I’ve Got a Crazy Idea:  How About We Focus on Next-Quarter’s Pipeline?

I’m frankly shocked by how many startups treat pipeline as a monolith.

Sample CMO:  “we’re in great shape because we have a total pipeline of $32M covering a forward-four-quarter (F4Q) sales target of $10M, so 3.2x coverage.  Next slide, please.”

Regardless of your view on the appropriate magic pipeline coverage number (e.g., 2x, 3x, 4x), I’ve got a slew of serious problems with this.  What do I think when someone says this?

“Wait, hang on.  How is that pipeline distributed by quarter?  By stage?  By forecast category?  By salesrep?  You can’t just look at it as a giant lump and declare that you’re in great shape because you have 3x the F4Q coverage.  That’s lazy thinking.  And, by the way, you probably don’t even need 3x  the F4Q target, but you sure as hell need 3x this quarter’s coverage [1] and better be building to start next quarter with 3x as well.  You do understand that sales can starve to death and we can go out of business – the whole time with 3x pipeline coverage — if it’s all pipeline that’s 3 and 4 quarters, out?”

I’ve got a crazy idea.  How about as a first step, we stop looking at annual pipeline [2] and start looking at this-quarter pipeline and, most importantly, next-quarter pipeline?

What people tell me when I say this:  “No, no, Dave.  We can’t do that.  That’s myopic.  You need to look further out.  You can’t drive looking at the hood ornament.  Plus, with a 90-day average sales cycle (ASC) there’s nothing we can do anyway about the short term.  You need to think big picture.”

I then imagine the CMO talking to the head of demandgen:  “Yep, it’s week 1 and we only have 2.1x pipeline coverage.  But with a 90-day sales cycle, there’s nothing we can do.  Looks like we’re going to hit the iceberg.  At least we made our 3x coverage OKR on a rolling basis.  Hey, let’s go grab a flat white.”

I loathe this attitude for several reasons:

• It’s parochial. The purpose of marketing OKRs is to enable sales to hit sales OKRs.  Who cares if marketing hit its pipeline OKR but sales is nevertheless flying off a cliff?  Marketing just had a poorly chosen OKR.

• It’s defeatist. If “when the going gets tough, the tough get a flat white” is your motto, you shouldn’t work in startup marketing.

• It’s wrong. The A in ASC stands for average.  Your average sales cycle.  It’s not your minimum sales cycle.  If your average sales cycle is 90 days [3] then you have lots of deals that close faster than 90 days, so instead of getting a flat white marketing should be focused on finding a bunch of those, pronto [4].

Here’s my crazy idea.  Never look at rolling F4Q pipeline again.  It doesn’t matter.  What you really need to do is start every quarter with 3.0x [5] pipeline.  After all, if you started every quarter with 3.0x pipeline coverage wouldn’t that mean you are teed up for success every quarter?  Instead of focusing on the long-term and hoping the short-term works out, let’s continually focus on the short-term and know the long-term will work out.

This brings to mind Kellogg’s fourth law of startups:  you have to survive short-term in order to exist long-term.

This-Quarter Pipeline
This process starts by looking at the this-quarter (aka, current-quarter) pipeline.  While it’s true that in many companies marketing will have a limited ability to impact the current-quarter pipeline — especially once you’re 5-6 weeks in — you should nevertheless always be looking at current-quarter pipeline and current-quarter pipeline coverage calculated on a to-go basis.  You don’t need 3x the plan number every single week; you need 3x coverage of the to-go number to get to plan.  To-go pipeline coverage provides an indicator of confidence in your forecast (think “just how lucky to do we have to get”) and over time the ratio can be used as an alternative forecasting mechanism [6].

In the above example, we can see a few interesting patterns.

• We start the quarter with high coverage, but it quickly becomes clear that’s because the pipeline has not yet been cleaned up. Because salespeople are usually “animals that think in 90-day increments” [7], next quarter is effectively eternity from the point of view of most salesreps, so they tend to dump troubled deals in next-quarter [8] regardless of whether they actually have a next-quarter natural close date.

• Between weeks 1 and 3, we see $2,250K of current-quarter pipeline vaporize as part of sales’ cleanup. Note that $250K was closed – the best way for dollars to exit the pipeline!  I always do my snapshot pipeline analytics in week 3 to provide enough time for sales to clean up before trying to analyze the data.  (And if it’s not clean by week 3, then you have a different conversation with sales [9].)

• Going forward, we burn off more pipeline to fall into the 2.6 to 2.8 coverage range but from weeks 5 to 9 we are generally closing and burning off pipeline [10] at the same rate – hence the coverage ratio is running in a stable, if somewhat tight, range.

Next-Quarter Pipeline
Let’s now look at next-quarter pipeline.  While I think sales needs to be focused on this-quarter pipeline and closing it, marketing needs to be primarily focused on next-quarter pipeline and generating it.  Let’s look at an example:

Now we can see that next-quarter plan is $3,250K and we start this quarter with $3,500K in next-quarter pipeline or 1.1x coverage.  The 1.1x is nominally scary but do recall we have 12 weeks to generate more next-quarter pipeline before we want to start next quarter with 3x coverage, or a total pipeline of $9,750K.  Once you start tracking this way and build some history, you’ll know what your company’s requirements are.  In my experience, 1.5x next-quarter coverage in week 3 is tight but works [11].

