.  We will all learn more.  If you have ideas about performance areas or metrics you’d like me to discuss, please let me know.

This week, and over the next series of weeks, I’m going to focus on pipeline/funnel metrics.  We know managers obsess over them, but they are critical of us as sales people.

One of the most important Pipeline/Funnel Metrics is Pipeline Volume.  The key question Pipeline Volume answers is:  “Am I pursuing enough opportunities to make my goal or number?”  Without an understanding of Pipeline Volume, it’s impossible to know whether you have enough opportunities, whether you need to prospect and qualify more. 

There are a variety of ways to look at Ideal Pipeline Volume.  Some look at it over a period of time (for example monthly, quarterly).  Some organizations have a fairly simplistic view of  Pipeline Volume–saying your pipeline has to have a certain amount of “coverage.”  What this means, is the total value of opportunities in your pipeline must be some multiple of your goal.  For example, if you have a $1 million target, and your manager insists on 3 times coverage, what you are really being asked to do is always have $3 million in your pipeline.

It’s not a bad way of looking at Pipeline Volume, but usually it’s implemented as a “one size fits all” approach.  I tend to prefer each person establishing their own goals and personal improvement plans.

I prefer to look at Ideal Pipeline Volume in a different way.  First I tend to focus on deals.  I tend to look at what are the number of deals or opportunities I have to be pursuing to make my number. 

To calculate your personal Ideal Pipeline Volume (on an annualized basis), you need to know the following:

  1. Your annual quota (AQ$’s) (I sure hope you know this.  It should be in dollars or whatever currency you use).
  2. Your average deal size in dollars (D$)(or whatever currency you use.  If you don’t know, look at your performance in the last year, look at all the deals you did and determine an average deal size.  If you are in a business that’s a recurring revenue model, there are some challenges and simplifying assumptions you have to make.  I wont’ be covering those in this post).
  3. And your win rate.  (WR%)(Look at your wins and losses over the past year to come up with your win rate.  There are a lot of ways people calculate win rates–all for good reason.  But a simple way I like to look at it is the percentage of deals that I qualify that I ultimately win.  To keep things simple, let’s just keep that definition.).

Simplistically, to calculate your ideal Pipeline Volume, do the following calculations:

  1. Total Deals You Must Close To Make Your Number (TD)= AQ$’s/D$.  For example, if you have a $1M quota and your average deal size is $50K, then you must close 20 deals to make your number.  (4M/$50k = 20)
  2. Ideal Pipeline Volume (IPV)= TD/WR%.  For example, in the previous step you needed to close 20 deals.  If your win rate is 33%, then you need to qualify and compete in at least 66 deals to make your number.  IPV = 20/0.33 = 66.

Again, on an annualized basis, it means you will have to prospect, and qualify 66 opportunities, compete vigorously to win 33% at an average value of $50 K to make your quota—simple.

So now that you know the Ideal Pipeline Volume, so what?  How do you use it?

Remember I’ve just taken the most simple approach to calculating the Ideal Pipeline Volume.  You will see all sorts of variations.  But having this number can give you tremendous insight into your own performance, and how to tweak what you do to improve your results,  or make your job easier. 

Often when I go through this exercise with sales people they look at the 66–or whatever “their” number is. reacting, “There is no way I can qualify and pursue that number of deals!”

When people say that, I respond by asking, “So what do you need to do to reduce that to a more realistic number of opportunities?” 

They usually scratch their heads.  Some wise guy (they’re always guys), pipes up, “Ask for a quota decrease.”  (You can imagine my reaction to that.)

The solutions are pretty simple:

  1. What can you do to increase the average transaction value?  Can you cross sell something?  Can you upsell?  Can you avoid discounting.  Imagine just increasing the average deal value by 10%, going from $50 to $55K.  This means you only have to close about 18 deals and compete in 55 deals–that’s 11 less!
  2. Alternatively you can improve your win rate.  What if you did a better job of developing your sales strategy?  What if you improved the quality of your sales calls?  What if you just were a little bit more knowledgeable–about your customer and your products?  What if you did a much better job qualifying?  If you increase your win rate from 33% to 40%, using our original numbers, you would only have to qualify and compete in 50 deals!  Thats 16 less!  Imagine that, having to find and compete in 24% fewer deals and still making your number!
  3. Finally, what if you could do both?  What if you could increase the average deal size by 10% and increase your win rate from 33 to 40%?  It would mean you only have to qualify and compete in about 45 deals!  A full 21 fewer than you orginally had to do.  You’ve suddenly freed up the time to do a better job in each deal  (or to shoot for a higher number, or to spend a little more time on the golf course).

So knowing your Ideal Pipeline Volume, gives you a basis for analyzing your performance and improving it—making your job much simpler. 

If also gives you other clues.  If you have fewer opportunities in your pipeline than the Ideal Pipeline Volume, you know you probably need to spend more time prospecting.  You need to qualify enough deals to get you to your ideal pipeline number.  But here’s where sales people “game themselves.”  They add junk to the pipeline to hit their Ideal Pipeline Number, but then their win rate plummets. 

Don’t game yourself!  This number is for you, it’s to help you understand your own performance and improve.  If you need to get more deals in the pipeline, don’t sacrifice the quality of the deals.

Depending on your sales cycle, if may be more useful to look at a monthly or quarterly Idealized Pipeline Volume.  Look at your monthly quota, run the calculations to determine the deals you need to close each month, run the numbers again to look at Pipeline Volume.  It’s just a rough guess–I know some of the analytics reading this will point out some problems with this model–I know them.  But as a rough guideline, this is OK.  You can tune it as you get more experience.

Now I’ve made a bunch of simplifications here–but who cares?  If this is a personal metric, make it something easy for you to track and use.  After all, these are about making things easier for you!

Finally, you might ask, “If this were yours Dave, what would you do?”  As a general rule of thumb, the thing I always try to do first is increase my win rate.  But here’s the real secret, the easiest way to increase your win rate is not by improving your selling, but by being vicious in your disqualification!  I don’t chase bad deals– I spend a lot of time qualifying, making certain the deals I do invest my time in are worth my time.  It pays off, my 12 month running average win rate is 87%.

Try this out for yourself, use your last 12 months’ performance to come up with the initial estimates for the numbers.  Track yourself.  Use this to figure out how to improve.

For managers, this is very powerful.  Make sure each of your people understands their own measures.  Coach them, work with them in identifying the performance levers they can use to improve their own performance.  Develop an aggregate view of the pipeline for your team.  Leverage this to see if your team will make their number.

Come back next Friday–I’ll talk about Pipeline Flow/Velocity!

 

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