The sales pipeline is a visual representation and process-driven approach to selling a service or product. Sales organizations have a pipeline of opportunities which serve as the foundation for delivering your company’s bottom line. The pipeline model consists of a number of named and sequenced stages that describe the sales cycle. The criteria for an opportunity to be in any particular stage is defined by the sales organization.
What do Pipeline Stages Represent?
So, if there is a stage called “Negotiate,” the sales function will understand what that means, the specific characteristics of an opportunity in that stage, and can easily defend why a particular opportunity is placed in that stage.
The criteria must be precise and verifiable, e.g. a pre-requisite for an opportunity to be in the Negotiate stage might be that you have to have presented a costed proposal to the potential client. Opportunities move between stages. Sometimes they move smoothly through each stage in turn. Sometimes they jump forward several stages, and sometimes they go in the wrong direction. As soon as an opportunity is lost, it drops out of the pipeline altogether. When an opportunity is won then it is removed from the pipeline and counted as won revenue.
An opportunity has a percentage associated with it. This percentage can usually be set explicitly but is often inherited from the stage. If the Negotiate stage has 90% associated with it, that is what attaches to the opportunity by default.
What Do the Pipeline Stage Percentages Mean and How Are They Set?
There are two common concepts.
The first concept is that the percentage represents the probability that an opportunity will eventually be won. This is quite a common usage and it is useful because it easily lets you derive a value from the pipeline.
The second concept is that the percentage represents progress through the pipeline. Negotiate at 90% would mean that we are 90% of the way to a win. This could describe the effort or time invested, but this method has problems. It cannot be used to value the pipeline because it tells you nothing about the likely outcome of any opportunity. It could be used to validate close dates if you know typical sales cycle length.
Pipeline stage percentages are usually set during CRM setup without much supporting evidence. They are frequently round numbers and that does not suggest that they have been carefully calculated.
How are Pipeline Stage Percentages Used?
A common usage for pipeline stage percentages is to project the pipeline to arrive at an amount of expected revenue. For opportunities with close dates in the quarter, each opportunity is weighted by its associated percentage. You add these up to get expected revenue. This usage assumes that the percentages represent a probability of winning. Even so, it isn’t going to give you a particularly good forecast.
A better approach to forecasting and the approach that Vortini takes is to also attach a “confidence of winning” to each opportunity and to use this as the basis for the forecast. This also holds and builds accountability for individual salespeople in the sales function. When the forecast is built, you only consider opportunities that are sufficiently far enough through the sales process to have a chance of closing by quarter end.
Are the Pipeline Stage Percentages Precise Enough?
Let’s suppose we sell services and we have a pipeline stage that is used to hold opportunities where the seller has presented the costed services proposal to the client. The probability is a simple 50%.
The assessment has been made that 50% is an accurate figure, and some questions to then ask are:
- Is it the same for me and every other seller in every other geography throughout the entire sales organization?
- Is it the same for every type of services offering that we sell irrespective of the competition we encounter?
- Is it the same for every industry and market we sell to?
- Is it the same for every contract value?
Not very likely, is it?
We can build a far more accurate model by looking at and using sales history. In addition to the history of opportunities, there is more knowledge about the circumstances of every opportunity – the service that is sold, the value, the customer, who sold it, etc. In this analysis, we might find that some of these factors have no real influence on opportunity outcome, in which case we can drop them from the model. The important outcome is to build an evidence-based model that will allow you to make smarter, data-driven decisions.
Three New Use Cases for Pipeline Stage Percentages
Model-based stage percentages open up a number of new possibilities. Here are several interesting ones and helpful use cases.
1. Start the Forecast Off on a Better Foot
The forecasting processes usually starts with a suggested forecast that is then fine-tuned before it is committed to. The model gives a better suggested forecast, and that means less work reviewing and tuning. The review process holds individual salespeople accountable for the forecast number they commit to.
2. Routing of Opportunities
If you are in the sort of business where you have the freedom to allocate new opportunities to any seller you like, within reason, then you now have the ability to allocate opportunities to sellers that have demonstrated the most success in the past with opportunities that have similar characteristics. We have seen this used very successfully in cases where leads are captured with useful additional information.
Even without a model, companies are doing this instinctively. They will often form teams of industry specialists because they know that it will improve outcomes.
3. Performance Analysis and Coaching
Following on from this last use case, if it is clear that some salespeople are less successful at closing certain types of opportunities, then there is a strong case for coaching. The model provides a useful benchmark and the objective of salesperson coaching is that it should raise performance to at least that of their peers.
The model can also track changes in performance over time.
There are several common concepts and outcomes when organizations use pipeline stage percentages. Vortini has the ability to calculate pipeline stage percentages that are evidence-based, linked to the drivers of the business and there are many businesses uses these can be put to. These use cases highlight how to improve performance, lead to greater efficiencies and better business outcomes. Contact us to learn more about Vortini and how to calculate and improve pipeline stage percentages.
David is the CEO of Vortini and is an experienced executive with extensive software and startup experience. He has over 30 years’ experience in various roles all in the enterprise software industry. Now his focus is sales forecasting and analytics.