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Sales Pipeline in Percentages Redefined
Posted on May 25th 2013
It’s common for leaders to measure their sales pipelines by the probability of the deal closing. And a common mistake. Probability of close is a subjective measurement that requires the sales rep to make a judgment about their chances of making a sale. It requires interpretation, bias and is ripe for abuse. Instead, you should be measuring the progress of a prospect through your sales pipeline, with each stage representing the percentage of the way through the pipeline that the opportunity has reached. A complete sale is defined as one that is either closed or lost.
This eight-stage pipeline is a good example of how measuring the percentage of progress through the pipeline can assist with sales forecast accuracy. In this pipeline, we have several phases: We start with discovery and prequalification, and then move into qualification–checking on a prospect’s budget, time frame and the decision makers for the process.
A fully qualified prospect would get a proposal, go through a negotiation stage and enter a closed stage. Whether the deal is won or lost, it’s still, in the end, closed.
Measuring an opportunity in terms of the percentage of the pipeline completed instead of the probability of the sale itself happening helps emphasize that sales pipelines and forecasts are objective, scientific tools that require sales reps to follow a very specific process.
When a seller thinks that moving an opportunity through the pipeline increases its probability of close, they’re less likely to use that pipeline accurately. They will hold back on moving deals into fully qualified stages until they are convinced that they will close, limiting the opportunities they put into the pipeline in the initial stages because they don’t want to use the pipeline to mange deals that they might lose. They arbitrarily change the probability percentage to match how they “feel” about the opportunity.
However, when the measurement is changed from probability of close to percentage complete, sellers will use the pipeline to track all opportunities and you will have an accurate measure of how opportunities convert from inception to close.
This change requires a shift in thinking, of course. Saying that a negotiation is 90 percent complete no longer means that it’s necessarily 90 percent likely to close. You may only close 60 percent or 70 percent of the deals you negotiate, which is something that you’ll know based on past data and history.
In rethinking the sales process this way, every step of the process represents a set of tasks or activities that have to be complete in order to move the deal through the pipeline. It’s no longer the probability of close—a subjective opinion from the sales rep—but the percentage complete in the sales cycle—an objective statistic based on facts.
If the sales team is properly using the pipeline, then sales leaders can get a truly accurate view of the conversion ratios between one stage and the next. After watching these conversion ratios for a few quarters, you will be able to create an accurate forecast based on historical facts. From here, you can develop a forecast that is within 5% accuracy every time.
By applying this fundamental change of measuring percentage complete as opposed to probability of close to your sales process, you’ll not only gain accuracy in your forecast but also will encourage your sales team to utilize the sales pipeline in the way that it is supposed to be used and in the way that will allow you the most visibility into your opportunities.