Dial It Up: Optimizing Pipeline for Better Revenue Outcomes
In my article on How to Build a Predictable Revenue Engine, I summarized the key elements to building and maintaining a plan to drive predictable revenue. One of the main elements of this plan are the dials, or assumptions, about your revenue funnel.
As a quick recap, the dials of your model drive predictable pipeline and the three most common of these are:
average selling price (ASP)
conversion rates (lead to opp, opp to deal)
average sales cycle (how many days it takes to win a new customer)
The goal with this post is to put these dials into real-world context and to provide some examples of how moving the needle or impacting the dials can dramatically alter your outcomes.
The basic equation to keep in mind when you think about your model is:
# of qualified opportunities x % Win Rate X $ ASP = $ Revenue*
Using actual data from your business to create these dials is important as there are many pitfalls of using benchmark or “best in class” substitutes in their place (more on that here).
If you have 100 qualified opportunities, a 40% win rate, and an ASP of $50,000, then you can expect to book $2 million from that pipeline.
100 x 40% x $50,000 = $2,000,000
Selling $50k deals likely means that your sales cycle is 90+ days from the time your sales rep accepts the qualified opportunity to when she actually closes it. This timing is critical as it tells you when you need to generate those 100 qualified opportunities. If your Q2 bookings goal is $2 million and you have a 90-day average sales cycle, then you need to make sure Marketing, Sales, and anyone else responsible for generating that pipeline are doing so in Q1.
Let’s say you’re starting your new fiscal year and the board is asking you to increase net-new ARR by 50% this year. We’re looking for growth! At the same time, you’re not going to have access to an equivalent increase in resources, be it headcount or marketing budget.
Well, then you need efficiency gains in your engine!
This is where the dials of the model come into play. In order to increase our bookings while being more efficient, we need to turn the dials of the model. Let’s take a look at the impact and options for each of our 3 key dials.
Increasing your Win Rates
With all other dials staying consistent, if we can increase our win rate, we can win more deals from the same population of qualified opportunities. Simple enough, but let’s take a look at the impact using the same numbers from above.
With 100 qualified opportunities, an ASP of $50k and a win rate of 40%, we’ll close $2 million.
Say we could increase how often we win by 5%, making our new win rate 45%.
From the same 100 qualified opportunities we would now generate an additional $250k for a $2.25M total.
That’s 12.5% growth in quarterly bookings without spending any more money on generating pipeline.
Of course, Finance can’t expect us to hit 50% growth without spending any more money than last year (if you could, then our growth targets are clearly not aggressive enough!).
Let’s look at it another way. To hit 50% growth, the $2 million we did in the same quarter last year needs to be $3M this year. All things staying equal, with a $50k ASP, we would need 60 deals to hit our target. With a 40% win rate that’s 150 qualified opportunities.
If we can increase our win rate to 45%, our team would only need to create 133 qualified opportunities.
Once you figure in the true cost of creating those opportunities (marketing spend, SDR/AE headcount, time/effort), you’re going to find that you’re generating some major efficiency gains. When you can create more with less, additional resources can also be reallocated to overachieving on goals or other strategic initiatives.
I’ll cover ways to increase your win rate in a future post.
Raising your Average Selling Price (ASP)
Your next dial is all about the size of your deals.
Say we could increase the average size of our deals to $60k.
From the same 100 qualified opportunities, we would now generate an additional $400,000 for a $2.4M total.
That’s 20% growth in quarterly bookings without spending any more money on generating pipeline.
Again, let’s take a slightly different view on the math of generating $3M in bookings this quarter compared to $2M last quarter (50% growth).
All other dials remaining the same, a $60k ASP would require 50 deals from 125 qualified opportunities to hit our target. By comparison, last year’s 50k ASP would require 60 deals and 150 qualified opportunities to achieve the same $3M quarterly bookings goal.
If your Sales reps have a $1m quota, they’ll be on the hook for about 5 deals a quarter or 20 deals a year. Raising your ASP by $10k requires 10 fewer deals a quarter or 40 a year -- meaning 2 fewer sales heads are needed to achieve your revenue targets.
You can apply similar efficiency gains if you have an SDR team where each SDR is responsible for 25 qualified opportunities. Or to your marketing budget where the average cost per qualified opportunity is $6,000. That’s $150,000 saved on marketing and one less SDR to onboard.