The primary point here is that given:

• Your knowledge of history and your pipeline coverage requirements
• Your marketing plans for the current quarter
• The trends you’re seeing in the data
• Normal spillover patterns

That marketing should be able to forecast next quarter’s starting pipeline coverage.  So, pipeline coverage isn’t just an iceberg that marketing thinks we’ll hit or miss.  It’s something can marketing can forecast.  And if you can forecast it, then you adjust your plans accordingly to do something about it.

Let’s stick with our example and make a forecast for next-quarter starting pipeline [12]

• Note that we are generating about $250K of net next-quarter pipeline per week from weeks 4 to 9.
• Assume that we are continuing at steady-state the programs generating that pipeline and ergo we can assume that over the next four weeks we’ll generate another $1M.
• Assume we are doing a big webinar that we think will generate another $750K in next-quarter pipeline.
• Assume that 35% of the surplus this-quarter pipeline slips to next-quarter [13]

If you do this in a spreadsheet, you get the following.  Note that in this example we are forecasting a shortfall of $93K in starting next-quarter pipeline coverage.  Were we forecasting a significant gap, we might divert marketing money into demand generation in order to close the gap.

All-Quarters Pipeline
Finally, let’s close with how I think about all-quarters pipeline.

While I don’t think it’s the primary pipeline metric, I do think it’s worth tracking for several reasons:

• So you can see if pipeline is evaporating or sloshing. When a $1M forecast deal is lost, it comes out of both current-quarter and all-quarters pipeline.  When it slips, however, current-quarter goes down by $1M but all-quarters stays the same.  By looking at current-quarter, next-quarter, and all-quarters at the same time in a compact space you can get sense for what is happening overall to your pipeline.  There’s nowhere to hide when you’re looking at all-quarters pipeline.

• So you can get a sense for the size of opportunities in your pipeline.  Note that if you create opportunities with a placeholder value then there’s not much  purpose in doing this (which is just one reason why I don’t recommend creating opportunities with a placeholder value) [14].

• So you can get a sense of your salesreps’ capacity. The very first number I look at when a company is missing its numbers is opportunities/rep.  In my experience, a typical rep can handle 8-12 current-quarter and 15-20 all-quarters opportunities [15].  If your reps are carrying only 5 opportunities each, I don’t know how they can make their numbers.  If they’re carrying 50, I think either your definition of opportunity is wrong or you need to transfer some budget from marketing to sales and hire more reps.

The spreadsheet I used in this post is available for download here.

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Notes

[1] Assuming you’re in the first few weeks of the quarter, for now.

[2] Which is usually done using forward four quarters.

[3] And ASC follows a normal distribution.

[4] Typically, they are smaller deals, or deals at smaller companies, or upsells to existing customers.  But they’re out there.

[5] Or, whatever your favorite coverage ratio is.  Debating that is not the point of this post.

[6] Once you build up some history you can use coverage ratios to predict sales as a way of triangulating on the forecast.

[7] As a former board member always told me — a quote that rivals “think of salespeople as single-celled organisms driven by their comp plan” in terms of pith.

[8] Or sometimes, fourth-quarter which is another popular pipeline dumping ground.  (As is first-quarter next year for the truly crafty.)

[9] That is, one about how they are going to get their shit together and manage the pipeline better, the first piece of which is getting it clean by week 3, often best accomplished by one or more pipeline scrub meetings in weeks 1 and 2.

[10] Burning off takes one of three forms:  closed/won, lost or no-decision, or slipping to a subsequent quarter.  It’s only really “burned off” from the perspective of the current-quarter in the last case.

[11] This depends massively on your specific business (and sales cycle length) so you really need to build up your own history.

[12] Technically speaking, I’m making a forecast for day-1 pipeline, not week-3 pipeline.  Once you get this down you can use any patterns you want to correct it for week 3, if desired.  In reality, I’d rather uplift from week 3 to get day-1 so I can keep marketing focused on generating pipeline for day-1, even though I know a lot will be burned off before I snapshot my analytics in week 3.

[13] Surplus in the sense that it’s leftover after we use what we need to get to plan.  Such surplus pipeline goes three places:  lost/no-decision, next-quarter, or some future quarter.  I often assume 1/3^rd  goes to each as a rule of thumb.

[14] As a matter of principle I don’t think an opportunity should have a value associated with it until a salesrep has socialized a price point with the customer.  (Think:  “you do know it cost about $150K per year to subscribe to this software, right?”)  Perversely, some folks create opportunities in stage 1 with a placeholder value only to later exclude stage 1 opportunities in all pipeline analytics. Doing so gets the same result analytically but is an inferior sales process in my opinion.

[15] Once you’re looking at opportunities/rep, you need to not stop with the average but make a histogram.  An 80-opportunity world where 10 reps have 8 opportunities each is a very different world from one where 2 reps have 30 opportunities each and the other 8 have an average of 2.5.