Evaluating The Health of Your Sales Pipeline
Creating a sales funnel structure can certainly feel like the hardest part of managing your opportunity pipeline process – but managing its health frequently and making sure it’s performing well can sometimes be a lot harder.
In this latest entry, we discuss the concept of “Sales Funnel Health”. How do you measure it, and how do you know if the results are good or bad?
What do you consider “healthy”?
Sara Smith, VP of Sales at Acme Medical Solutions, has been given a revenue goal of $10 Million – a 25% growth compared to last year’s results. Requiring an additional $2 Million in sales, Sara is forecasting her existing base of business will grow $1.2 Million, leaving $800K still unaccounted for. Thus, Sara needs her funnel to produce and close opportunities that have sales this fiscal year worth at least $800K.
This basic exercise should be Step #1 of all health measurements – a funnel value by itself with no context is worthless. To truly understand your funnel health, you first need to have an understanding of how you need it to perform – and measure its health accordingly.
Measuring Quality, Not Just Quantity
Let’s start off by saying the obvious: the health of your sales funnel is not dictated just by how much dollar value is in your funnel, but how much dollar value is likely to be realized (and when).
Therefore, it’s important to have an idea of how much “falls out” of your funnel – i.e. your close rate/funnel factor. Some organizations manage this at a very high level – saying that only “X%” of all opportunities make it through to “Closed Won” – regardless of the type of opportunity or activity.
Others manage this in much more minute detail – basing it on a combination of closing history, or using selling/buying stages to assign a level of risk for each individual opportunity.
Regardless of what system you use (we’ll discuss various approaches in greater detail in our upcoming “Forecasting Risk” blog entry), make sure it accurately reflects your selling cycle and customer buying process.
In our example above, Sara is using a general assumption that only 25% of all opportunities will close and produce revenue (conversion rate).
Are you Top-Heavy?
Another important aspect of knowing how your funnel is positioned for success is by knowing where your opportunities are positioned vs. where they need to be.
In our example with Sara, she’s applying a 25% conversion factor no matter the opportunity or where it’s at in terms of funnel progression. So this covers risk, but it doesn’t account for selling cycle time.
Here’s a (very) simple example: Let’s assume your selling cycle is 12 months – and you classify your opportunities by where they are in your selling cycle: Sampling (Takes 4 months), Testing (Takes 6 Months), Evaluating/Deciding (Takes 2 Months), Closed Won/Closed Lost.
If you’re 6 months into your year, and all your opportunities for this fiscal year are at the “Sampling” stage, then it’s likely that at the very least they’ll take 8 more months to close – time you don’t have.
Not to mention, just because they CLOSE at a certain date doesn’t mean you’ll get all the revenue from them in the time you need it. If your fiscal year ends Dec 31, and they sign an agreement on Dec 30th – unless you can get product out the door and recognize that revenue in time, that signed agreement doesn’t do much good if you’re behind on your sales number.
Therefore it’s important to note not only just the value of your opportunities and when they’re closing, but making sure you’ve got the right proportion of opportunities spread throughout your funnel stages to hit your numbers.
The Doctor Will See You Now
Like going to the doctor or a dentist, you maintain your own health (and catch things early) when you go in for regularly scheduled check-ups. The same holds true for your sales pipeline/funnel.
Back at Acme Medical Solutions, and halfway through her fiscal year, Sara has finished her monthly review with her sales team and their funnel opportunities. After the data has been crunched, here’s what she found: She has opportunities scheduled to close in this fiscal year, based on her selling cycle/stages, worth $2.5M in realized revenue – not adjusted for risk. So is this good or bad?
Well, using her assumption that only 25% of her opportunities will make it to the “Closed Won” stage, her funnel is NOT performing where she needs it to be.
In order to hit her goal of $800K in new business this fiscal year, she needs her funnel value to equal at least $3.2M to hit her goal (Remember her conversion rate assumes 75% of her all her opportunities will not come to fruition).
So her funnel value is short by $700K this fiscal year. Time to start hunting!
What About Next Year?
It’s important to remember that funnel health is not just determined by how much, but also by when.
Let’s assume Sara’s funnel was doing well for this fiscal year and the opportunities she had would most likely enable her to hit her $10 Million revenue goal.
What about next year? And the year after that?
If it takes Sara’s business, on average, 12 months to find, qualify, and nurture/close a new opportunity, finding out that her funnel is short with 6 months left in the year can be disastrous.
Making sure to frequently manage both short-term and long-term funnel health is key. It can give you a head-start on outlining and executing the activities your sales team needs in order to hit your numbers for this year, and all the years to come.
- Know how much of your sales number needs to come from new business – and make sure your funnel meets that requirement.
- How do you forecast risk? Make sure the approach is aligned with the nature of your customers and selling cycle.
- Don’t be top heavy in your funnel – make sure your opportunity mix matches where you need them to be in the corresponding funnel stages.
- Make sure all the timing information you have in your funnel is linked to revenue realization, and not just contract/agreement signing dates.
- Using regularly scheduled session with your sales team can help you pressure-test your assumptions and uncover the “real” health of your sales pipeline!
- Manage short and long-term in your funnel – this year’s success may be completely separate from how your funnel is meeting future revenue target needs.