The next quarter is already baked
You can't magically change pipeline or capacity instantly
The next quarter is already baked. You know it. I know it. Unfortunately, not everyone else seems to have figured that out yet. Why do I say that? Two words: capacity and pipeline. Specifically – the amount of time it takes to build sales capacity, and the amount of time it takes to build new pipeline.
Let’s focus on pipeline – we’ll do a different thread on sales capacity. For purposes of discussion, we will assume that there is a single sales segment – enterprise customers. Let’s also assume that it takes 180 days on average to close a deal. Two more assumptions (and we can of course play with these later) – that we convert 1/3 of our deals (so we need 3x pipeline coverage), and that the average deal size is $10,000.
So in the current quarter, we have a sales target of $100,000 – so we need to close 10 deals.
Given that we have a pipeline coverage ratio of 3x, we know that we need to have $300,000 of starting pipeline in the quarter – so our business now looks like this.
Given that it takes an average of 180 days to close a deal, everything sitting in the pipeline needs to have been created 2 quarters ago. So the lifecycle of those deals now starts to look like this:
So that’s what I mean by saying the next quarter is already baked. If you’re coming into the quarter and you only have $200K of pipeline, unless it’s incredibly mature or you get incredibly lucky – it’s going to be hard to make the number. Given the amount of time it takes to create and mature pipeline – you don’t have the time.
But as we all know – that’s not really the end of the story. We have to wind the clock back a lot further. Before something actually enters the pipeline as a qualified deal, it has to go through an entire funnel process – and at each stage of the game the number of companies in the funnel is bigger and bigger.
Let’s say that your sales process looks like this:
You get hundreds or thousands of new account leads each month through your marketing efforts. You go through a marketing engagement (MEL) process to score and qualify those leads enough for them to become marketing qualified leads. Then your SDR’s take over and run a qualification process (BANT or something else) to get them to being what they consider sales accepted leads (SAL’s). Your SDR gets the customer and account exec on the phone and your AE’s (hopefully) move those SAL’s into sales qualified leads (SQL - yeah – pipeline!). Then they run the process to the end to get to a close won deal.
Each of these stages take time, and potential deals fall out at each stage of the game. Let’s make a couple of assumptions to see how this will look in the end:
New account lead to MQL process: 20% success rate (so 1 in 5 account leads make it to MQL), and that process on average takes 60 days
MQL to SAL process: 33% success rate (so 1 in 3 MQL’s makes it to an SAL), and that process takes 25 days
SAL to SQL: 75% success rate (so 3 in 4 SAL’s turn into deals), and that process on average takes 5 days
SQL to Closed won deal: 33% success rate (so 1 in 3 deals turn to closed-won business) and that process on average takes an average of 180 days
Let’s make this really simple and assume that we need to close 10 deals on January 1st of the new quarter. Working backward – it would look something like this:
So the entire lifecycle from lead to deal in this example takes about 9 months from leads coming in to get to every process to a closed deal. This is why I say the next quarter is already baked. Be honest about the math in your business - know the metrics at each stage and plan accordingly. Also - always be looking for ways to improve conversion and timing at each step.
When you’re planning pipeline targets – you will typically be planning for multiple lines of business, each with slightly different statistics (times by pipeline source, conversion rates at each stage, etc). You also need to factor in existing pipeline. So when you’re looking out at the year – build a model that looks at all of those things and then figure out what you need to be generating each quarter and track it ruthlessly. One key learning I’ve had - is to always be looking forward 8 quarters into the future from a bookings and pipeline perspective so you can plan accordingly. Some large enterprise deals can take a year to close - so given the build time before then - you need to always be having that type of long-term view.
As always – ending with Ollie. Not eating something baked, but something grilled. It took him about 30 seconds to devour the whole plate. If there are any topics you’d like me to write about - drop me a note - happy to hear from you. Thanks!
Best,
Steve