New Venture Lab: Equipping Christian Entrepreneurs

Question

I've picked up from some of your materials and blog posts that sales pipeline management is a big deal.  What exactly is sales pipeline management?  Please explain...

Answer

I do like to talk a lot about pipeline management in my businesses and in my presentations because this is so critical. 

 

A typical pipeline might look like the diagram below, where the Universe is the total addressable market and the Targets are the segment of the market you are targeting to win (perhaps a geographic subset or a demographic subset of the entire Universe.)  The Suspects are those Targets that have the highest likelihood of turning into customers based upon their response to your marketing and the Prospects are those that have been qualified in some way (fit, timing, pricing, etc.).  The Proposals are those Prospects that advance to the stage of actually getting a proposal and the Wins are those Proposals that became customers.

 

 

The three critical measures of the sales pipeline are as follows:

•         Win rate: The percentage of potential customers that pass from one stage to the next stage.  Think of this as the pipeline friction.  For example, if you only win half of your proposals, then your win rate is 50%.  You will want to measure win rates for each stage to get a sense for the overall rates.

•         Sales cycle time: The rate at which wins can be produced from one end to the other.  Think of this as the pipeline velocity.  For example, if it normally takes two months on average to turn a Prospect into a Proposal and one additional month to turn a Proposal into a Win, then the cycle time from Prospect to Win is three months.  You will want to measure cycle time for each stage to get a sense for the overall cycle time from beginning to end.

•         Sales plan: The number of wins needed to meet plan.  Think of this as the pipeline flow rate.  How many leads need to be pumped into the front end of the pipeline in order to get the needed number of wins out of the back end of the pipeline?  If your plan is 10 wins each month and your win rate is 50%, then you need to make 20 proposals per month and if only 25% of your Prospects ever progress to the Proposal stage, then you need to add 80 Prospects each month.

 

Overall, it should become clear that based upon the example above that the 80 Prospects needed in order to win the 10 customers, needed to be generated three months in advance.  Therefore, if the plan for January is to win 10 customers, then the sales and marketing activity has to be ramped up so that the 80 Prospects are added in September so that there is sufficient time (October, November and December) for the leads to work their way through the system.

 

What happens if you don't pay enough attention to this?  If you don't get a good handle on your sales pipeline, it will be impossible to do a good job of sales forecasting.  And if you can't do a good job of sales forecasting, it will very difficult to do any operational planning, especially around capacity.

 

In one of the businesses I ran I didn’t pay much attention to sales pipeline.  I was so busy selling that I didn't take the time to measure what was happening and it ending up costing me dearly.

 

We were hiring lots of employees based upon our past results rather than our forward forecast -- big mistake.  Unfortunately, our recruiting machine really kicked in just as our sales started to slack off and well, you guessed it, we completely over-hired.  Our hiring pipeline and our sales pipeline didn't get connected because I didn't have a good enough handle on the sales pipeline. 

 

We were hiring at a rapid pace, but I hadn't had time to worry about the hiring too much because I was so worried about why sales were so slow.  So one day when I showed up to welcome our new employees at a new employee briefing -- which I did every two weeks or so -- I nearly panicked when I saw that there were about 30 or 40 new employees in the room.  I did my best to suppress my inner pain as I started out by asking them to go around the room and introduce themselves and tell me what office they worked out of and what they did for the company, etc.  And then this one lady stood up and introduced herself and said, “I’m the Account Manager in Tucson, Arizona.”  I immediately thought, Tucson!?!  We don’t have a branch in Tucson and we don't even have any customers in Tucson!  I tried my best to smile and nod knowingly as if we certainly needed an account manager in Tucson and tried to get through the briefing without any additional panic.  As soon as I got back to my office, I grabbed our VP of Account Management and asked her why we had hired an Account Manager in Tucson since we didn't have any customers in Tucson.  Noting the wild look in my eye, she mumbled nervously along of the lines of, “well, yeah, but we might.  And, you know, I’m building up my account management team because of our growth.”  Ouch. 

 

The bottom line is that the sales forecast has to drive the growth of the business.  If you are investing in capability and production and distribution and customer service, etc. at a rate different than your sales pipeline is bringing customers in, that’s a real problem.

 

I ended up laying off 75 people a few weeks later in an effort to right-size the organization that had gotten so badly out of whack because I didn't manage my sales pipeline as closely as I should have.  Needless to say my new employee briefings dropped off for quite some time.