Throughout my entire career, there has been one unrelenting mantra that remains unquestioned gospel from the mouths of every sales leader to the ears of every dutiful salesperson: “You need to keep 3 times your annual quota in your sales pipeline”
Surprisingly, it’s never 2 times, 4 times, or even 3.5 times... Always 3 times. We know this by shorthand as the 3X Pipeline. But why?
At a glance, this supposed truism is based on the presumption that salespeople will generally win 33% of the revenue that they put into their sales pipelines. Therefore, if a seller maintains 3 times their quota in their pipeline, then they will achieve their annual quota. It’s just math. HOWEVER, it’s bad math.
At a high level, the 3X pipeline only works under the following conditions:
- The salesperson wins 33% of the revenue that they put into their sales pipeline
- The salesperson’s average sale cycle is exactly one year
In other words, the 3X Pipeline is brilliant and mathematically accurate guidance IF you win 33% of the revenue that you put into your pipeline AND your deal cycle length is exactly 365 days.
But if you win less than 33% of the revenue you put into your pipeline... Missed quota. And if you have a sale cycle that is longer than 365 days,... Missed quota. Hmm.
So what if you win 20% of the revenue you put into your pipeline, but your sale cycle is only 120 days? Good or bad? Or what if you win 50% of the revenue you put into your pipeline, but your sale cycle is 450 days? Win or lose?
Or what if you are unfortunate enough to win only 10% of your pipeline revenue, but your sale cycle is a speedy 25 days? What should your target pipeline size be then?
Enter Math
As you can deduce from my examples above, the actual pipeline size that a seller needs to maintain in order to make quota is derived from 3 data points:
- Quota
- Win Rate
- Number of Sales Cycles per Year
Quota is of course the sales target for some time period, most commonly expressed in dollars per year. For example, a seller must win $1 million in revenue per year to achieve their target.
If the Quota is expressed in dollars, then the Win Rate should be expressed in dollars as well. That is, the Win Rate should represent the percentage of dollar value won from the sales pipeline created, not the percentage of deals that are won. For example, for every $1 million of opportunities that are created, a seller wins $250,000 for a 25% Revenue Win Rate.
The Number of Sales Cycles per Year is simply that… The number of complete sales cycles a seller can navigate per year. If the sales cycle is 182.5 days long, the seller can complete 2 sales cycles every 365 days, so the Number of Sales Cycles per year equals 2.
Drum roll, please… The formula used to calculate a seller’s ideal pipeline size is:
Pipeline Target Size = Quota ÷ Win Rate ÷ Sales Cycles per Year
To complete the example above, a seller with a $1 million Quota, a 25% Win Rate, and a 182.5 day Sales Cycle should have an ideal pipeline size of:
$1 million ÷ .25 ÷ 2 = $2 million
To take that one step at a time, if the seller wins only 25% of their pipeline, that would imply that their pipeline should be 4 times larger than their $1 million target – or $4 million. BUT they will turn over that pipeline twice in a year, so they only require half of that or $2 million to confidently reach their goal. With a $2 million pipeline, they will win $500,000 twice each year to equal $1 million. Math to the rescue!
The ideal pipeline formula: Quota ÷ Win Rate ÷ Sales Cycles per Year
On our website, you’ll find HANDY CALCULATORS to do this math for you. If you’re like me, you’ll spend a lot of time tinkering with assumptions to see how this might play out in different salesperson scenarios. Fun!
If you’re intrigued by this blog post and want to learn more about our associated pipeline management training program – The Pipeline Playbook – please CLICK HERE.
The 3x Monster is Slain
Historically, the conversation between manager and rep has been: “Hey, your pipeline’s not three times your quota.” The new conversation needs to be: “Hey, I looked at the data. We’ve gotta get this much more stuff into your pipeline, or else win more stuff, or else do stuff faster.”
That’s better coaching. And that happens when we stop dictating that pipelines should be 3X our quotas — and start letting the pipeline tell us what we should be doing to succeed.
