Want To Know If Your Reps Have Any Hope Of Hitting Their Quota? Uncover The Truth
Companies have just as much trouble forecasting sales, following up on leads and closing new customers as they do generating new leads. This is typically referred to as sales execution.
We learned that early in our history when a client’s marketing program took them from 30 leads a month to 300 leads a month but revenue remained flat. We had to jump into action, and we quickly found that their sales team was a mess.
The sales enablement practice at Square 2 Marketing is designed to help clients with sales process, sales rep training, sales tools, sales communication and sales metrics. Lately we’ve been talking a lot about the new key performance indicators (KPIs) sales leaders should be looking at, and today we have another new one to share.
Looking at pipeline value in comparison to quota is a smart and proactive way to identify sales reps who are never going to hit their quotas, work with them to upgrade their pipelines, put them in a position to be more successful and balance out the performance of all your reps every single month.
How To Calculate Pipeline Value
Pipeline value is easy to calculate. You take the estimated deal size for everything in the pipeline regardless of stage and add it up. You can do this for your entire company, rep by rep or region by region. The subset pipeline analysis is up to you.
But a simple snapshot or single point in time is hardy helpful when it comes to pipeline value. Instead, its relative value is what you should be looking at. Is the pipeline value increasing over time? Is it richer today than it was yesterday? Is it higher this week than last week? Is the trend up over time, or is it decreasing? That’s the important question related to value.
A number of different calculation methodologies also exist. Again, I’m not sure any one or two are better or worse, they’re just different. If you don’t like taking the full deal size for opportunities that are early in the process versus deals that are about to close, that seems fair to me. You can apply a discount to deals early in the process by multiplying deal value by projected close rates.
As mentioned before, a single number isn’t highly relevant. Once you start comparing today’s pipeline value to tomorrow’s value or next week’s value, that’s where it gets interesting, and as long as you’re doing your calculations the same way, your methodology doesn’t really matter.
Comparing Pipeline Value To Quota
What gets interesting is comparing pipeline value to quota, because this tells you whether your company, region, district or individual rep has the pipeline to hit their quota. Typically, most experts suggest around 3x quota for your pipeline value target, but I’ve seen this number as high as 8x. If numbers are hard for you, then when your quota is $50,000 a month, you need between $150,000 and $400,000 in pipeline value every day during the month. If your rep is constantly looking at pipeline value around $100,000, it’s highly unlikely they’ll be hitting quota.
If you want to be sure about your multiplier, consider doing a complete sales process analysis to see live company data on the conversion rates across your entire sales process. If pipeline value is defined as deal value once a lead becomes a sales-qualified lead, then your conversion rate on sales-qualified leads to new customers would be the key multiplier to understand the relationship between pipeline value and quota.
Here is an example: You get 50 sales-qualified leads a month, with most of those valued at $10,000. A total of 25 are actual sales opportunities, and of those, 20 end up getting proposals. You close 50% of your submitted proposals for 10 new customers a month. If this is the case, you’d probably be looking at quotas of around $100,000 to $120,000 a month per rep. In this example, you’d be looking at a 5x multiplier on pipeline value. You need $500,000 in pipeline value to hit your quota of $100,000. Try to get this math done for your company.
What Is Strong Pipeline Value?
This is like asking, “What are good numbers?” The answer is almost always that “good“ is relative for every company. In the example above, the company needed 5x quota to feel good about the value of its individual rep’s pipeline. If reps were closing 75% of the submitted proposals month in and month out, the company could be comfortable with a 3x pipeline value to quota number.
Again, it’s nice to compare industry benchmarks, Google the term “pipeline value,“ read a couple of articles and feel like an expert. What I’d rather see you do (and what we do with clients) is benchmark and baseline current performance. Set goals on where you want that performance metric to be and how long you want to work on it. Then create the attack action plan and start working to impact the number.
Measure it regularly and make sure your energies are moving the number in the right direction. I contend that if your action plan is having a positive impact on the numbers day by day, week by week and month over month, then before you know it, you’ll be setting a new benchmark and running a similar set of exercises to beat that baseline next.
Size And Quality Matter
If we stick with the example above, you can also move the needle by getting bigger deals in your pipeline. If you start closing deals that are $20,000 instead of $10,000, you’ll need less in the pipeline and your close rates should go up. In most cases, this is a positive way to proactively manage your pipeline and make sure the pipeline value to quota stays tightly aligned.
Quality of leads has an equal impact on this conversation. If you get a lot of bad leads, you’re going to have low conversion rates. If you get a few excellent leads, you’re going to have high conversion rates and your pipeline value to quota relationship is going to be influenced positively.
Sales And Marketing Alignment
This is especially important when you start looking at how to better align sales and marketing. If the quality of lead, the size of the lead and the conversion rates along the sales process are all key drivers to being able to hit quota, then a lot of these metrics are controlled by tactics run out of marketing. If your marketing team is getting paid on the number of leads (and a lot of teams are), then the pipeline value to quota multiplier is going to be higher.
If your marketing team is getting paid on sales opportunities generated, the team is going to work harder to produce high-quality leads that convert at a high level from qualified lead to sales opportunity, meaning the multiplier can be lower. As mentioned before, set the baseline and then work on improving it week over week. This is going to produce the best results and the most consistent continuous improvement process.
If your crew is doing the right things, you should see all of the relevant variables improving. Average deal size should go up, conversion rates should go up, close rates should go up and, as you’d expect, pipeline value should also go up. What will come down is the multiplier you need to ensure your company and your reps have the pipeline needed to hit their quota.
Managing The Data
It’s not hard to come up with these numbers once. What gets tricky is coming up with them every day, week or month. What gets even tougher is being able to quickly pull data like this with the click of a button and then being able to quickly compare it. The value comes from the insight you see when you compare this week to last week and this month to last month. Then you can start working on specific improvements designed to power up the right numbers.
Nothing is better than installing a process change that improves your close rate from 50% to 60% so the overall pipeline value goes up and reps start consistently overachieving on their quota. The entire company wins when the sales team excels. You can worry about increasing their quotas next, but not until you have a complete understanding of what their potential quota could be. The power of the math (and the science) gives salespeople an entirely new toolkit to make their roles in the company more creative, more constructive and more impactful.
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Posted By Author Mike Lieberman, CEO and Chief Revenue Scientist
Mike is the CEO and Chief Revenue Scientist at Square 2. He is passionate about helping people turn their ordinary businesses into businesses people talk about. For more than 25 years, Mike has been working hand-in-hand with CEOs and marketing and sales executives to help them create strategic revenue growth plans, compelling marketing strategies and remarkable sales processes that shorten the sales cycle and increase close rates.