Sales Productivity is a critical measure of the viability of your sales force. One of the important ways to improve Sales Productivity is to provide each rep with an adequate pipeline of qualified leads. The more time that your reps can spend moving prospects through their funnel (rather than hunting for qualified leads) the more productive your sales organization. Yet, we regularly hear that reps do not have adequate deal flow from field reps and their managers. When companies do not adequately project the number of suspects required to meet the sales goals or they use very optimistic assumptions on conversion rates, the result is missed goals and high selling costs.
This article is focused on developing a Pipeline Requirements Model for subscription revenue businesses. It incorporates conversion and lead time metrics.
Explanation of the model An example of such a model is shown below.
The second row states the Revenue Goal for the year ($50M in this case) and row 3 shows the Renewal Revenue Estimate of $42M. An assumption in this version is that Renewal Revenue takes Churn into account. If not, you should add in specific Churn Estimates by quarter and compute Net Renewal Revenue before proceeding down the model. The Average New Account Order Size (Row 4) is an important element to estimate how many new accounts are needed.
Next, management states the desired distribution of New Account Revenue by quarter (shown in row 6: 10% in Q1 growing to 35% in Q4). Sales Leadership estimates the number of New Accounts to be Closed from the Current Pipeline by quarter (row 8: Total = 290 in this example). Multiplying the number of New Accounts to be Closed from the Current Pipeline by the Average New Account Order Size provides the revenue for a full year after the order is closed (assumes all contracts are for one year). Multiplying that by 25% (the assumption that the subscription service is provided equally each quarter may not be correct in your case) provides the ratable revenue that is recognizable each quarter (row 10). The difference between the New Account Revenue Goal (row 5) and the Revenue from New Accounts to be closed from the Current Pipeline (row 10) reveals the Revenue required from New Accounts Not yet in the Pipeline (row 11).
The calculation of New Account Orders to be closed that are not in the Current Pipeline (row 13) is (Revenue from New Account Orders not in the Current Pipeline X 4) / (Average New Account Order Size). Now, with the Number of New Account Orders not in the Current Pipeline, we can proceed to develop projections for the number of Qualified Leads, Prospects and Suspects or Targets required to meet the plan.
It is important to use conversion rates that meet a sanity test and to progress to a point where most of your Qualified Leads and some of your Prospects are generated in earlier quarters than the order close quarter. This assumes that the sales cycle for $80K+ deals is more than 1 quarter. The number of Suspects, Prospects and Qualified Leads needed to satisfy the revenue goal is often much larger than the company executives think is necessary.
As we see here, we need to touch more than 200,000 Targets to get 109 New Accounts not currently in the Pipeline. This can be reduced if the conversion rates for Qualified Leads and Prospects improve. If we can close one of every two Qualified Leads, the number drops to 136,000 (which is still significant).
Assumptions in this model
- Renewal revenue estimate includes revenue lost due to Churn
- All orders are for one year contracts
- Subscription service is provided equally per quarter
- Average order size is a meaningful number
- Sales cycles are more than 1 quarter
Companies need to apply this approach globally as well as to the individual territory, Different territories have different needs. Marketing programs should be driven to serve the needs of each sales territory. For this to work well, the Marketing team needs to have the philosophy that Sales is their number one customer.
Adequate Lead Generation and Qualification is very important and should be guided by your Target Markets and Ideal Prospect Criteria. There are several new technology approaches for generating and tracking new opportunities. Refer to the extensive excellent subject matter resources at Marketo.com and HubSpot.com.
You can view this and our other blogs here. If you would like help in building your Pipeline Development Model or improving other Sales Productivity issues, contact me.