How Solution Selling® eases pipeline coverage pressure
Within the last week, two different clients asked us for benchmarks on sales pipelines. Specifically, they wanted to know what a “good” sales pipeline coverage ratio should be. That is a question that we hear often. And, like all good consultants, we generally answer with the rather unhelpful response: “It all depends.”
First, the commonly held “rule of thumb” is that a ratio of the total gross value of all opportunities in a sales pipeline should be at least three times the total weighted value of opportunities, where the weighted value is calculated as a percentage probability of closing for each stage in the pipeline. Opportunities at the top of the pipeline which have just begun their sales cycle are weighted very low, while those that have successfully navigated to the bottom of the pipeline and are nearing closure are going to be weighted much higher. The rationale for this, of course, is that sales opportunities that remain qualified as they progress through a sales cycle are going to have a higher probability of producing business, as they move closer to a final decision.
Users of Solution Selling® already know about the weighted calculation approach to pipeline valuation, as it’s an essential part of the methodology. But, does the generally held 3:1 total/weighted pipeline ratio make sense?
SiriusDecisions conducted a study of this and found that business-to-business (B2B) companies that more consistently achieved their sales goals had pipeline coverage ratios in excess of 3.6 – in some cases, they were as high as 4.0. They speculated that the reason for this higher coverage number is because of the increased complexity of selling B2B solutions – more people involved in evaluations, more educated buyers, and as a result, longer sales cycles. This seems consistent with our own clients’ experience, especially in the increased unpredictability of the current economic environment.
The Active & The Latent
This is further substantiated by research recently conducted by CSO Insights, who found that conversion rates of opportunities from discovery to close are dropping. In other words, more opportunities entering into sales pipelines are now resulting in higher “no decisions” or losses. They confirm that sales cycles are indeed getting longer, almost every stage of the sales process requires more effort, and fewer deals are being won as forecast. The end result: a 3:1 coverage ratio is now most likely inadequate for most businesses.
There is one factor to consider, however, that can lower the required pipeline coverage ratio – the number of latent vs. active opportunities.
An active opportunity is one where the buyer already has a vision of a solution, before they talk with a salesperson. Latent opportunities are those where the buyer is either unaware of a business need that they should address, or they are aware but aren’t yet motivated to do anything about it. If a salesperson can elevate a buyer from a latent state to an admitted state — that is, if they can help the buyer to realize that they must take action to address a business issue or potential missed opportunity — then they can create a new sales opportunity where they can influence the buyer’s vision of a solution: one that favors the solution provided by the seller.
Latent opportunities are extremely valuable. According to research conducted by IBM and other SPI clients, the win rate on opportunities created by a seller who stimulates buyer interest and raises their latent need to an admitted state is very high – in excess of 85% in most cases. Being “Column A” in the evaluation matrix is a powerful place to be – and they generally result in larger opportunities with a much higher than average probability of winning.
Recently, several consultants have written about the importance of latent opportunity development, although they give it different names. For example, an article in the March 2009 issue of Harvard Business Review called it “provocation-based selling.” The Sales Executive Council called it “hypothesis-based selling” in interviews and reports published last year. These pundits imply that pursuing latent opportunities is a new idea, but in fact it’s been a core principle of the Solution Selling® methodology for more than two decades, as described by Keith Eades in his book, The New Solution Selling (2003, McGraw-Hill, ISBN 978-0071435390). The recent surge in interest in latent opportunity development is a direct result of the uncertain and unpredictable economy, when customer demand is generally much lower than normal.
The interest is latent opportunity development is fueled further by the low win rate on active opportunities – where the customer already has a vision of a solution, and the seller must react to the buyer’s already established requirements. We’ve seen the win rate on active opportunities decline to below 10% in some highly competitive industries. In times of plenty when buyer demand is high and they produce lots of unsolicited opportunities which flow into sales pipelines, many salespeople can make a good living by winning one-out-of-ten of their active opportunities. But in tougher times, the flow of active opportunities slows to a trickle, and therefore, top sales performers must either win an unnatural proportion of active deals to survive, or they have to become proficient in latent opportunity development. Usually, it’s a combination of both.
You Need both
The most successful salespeople today are those with a balanced portfolio of both latent and active opportunities in their pipeline. If half of the opportunities in a pipeline are latent with expected win ratios of 85% or more, and half are active with win ratios of about 15% (assuming the rep is competing for them effectively), then the total overall win ratio should even out to about 50% of all opportunities in the pipeline over time. With a balanced portfolio of active and latent opportunities, if we assume that the number of opportunities are evenly distributed throughout all the sales stages in the pipeline, then the total value to weighted value ratio can be lower than 3:1 and the rep can still achieve their sales goal.
Therefore, the cure to inflated pipeline coverage ratios is increased emphasis on latent opportunity development, while also competing effectively in active opportunities.
The Golden Ratio?
So, what is an optimum sales pipeline coverage ratio? Well, it all depends on:
- The number of active opportunities entering the pipeline
- The number of latent opportunities created by the salesperson
- The average value of opportunities in the pipeline
- Accurate weighted values by sales stage in the pipeline
- Accurate average length of sales cycles
- Win rates on latent opportunities (ideally above 85%)
- Win rates on active opportunities (ideally above 15% or more)
Consistent application of Solution Selling® principles throughout the sales force generates larger average opportunities with reduced sales cycles and a higher chance of winning, thereby reducing the required sales pipeline coverage ratio in order to achieve overall sales goals. With Solution Selling®, it is possible to reduce your coverage ratio to 3.0 or less, and still have a chance of “making the numbers.” Without it, you must have coverage ratios of 3.6 or higher, which is increasingly harder to achieve – if not nigh impossible in the current economic environment.
Good luck and good selling!