CEOs who prioritize sales pipeline management outstrip their peers by as much as 80% in terms of revenue and profitability.
While most CEOs are actively involved in setting sales budgets and goals, few are actively engaged in monitoring the sales pipeline—and that can be a costly mistake. According to research from McKinsey, CEOs who prioritize sales management outstrip their peers by as much as 80% in terms of revenue and profitability.
Leaders who understand the sales pipeline can predict revenue more accurately and take action to improve sales outcomes or revise expectations, both of which are critical to sustainable growth.
But how much—and exactly what—do you need to need to know? At a minimum, make sure you have the answers to these four questions:
What’s our average deal size?
Let’s use this example: you need to reach $2 million in ACV by year’s end, and it’s now July. Your sales team is optimistic, but how can you be sure they’re on track?
First, you need to determine your average deal size, which can be calculated using the average deal size of the closed won deals over the last 12 months. Assuming the average deal size is $50,000 ACV, the sales team would need to close 40 deals to hit the $2 million target.
What’s our average sales cycle?
Next, you need to look at the average sales cycle—the time it takes to go from creating a sales-qualified opportunity to actually closing the deal. Once you know your sales cycle, you can estimate how many opportunities in your sales pipeline are likely to close within the year.
The average sales cycle can be calculated by opening up your CRM and averaging the time it took to close the deals you’ve won in the last 12 months. For example, let’s say the average sales cycle is 6 months. That means the sales-qualified opportunities that are in our current pipeline—excluding bluebird deals—will determine our full-year sales number.
What’s our conversion rate?
Of course, not every sales-qualified opportunity converts into a customer. To forecast the number of deals accurately, you need to know what percentage of sales-qualified opportunities are likely to close. In other words, what’s your conversion rate?
Here, again, you would check the historical data in your CRM. Let’s say you converted 10% of opportunities on average. That means your sales team would need 1,000 opportunities in the pipeline to close a target of 100 deals.
Ideally, those opportunities will be evenly distributed throughout the sales pipeline. If the majority of them are at the top of the funnel, you might want to use a more conservative estimate to reflect less certainty.
How many leads do we need in the sales pipeline?
And here’s the last piece of the revenue puzzle: how many leads do you need to create those 3,000 sales-qualified opportunities?
It’s a key metric, and one that will vary across different lead-generation channels. For example, leads that are generated by client referrals may have a high conversion rate, with as many as 75% of leads converting to sales-qualified opportunities. Leads generated by e-newsletter sign-ups by comparison, may have a conversion rate of no more than 10%.
By determining the number of leads and applying the conversion rates channel by channel, you can predict the number of sales-qualified opportunities. Then you can apply the sales-cycle metric to determine how many of these leads will complete the buyer journey by year’s end.
So how do we use these metrics to drive growth? Once you know the numbers that define your deal size, sales cycle, conversion rate and pipeline size, using them to monitor this year’s revenue target is just the beginning.
You can also start looking further into the future to see what kind of pipeline is required to support next year’s growth. If you’re a SaaS company, you’ll have annual revenue targets that rise exponentially. To meet them, you’ll need to keep a watchful eye on the size of your pipeline and the performance of every marketing channel and conversion point that feeds into it.
For example, if this year’s target was $2 million, next year’s could be $6 million. To reach that goal—with a conversion rate of 10%—the sales team would need to generate 3,000 sales-qualified opportunities to close 300 deals and hit their target.
Here’s the bottom line.
It’s not your job to micromanage the sales pipeline. But you do need to know how to forecast revenue with confidence and know when the pipeline isn’t supporting growth projections. With these four metrics in hand, you’ll gain the visibility you need to see when revenue expectation and realities are not in sync, which means you can step in sooner to course correct.