5 Fundamentals for Improving Win-Rates and Narrowing the Gap between Forecast and Results.
In the initial three parts of this five-part series, we discussed the importance of having a sound, basic sales process that is uniformly applied, and in particular, we explored how to define Sales Stages, how to establish a flexible framework of recommended Sales Activities for each sales stage, and how and why to use Stage Gates.
In this fourth installment, we will continue our discussion of five important fundamentals of a basic sales process (below) that can help quickly improve your sales performance, and set the stage for a more comprehensive process later, this time looking at the relationship between Sales Stages and Probability of Close.
Define a Common Set of Sales Stages;
Define Typical / Recommended Activities Sales Reps should be doing at each stage;
Define specific, required Stage Gates that must be satisfied for opportunities to advance from one pipeline stage to the next;
Assign Specific Probabilities of Close to each pipeline stage;
Ensure that all stage definitions, activities, gate requirements, and probabilities are consistently and completely communicated, understood, and used throughout the sales organization.
What is "Probability of Close"?
For many, the term of "Probability of Close" will be familiar, but it is worth reviewing here, as a surprising number of companies, particularly early-stage and companies with small sales teams that operate in a mode of chasing everything that moves, either do not utilize the concept, or do not apply it in a formal and consistent way as part of a well-considered sales process.
Simply put, the Probability of Close is the percentage chance that you will win an opportunity.
Regardless of whether you use this concept in a structured way as part of your sales process now or not, if you think about it, it should be apparent that the more things you do right during a sales cycle, the greater the likelihood of winning, or said another way, the higher the Probability of Close.
How to Connect Probability of Close to your Sales Stages
The trick, then, is to take that recognition of what probability of close is, and how it increases throughout the course of a well-run sales cycle, and bake it into your sales process in a structured way. Specifically, you will want to determine the probability of close that best fits each Sales Stage of your sales process. There are 3 ways to do this:
Take a guess;
Use statistical analysis to determine actual probability of close based on historical data;
Set aspirational targets for probability of close at each pipeline stage.
Most companies go with Option A: Take a Guess. And for many, especially early and growth-stage companies, that's a reasonable starting point, because you may not have enough good and relevant sales data to perform a useful statistical analysis, and frankly, it's tough to set aspirational targets if you don't have an established baseline to work from. So if you have not already made the connection between probability of close and sales stage, it's okay to go ahead and "guess" -- understanding, of course, that when I say "guess", I really mean, "leverage the experience of your sales leader, look at how other comparable companies have assigned probabilities to sales stages, and/or seek counsel from an experienced external advisor." Chances are, though, what you come up with will be an essentially linear progression of probability of close across the sales stages.
But over time, you will want to build upon that starting point, and refine the probabilities of close you associate with sales stages -- first, by performing some statistical analysis once you have enough data to be useful, so you can align the probabilities with reality, and later, by adjusting and fine-tuning the probability-to-sales stage mapping to be aspirational. Specifically, an aspirational model will likely mean a Disqualification-Weighted Non-Linear model, wherein you hold the probabilities of close lower in the earliest stages, where you really want to apply strong disqualification criteria, then see the probabilities pop up in the middle of the sales cycle, such that the progression of probability of close is non-linear across the sales cycle. Here is a (crudely hand-drawn) picture of what I mean:
Why does this matter?
The linkage between probability of close and sales stages matters greatly, because from a pipeline-management perspective, whether you are a sales rep, a sales manager, or a senior executive, you need to know the true value of your pipeline at every stage, as this is a very good indicator* of whether you are on track to hit your quota (as a rep or manager) or your overall revenue targets as a company. The way we determine the value of pipeline at every stage is by calculating the Expected Revenue of the pipeline at each stage, which is simply:
Expected Revenue = (sum of deal-size values in stage) * (probability of close % for that stage)
For example, if you have $1,000,000 of deals in pipe in the Qualification stage, and the probability of close for that stage is 25%, then the Expected Revenue of that stage would be $250,000. That is to say, as a company, you can expect $250K of actual closed-won revenue.
Do this across all pipeline stages for deals with close dates within the fiscal period of interest (e.g., this quarter, this year, etc.), and you can derive a picture of what revenue you can expect to close in that fiscal period.
*The reality is that deal-sizes sometimes change, close dates slip, and sales reps sometimes sandbag or have "happy ears", so you have to keep in mind there is a big caveat around depending too heavily on Expected Revenue as the only predictor of future bookings value. That said, there is much we can do upstream and downstream in the sales, pipeline management, and forecasting processes to bring consistency, traceability, and transparency to your data, including approaches to connecting sales stage actions to opportunity pursuit plans and close plans, promoting daily sales rep behavior that keeps opportunities up to date and accurate, introducing pipeline hygiene practices that keep the pipeline clean and honest, and much more. Keep reading our blog for information on each of these topics in future posts.
Our final post in this series will discuss the importance of uniformity and consistency in the definition, communication, and use of these critical fundamentals of an effective basic sales process. Thanks for reading!
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About the author
Eric Heine, Founder of Growth Point Solutions LLC, draws upon over 25 years experience in marketing, sales, service, and IT leadership to advise C-level executives and boards of directors of growth-stage companies, as well as growth-equity investors, to help organizations develop, refine, and execute the revenue strategies that power significant, sustainable year-over-year growth.
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