Again, I’ll share some ideas on how to optimize your ASP in a later post.
Impact on the Sales Cycle
Increasing our deal velocity will mean more deals close sooner. Which of course means more revenue hits the books sooner too.
Unlike Win Rate and ASP, the length of your sales cycle doesn’t impact the raw volume of opportunities needed to hit a revenue goal or boost the revenue won from a pool of opportunities.
However, it can make a huge difference in hitting your revenue goals and is in my experience often the most overlooked dial in the engine.
In our previous example, our new quarterly target was $3 million. Through some great analysis, strategic planning, and execution, let’s say our team has managed to not only increase our win rates but also increase the ASP of our deals. We’ve created efficiency gains that will ensure we hit our growth targets with fewer relative resources - awesome!
Increasing our deal sizes has meant selling bigger deals into larger teams. To address the needs of the broader set of buyers, we implemented a more tailored approach that now includes a POC and an on-site presentation. This level of tailoring is above and beyond what the competition offers, which has positively influenced our win rates. High fives all around.
But these deals take time!
In fact, we’ve taken our 60-day average sales cycle and doubled it to 120 days. That’s ok if we still hit our $3m revenue goal, right? Yes, it is. But we can not lose sight of the fact that our $3m goal is a quarterly target and we have a timeframe in which to hit it.
If our $3M quarter starts next month, the end of that quarter is in 120 days. With a sales cycle of 120 days, we’re going to be extremely hard pressed to influence our results with any of the 100 qualified opportunities we create after today!
In fact, the 100 qualified opportunities we create after today will almost all get closed in the subsequent quarter, and almost all of the $3m sourced from those opportunities will hit the books then too.
This is one of the most common gaps I see: Marketing hits its quarterly goal (ideally this is a Qualified Opportunity goal and not MQLs!), but Sales misses their number. From there, the discussion revolves around quality and count. In fact, Marketing did hit their goal but did so without regard for timing. Either the monthly targets were set wrong to begin with, or the team “bridged the gap” in the last month with a major campaign push.
Timing is everything, and I’ll cover this in more specifics in a future post.
Relationships between the dials
In the previous example, there was a relationship between ASP, Win Rate and Sales Cycle. In most cases, there will be a thread that ties together the dials of your model. Sometimes that means when you turn a dial one way, another follows. In other cases, another dial will have an equal and opposite reaction (Newton’s third law of SaaS pipeline mechanics...)
Neither case is definitively good or bad for business -- but it’s critical to understand and account for the relationship when you model your plan.
When deal size goes up, sales cycles most often lengthen. Bigger deals have more people involved and are generally more complex.
Smaller deals usually move quicker, as they are more transactional (sometimes down to a website session and a credit card swipe).
Finding ways to win deals faster may actually increase your win rates. In other cases, taking more time to fan out in an account, offer demos, etc. will add weeks to your sales cycle, but also extra points to your win rate.
Which way to go depends on your business. And many times a plan that accounts for multiple channels each with their own dials will be the key to success.
You may build a plan for each of your two selling teams:
Your commercial business will have lower ASPs but you’re able to create a much greater volume of opportunities to make up for it. And you can win more of these deals in 30 days or less.
On the other hand, your enterprise team will work six-figure whales that take 6-12 months to close. Lower volumes and lower win rates, but just a handful of high ASP deals will get them to their number.
Perhaps you’ll build a sourcing-based plan that recognizes opportunities referred from partners are smaller but move much faster than the larger deals you initially source from sponsoring tradeshows on your own.
The point is to build a plan around the way you’ve organized your business - by product line, selling team, vertical, or other. You will ensure the business hits revenue goals on budget and on time by building real and defensible dials into the plan for each.
In my next post, I’ll share some concrete actions that you and the business can take to move each of the dials. If you need a refresher on the building blocks of a predictable revenue plan, check out my previous post.
I’d love to hear how you manage the dials in your plans and what sort of changes you've made to influence them in one direction or another. Drop me a line if you have questions or want to bounce some ideas around. I’m always up for discussing a challenge.
*In the SaaS world we’re really talking about Bookings when we talk about hitting our monthly and quarterly sales targets. Usually, only part of the Revenue is actually recognized upfront. I’ve been in many a meeting with Finance where the “R word” was frowned upon; for the purposes of these blogs I’m using Bookings and Revenue interchangeably.