Making or missing a quota comes down to two variables: pipeline and your conversion rates. The first is fairly obvious—did you begin the quarter with enough sales pipeline? The second variable is whether your sales team executed on closing that pipeline.
One can distill every quarterly performance (or time period you measure) down to these two variables, and they should be the focus of your executive conversations and board meetings. While there are a million elements you can examine to determine performance, the common denominator at every board meeting is the pipeline and the conversion rate.
Before you deep dive into the “engine room” metrics of marketing and sales, I suggest you really understand these two metrics. Tracking pipeline and conversion metrics is one of the best ways to understand the reasons for your hits and misses. Over time it helps you better predict what’s going to happen in the next quarter. Some companies measure conversion X pipe quarterly, but if you have a fast sales cycle, you can consider monthly tracking (or even weekly if your company is primarily PLG-driven).
Let’s start with a slide that you can add to the board deck, and then break down the variables.
Let’s start with the first element—pipeline. As we all know, best-in-class companies track their pipeline closely, which means locking down what their pipeline is at the start of a new quarter. Quarter-ends tend to be hectic, so most companies ask their sales teams to cleanse and update their pipeline right after the quarter closes. Our recommendation is to take a snapshot of your pipeline on day three of the new quarter. This affords your team sufficient time to close out the quarterly properly, and lets you know what your clean pipeline is moving forward.
Next, you’ll want to get granular. You don’t want to lump all your pipeline together (i.e. we have $3M of pipeline against a $1M quota). Our recommendation is to get specific and track your pipeline in the most detailed way possible. Some potential ways to track your pipeline include:
- Stage of pipeline, like commit, best-case, upside
- Stage of deal cycle: qualifying, solution evaluation, solution acceptance, negotiation
- Segments: small, mid-market, enterprise
- Geographies: USA, Europe, Asia
- Channel: direct, partner, PLG
You want as detailed a view as possible. If you’re a seed or series A company, you may not have these breakdowns today, but if you’re growing you soon will. Think about where your business is moving towards, metrics-wise, and start tracking these sooner rather than later.
Next let’s dive into the conversion rate. Conversion rate is the percentage of pipeline that turns to closed won. If you reported $3M of pipeline on day three, and at the end of the quarter you closed $1M of it, that translates to a 33% conversion rate. Again, that is a blended rate and not as illuminating a figure as you may need. That’s why we are encouraging you to break down your details as granularly as possible.
If you’re tracking by forecast category, your $3M of initial pipeline was probably more like $600K of committed pipeline, $1.5M of best-case, and $900K of upside. It’s likely you’ll see a higher conversion rate against the committed category, and then a lower conversion rate against best-case, and then dropping further from there. The more detailed you can be, the better you can become at predicting your future quarters. Ideally you want to build consistency on your conversion rates each quarter.
Now you have the basis for measuring your quarterly performance. So, let’s see how these two metrics together will help you better analyze the past and optimize your efforts for the future.
As you finish your quarter, these two simple metrics explain why you over-achieved, made, or missed the quarter’s targets. You either had the right/wrong amount of pipeline, or you converted/didn’t convert the pipeline. It might be a mix of both. This is a good way to communicate to your company and investors why the quarter’s performance came in how it did.
Forecast for the quarter ahead
Look at your next quarter pipeline and calculate your historical conversion rates. As you build your board deck, you can project your likely outcome, based on your current pipeline X your conversion rates. This forward-looking metric is helpful in answering a few critical questions: 1) Is your marketing team delivering the right amount of pipeline? 2) Is your sales team executing as well as they did in previous quarters? 3) Are you projecting a miss but spending like you’re on budget?
One additional metric to consider is in-quarter create and close (IQCC). Some companies have relatively fast sales cycles (less than 90 days) and need to track this metric outside of the conversion X pipeline metric. Since these deals are born and closed all within the same quarter, they may not have been created yet and therefore aren’t factored into pipeline. Track this metric in addition to your pipe X conversion metric, as you’ll want to use some historical create and close to predict future quarters. If you close 20-25% of your quarterly business as IQCC, you’ll want to include a calculation for this in your forecast.
A lot of time gets spent in board meetings on why we made or missed the numbers. I missed a quota one quarter and hit 88% of the plan. In the board meeting, I was asked why. I made the mistake of too quickly diving into the other factors—ACV, sales cycle length, new vs. expansion mix, competition etc. One of my board members pulled me back up—had I analyzed my pipe and conversion rates? I had skipped this analysis, so after the board meeting, my CMO and I found that 5% of the 12% miss was lacking pipe, and 7% of the 12% was due to lower-than-normal conversions. This framework helped shape all our future board sessions. The CMO would discuss the pipeline and what factors made it high or low, and then I would discuss the conversions rates.
This framework also aligns marketing and sales at the executive level. Marketing teams are largely responsible for pipeline and sales teams are largely responsible for closing. Some of my marketing colleagues argue with me about this, but I insist that marketing creates the messaging and helps train all sales reps/partners who use that messaging to create pipe. Sales is on the hook for the conversion side, thus making both marketing and sales equal-class citizens on the food chain. The bottom line is these three (including in quarter create and close) metrics are excellent additions to your board narrative.
The information contained herein is based solely on the opinions of Bill Binch and nothing should be construed as investment advice. This material is provided for informational purposes, and it is not, and may not be relied on in any manner as, legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any fund or investment vehicle managed by Battery Ventures or any other Battery entity.
This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and is for educational purposes. The anecdotal examples throughout are intended for an audience of entrepreneurs in their attempt to build their businesses and not recommendations or endorsements of any particular business.