Quick, go ask any sales manager or Silicon Valley how much pipeline you need to make your quarter.
The answer you will hear: 3x. Always, everywhere, every time. Let’s talk about why that’s true, what it means, and what to do about it in this post.
First, let’s define some terms. What is pipeline? Pipeline for a period is the sum of the value of all opportunities with a close date in that period.
That is, quarterly pipeline for 2Q13 is the sum of the values of all opportunities with a close date on or before 6/30/13. (Note that in most companies saying before 6/30/13 as opposed to “on or before” cuts the pipeline in half. But that’s a different story.)
This begs the question: what’s an opportunity? I have two definitions: (1) the way you track deals in your salesforce automation (SFA) system, which these days is typically Salesforce.com, or (2) a possible deal that a salesperson is willing to be asked about every week by his sales manager on a forecast call. (By the way, I love definition 2 because that’s how “opportunity” really is defined from the viewpoint of the salesperson.)
This in turn begs the question: how do you value an opportunity? Most organizations should have rules for establishing the value of an opportunity, given its evolution in its lifecycle. Early stage opportunities should either count as zero or some agreed-upon placeholder value. Mid- and later-stage opportunities should have a value which is the likely amount that the deal will close at, including discounts and concessions made during final negotiations. (Always be sure that this value has been socialized with the customer and is not simply a figment of a salesperson’s overly active imagination.)
So where does the magical 3x coverage ratio come from? I don’t know the history, but I can say that long before I saw — and I mean years — my first salesforce automation system, I heard sales managers speak of the rule of three. It makes sense: 2x seems tight and 4x seems rich. So, through the Goldilocks Principle, we ended up with 3x.
Back then, it was kind of harmless; you couldn’t easily track the pipeline because deals and forecasts were being managed in a conglomeration of spreadsheets. But along came SFA with Siebel, and its democratization via Salesforce, and — bang — now every sales manager on the planet could quickly and easily calculate the total pipeline for a salesrep, for a region, and for the company.
What happened next should be no surprise.
Every time a sales manager had salesrep whose pipeline didn’t have 3x coverage, they beat the salesrep until they did. Every time an regional manager had a district manager whose pipeline didn’t have 3x coverage, they beat the district manger it did. Every time the worldwide sales VP had a country without 3x coverage, they beat the country manager until it did. Heck, it even worked on overlays: every time a product manager with a revenue number saw a country without 3x coverage of his/her product, they beat the local product manager and the local sales director until it did.
And, fairly quickly, every company on the planet had 3x pipeline coverage.
But, of course, it was all meaningless because it was a giant self-fulfilling prophecy. And one that many or most organizations still perpetuate today.
What management should do is to beat on salesreps to show the real pipeline, as they believe it exists, using well-defined staging and valuation rules. They should never mention the 3x, nor institutionalize any coverage ratio because, once you do so, you can be certain of only on thing: you will have that coverage ratio in your pipeline. Whether that pipeline actually converts into sales at the inverse of the ratio (so you can achieve your sales target) is an entirely different matter. And most of the time it certainly won’t.
We’ve taken a perfectly good metric and we’ve ruined it by generalizing it, institutionalizing it, and communicating it. Its predictive value is now zero. Such metric abuse should be a crime.
Instead, we need to think about the problem differently. To do this right, these coverage and conversion rates should be:
- Emergent. They should regressed from your actual data, not taken top-down as rules of thumb.
- Personalized. They should be tailored to a rep, a region, or product. Example: Joe usually closes 40% of his pipeline so 2.5x coverage should be good enough for him or France typically needs 3.5x coverage to hit its number.
- Secret. As you as you tell the head of France he needs 3.5x coverage you start the metric abuse cycle and destroy the predictive value of the metric. Instead, management should direct marketing or telesales should be instructed to focus on pipeline development when they see insufficient coverage, without any explicit reference to the 3.5x.
- Time varying and to-go based. As the quarter proceeds business closes along the way so coverage ratios can get quite complex. They need to be based on business to-go (to get to plan) and based on historic linearity patterns. While the math gets cumbersome, this complexity is good because it eliminates the possibility of a single number getting burned into the organizational consciousness. Instead of everyone saying “3x,” it actually sounds like: “in week 7, France has 2.2x to-go coverage and they typically need only 2.0x to get to plan.” Some companies abstract this into a “waterline” that shows what coverage is needed by week given both personalization and linearity.
