The Sales Manager’s Law, and why 3 times annual sales may or may not be an accurate estimate of your required pipe

Sales Management

Let us assume you are mid-way in a tough year, with an order intake gap of G.  You have a solid (gross) opportunity pipe though,  say P, and you want to know if your opportunity pipe is big enough to secure your bonus for this year (which is based on order intake or revenue target for full year).

Most people, including CFOs and fairly quantitative people from VC community, would say that if P is larger than 3 x G, you should be on pretty much safe ground.

In some cases you really are on safe ground in such situation.  However, you may also start to think: What is the rationale for this simple rule, and how may sales process KPIs like win probability, sales cycle, and typical opportunity visibility horizon influence the assessment (they would, wouldn’t they)?

Here is the answer: the order intake OI to be expected from opportunity pipe with size P is given by the following formula:

OI = WP x (TP / SC) x P

where WP is win probability, TP is rest of time period, and SC is sales cycle or opportunity visibility horizon.  (The above is in some sales organizations called The Sales Manager’s Law, as it is essentially the only piece of math a sales manager needs to know.)

(In high-growth organizations, say with annual topline growth of 50%+, there are some additional complexities in the above formula, but I will leave it to the reader to sort out the math.)

The revenue impact of this order intake can then be estimated by multiplying the above expression with a factor alpha, which accounts for the conversion of this time period’s order intake into this time period’s revenues.  In general, 0 < alpha < 1.

With WP = 0,33%, TP = SC = 1 year, one is really back to the P > 3 x G rule as a special case, for the comfort of those who have successfully used the ​P > 3 x G rule.  However, with very short opportunity visibility horizons, say when selling cell phone subscriptions, one may be OK with essentially zero pipe, or with very long sales cycles, say in the defence industry or when selling government IT projects, one may have to have a much larger pipe than 3 x G.

You may ask me: The above is a trivial piece of textbook math and how can it help me in my work as VP Sales & Marketing?  Well, I have observed in a fair number of fairly sophisticated sales organizations that there are i) limited appreciation for even the ​P > 3 x G rule; ii) limited or no measurement / estimation of alpha, win probability and sales cycle (so how can one know the relevance of the P > 3 x G rule); and iii) when clearly having too small pipe, no sense of urgency regarding the need to accelerate pipe-building activities.  So, going back to the bonus issue, a tad more reflection on the implications of The Sales Manager’s Law by most of us would probably generally be good, both for our personal bonuses and for our shareholders.