Today's guest post is by Jason Jordan, partner of Vantage Point Performance and coauthor of Cracking the Sales Management Code: The Secrets to Measuring and Managing Sales Performance.
A sales pipeline’s size is no doubt a critical measure of a pipeline’s health, but how big should a sales pipeline be? Sales managers are looking for a magic number they can multiply by their salespeople’s annual quota to determine an ideal pipeline size: “The ideal sales pipeline should be exactly three times your sales rep’s annual quota.” Unfortunately, there is no universal factor that can be multiplied by quota to yield an ideally sized pipeline.
So does this mean sales managers are simply left in the dark to guess the correct pipeline size for each sales rep? Thankfully, no. While there is no magic number, there is a formula sales managers can use to determine the ideal pipeline size for the sales force. The formula uses two interrelated variables that are often unique to each sales rep: close rate and quota.
The first variable sales managers need in order to calculate the ideal pipeline size for sales reps is a rep’s close rateover a given period of time. A rep’s annual close rate can be determined by dividing his or her sales over the past 12 months by the average size of the rep’s pipeline over that period. So if a rep closed $1 million worth of business over the past 12 months, and his or her average pipeline size was $5 million, then that rep’s annual close rate would be $1 million divided by $5 million, or 20%.
A sales rep’s quota is the second variable in the equation to determine a sales pipeline’s perfect size. Say that a sales rep has an annual quota of $1.5 million. To determine the ideal pipeline size for this rep, divide his or her annual quota by the rep’s annual close rate. In this case, the calculation $1.5 million divided by 20% yields an ideal pipeline of $7.5 million. So if the rep maintains a sales pipeline of $7.5 million and closes 20% of that business during the year, he or she will close $1.5 million of business.
So here’s the formula to calculate the ideal sales pipeline size for your sales reps:
Sales quota ÷ close rate = the perfect pipeline size.
By using this formula, sales managers can quickly calculate the ideal pipeline size for sales reps on an ongoing basis to determine if reps are on track to hit their target numbers. The pipeline size for each rep will vary by individual factors, so keep in mind that one pipeline size doesn’t fit all. There is a uniquely sized pipeline for each reps. Over time, reps can confidently reduce the size of their pipeline by improving their close rates.
Knowledge of the ideal pipeline size for each rep on your sales force goes a long way in creating effective, accurate pipeline management so you can better steer reps toward quota attainment.