So the next time you ask a sales manager how much pipeline he/she needs to make a quarter, wait for them to say 3x, and then start asking questions.
As always bang on target – easier said than done though.
I know I’m naive, but the *ideal* system would be one where the sales person would take responsibility for the figure — i.e. where they are incented to tell the truth about what money they will bring in, and where they have the data they need to improve their predictions over time… is there no way to use commissions percentages that peak at the predicted amount, or some sort of internal market where the rep has to “buy” his/her prediction, the price of which would depend on its accuracy? Or give the data to everybody (marketing, telesales, etc.) and let them buy predictions?
agree. for forecasting i’ve always liked prediction markets.
Spot on! The 3x pipeline is a fallacy. As far as I am concerned, when I was a sales person, I never ever reached the 3x pipeline volume, even though I have consistently delivered against my quota obligation.
As you highlight, the 3x is the result of some form of amateurism of sales managers in the high tech industry. Because in general, they are process-averse, and they want to feel safe and they don’t rely on their sales people, they exhibit a natural tendency to create thick cushions.
Strangely enough, a VP of supply showing the same tendency – managing supply by creating surplus at inventory level – would be considered as a bad professional, and would probably be fired for being so complacent with him/herself and so generous with the organization’s resources.
The opposite seems to apply with a VP Sales. The bigger his/her pipeline, the better off he/she will be. In this respect, the 3x fallcay doesn’t provide any good. Instead, it tends to reinforce amateurism at sales management level.
I have made some calculations about how big a pipeline should be and I have come to the conclusion that the “ideal” pipeline volume is in the (1.2x – 1.6x) range. The rest – I mean the difference to reach 3x – is just a matter of corporate bullying and bad management.
For those of you who might be interested in understanding how I came to these numbers, you can click on the link below:
http://www.linkedin.com/today/post/article/20130211101238-142804-how-to-calculate-your-ideal-pipeline?trk=prof-post
thanks jean-marc. i tought your post was very interesting
Jean-Marc, I read your post again and think it is *very* good. Congrats!
Great post Dave! I often wonder why there isn’t more focus on sales effectiveness, or expressed differently the precipitous ineffectiveness of most sales teams these days. Sales pipeline coverage is a direct function of your win rates. Most research shows that sales win rates have been consistently dropping over the past decade. What are sales leaders doing about this?
i think what they’re doing is asking for more pipeline which drops conversation rates which means you need more pipeline!
About two years ago I did some serious historical pipeline analytics for a public software company that closes thousands of transactions a quarter worth an average of 7K or so. It was a high velocity, light touch model with lots and lots of data of significance to play with. It was a sales culture focused entirely on closing and commits (versus pipeline window dressing).
Guess what I found the aggregate close rate to be from opportunity to sale? 35%. 1 / 35% = ~3X. Behind that number were plenty of interesting dimensions around sales reps, geographies, products involved, predicted and actual deal sizes… and while those all enabled us to forecast insanely accurately (to within 0.1% of a quarter by the 4th week in) and tweak marketing activities throughout a quarter to enable us to hit our targets, the aggregate number that emerged was 3X.
The approach you describe is the correct one and this was probably a coincidence, but… just sayin’ :D
Hi Dave: Agreed with your Post. I think that maturity has a great deal to do with the necessary coverage. Maturity of the rep, the product, and the market. Veteran sales reps can get away with far less. Hot products will have a higher sales yield, and a miserable economy will need even more than 3X. The length of the sales cycle can impact the coverage as well as if you can generate business that closes intra-quarter. I agree – start asking questions and validate why THEY think the number is sufficient for the target.
Good post Dave. I think that the 3x coverage model is a solid approach but the trick is to think of it as a starting point and NOT an end point.
All good sales managers know that sales people are the most optimistic about their own pipelines. This means they always believe they have enough coverage for a quota regardless of the facts.
With the 3x rule as a starting point you need to add a solid methodology for deal qualification (e.g. SCOTSMAN or SPIN).
The 3x rule, used correctly, should add a sense of realism to any pipeline. For any three deals in a pipeline most sales people will win one, lose one and defer one on average. The first two are self-explanatory and the “defer one” option refers to deals that will get delayed outside of the forecast period due to circumstances that were unknown at the time of the forecast.
The next thing to realise is that sales managers will want to focus on quota upside and not quota coverage. The only way to way to deliver above quota (and get the upside multipliers, bonuses and President Club invites!!!) is to have a baseline pipeline that enables this.
If you have a 3x coverage as a starting point, you can then work with your team to reduce the defer rate and the loss rate while increasing the win rate. The best sales people will win more often, lose less often and no be caught by frequent deferrals. However, a good sales manager also needs to allow for weaker sales people who will win less often, lose more often and defer a lot more as they are less in control of their deals. This can bring the whole team a quota miss.
The manager needs to manage these metrics to see where he/she should apply the most effort to effect positive change. that way the sales person wins, the team wins and, most importantly, the manager wins. Individual sales people may have conversion rates above or below the 3x rule but the sales manager is NOT managing a single sales person, he’s managing a team of them and needs to hit team quota as the priority.
Long live the 3x rule!!!!
Peter
Dave…How timely. I’m in a training this week focused on getting 3x from all reps based on close rates. I think I’ll share your post
Here’s a great comment I received over email –>
Hi Dave, I follow your blog and enjoyed the read today on forecast pipeline. I can only agree with you whole heartedly. The issue is that the SFA Managers of today have been brought up on metrics that do not reflect the business of closing deals and making quota. A while ago I managed an EMEA team, my guy in Nordics always closed more than forecasted, my Swiss guys hit the number every time, whereas the Southern European team had ‘happy-ears’ and closed less than in forecast.
That was in the days of spreadsheets, now too many people look at SFA metrics and not the underlying activity or business environment. My top rep today never has 3x, and yet last year closed the year at 196% of quota, and is already ahead this year….thank you for sharing your thoughts…
Pingback: 5 Things Executives Should Say More About The Budget | Kellblog
Pingback: 5 Things Executives Should Say More About The Budget | Product Zine
>>>>My top rep today never has 3x, and yet last year closed the year at 196% of quota, and is already ahead this year….thank you for sharing your thoughts…
I can only think of 3 reasons:
1) Your sales rep is a super deal closer (winning >80% of all opps)
2) Your sales rep doesn’t bother with proper sales reporting
3) Your sales rep was having an “awesome” year (lucky or riding an unexpected spike in customer demand) – deals just drop in and close without any/much effort/intervention
Pingback: Don’t Be a Metrics Slave | Kellblog
Pingback: Don’t Be a Metrics Slave - Enterprise Irregulars
Pingback: daily 01/06/2015 | Cshonea's Blog
Pingback: Using Pipeline Conversion Rates as Triangulation Forecasts | Kellblog
Pingback: Using Pipeline Conversion Rates as Triangulation Forecasts - Enterprise Irregulars
Pingback: I’ve Got a Crazy Idea: How About We Focus on Next-Quarter’s Pipeline? | Kellblog
Pingback: I’ve Got a Crazy Idea: How About We Focus on Next-Quarter’s Pipeline? - Enterprise Irregulars
Pingback: Do We Have Enough Pipeline? The One Simple Metric Many Folks Forget. - Enterprise Irregulars
Pingback: The Evolution of Software Marketing: Hey Marketing, Go Get [This]! | Kellblog
Definitely relatable – for me, I just think who am I really cheating by ‘creating ops’ ‘showing dials’ or ‘inaccurately forecasting’ just to ‘fill the pipe’. No one but myself.
I may not get hammered at the next QBR, but definitely will the on the following one.
Knowing your individual conversion rate is a good metric I’ll definitely advise to my manager!
Thanks David – million years worth of knowledge in your blog!
Pingback: En finir avec l’illusion du 3X pour le pipeline ? – Sales Café
Pingback: The Pipeline Chicken or Egg Problem | Kellblog
Pingback: What To Do When You Need Pipeline in a Hurry | Kellblog
Pingback: Using To-Go Coverage to Better Understand Pipeline and Improve Forecasting | Kellblog
Pingback: Sales Pipeline Coverage Ratio – Everything You Need To Know – SalesTech Today